Internalization
of the Renminbi
Anwar Nasution ; Former senior deputy governor of Bank Indonesia
(1999-2004) and the auditor general of Indonesia (2004-2009). This article
was abridged from a paper he presented at an Asia-Pacific Forum on Economics
and Finance in Beijing last week
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JAKATA
POST, 04 Desember 2014
The use
of the RMB (renminbi) as international money indicates the readiness of the
People’s Republic of China (PRC) to take a greater role in managing the
global economy. The increasing use of RMB as a store of value shows the trust
of the international community in its stability as a safe asset and
confidence in its future role in the international monetary system.
The PRC
is now the second largest economy, after the US, with a large share of global
trade and huge foreign exchange reserves. Because of this, the RMB has been
used by its trading partners as a medium of exchange and a unit of account
for pricing and settlement of bilateral trade with the PRC.
The use
of the RMB in regional trade is rapidly increasing after the authorities in
the PRC allowed a number of domestic enterprises in selected cities to settle
trade in RMB.
Imports
are increasingly settled in reminbi but exports are still mainly settled in
the US dollar. Starting from a small amount, a number of countries, such as
Belarus, Cambodia, Malaysia, Nigeria, the Philippines, Korea, Chile and
Russia, have been holding RMB in their international reserves as an insurance
against balance of payment pressures.
ASEAN
has become a de facto RMB bloc and gradually countries in this region have used
the RMB as a reference point to determine the external value of their
currencies, eclipsing the US dollar and the euro (Subramanian and Kessler,
2013). Trade between the PRC and ASEAN rapidly increased after the
establishment of CAFTA (China-ASEAN Free Trade Area), which came into effect
in January 2010.
Stronger
economic links in East Asia have been reinforced by the international
production networks of the multinational companies that encouraged
intra-industry trade in this region. Traditionally, ASEAN countries are
suppliers of raw materials for manufacturing industries in the PRC, as well
as a market for its exports. The global supply change that breaks up the
production process into geographically separated stages has increased exports
of industrial spare parts and components from ASEAN to the PRC.
Personal
use of the RMB is encouraged by allowing financial institutions in Hong Kong
to open renminbi denominated accounts and for use in cross-border
settlements, including sending remittances to mainland China. On a limited
basis, the authorities in the PRC allowed some domestic banks to issue
renminbi-denominated bonds, popularly known as dim sum bonds and panda bonds,
in Hong Kong in June 2007.
This
allows Chinese banks and companies to tap low-cost financing in international
markets without exchange rate risk. The issuers are gradually expanding to
non-bank companies and to other jurisdictions, such as Singapore.
The PRC
and Japan have now become important providers of liquidity support to central
banks in many emerging economies in the ASEAN+3 region during times of
crisis. In addition, the PRC has a more important role as a provider of
development aid and finance.
Together
with the four BRICS countries (Brazil, India, Russia and South Africa), China
recently established a new BRICS development bank with its headquarters
located in Shanghai. Jointly with some other countries, in October 2013, the
PRC announced the creation of the Asian Infrastructure Investment Bank (AIIB)
to build badly needed infrastructure in Asia and the Pacific.
The
establishment of the AIIB is a welcome initiative given the declining lending
capabilities of the World Bank and ADB after the global financial crisis in
2008-2009. The building of infrastructure projects provides fiscal stimulus
for the stagnated world economy.
Under
the Chiang Mai Agreement (CMI) of 2000, the ASEAN+3 countries established
swap arrangements to provide liquidity support for member countries
experiencing short-run balance of payment deficits. The objective of this
initiative was to prevent crisis and systemic failure in a country and
subsequent regional contagion, as occurred in the Asian Financial crisis in
1997.
The CMI
has two components, namely: (i) a network of bilateral swap and repurchase
arrangements (BSA), which is an expansion of the ASEAN Swap Arrangement of
1977, and (ii) the multilateral swap arrangements of 2008. The
multilateralization of the CMI is a great leap forward in traditionally less
politically cohesive ASEAN+3 countries as they transfer some of their
national powers to a regional supranational authority, namely, the Chiang Mai
Initiative Multilateralization (CMIM).
The
benefits and costs of the internationalization of the RMB to the Chinese
economy
The
benefits include lower transaction costs because foreign trade and investment
are done in the domestic currency and hence eliminate exchange rate risk. The
country enjoys the international seignior age, which is the difference
between the face or nominal value of the currency and its cost of production.
The
issuing country enjoys inflationary tax as inflation rates erode the real
value of the currency. Internationalization of the RMB allows the PRC to
provide low-cost financing in international markets with liabilities
denominated in that currency without exchange rate risk. Issuing
international bonds makes domestic interest rates more dependent on interest
rates in the international market.
Making
the RMB a reserve currency, or an international store of value, in my
opinion, is a long-term goal. A number of policies should be taken to make it
happen. First, end rigid capital control and make the RMB tradable in
international financial markets. At present, the RMB is not a convertible
currency.
To make
the RMB convertible, the government needs to remove restrictions on capital
flows to open capital account. Government interventions should be reduced in
the thin foreign exchange and financial markets.
Limited
capital restrictions can only be used as a macro prudential policy to deter
speculative attacks.
Second,
adopt a flexible exchange rate system and allow market forces to determine
the external value of the RMB. This requires the end of the current fixed
exchange rate policy and the use of it to promote exports, restrict imports
and to reallocate resources from the non-traded sector to a traded one in the
domestic economy.
Third,
liberalize monetary and credit policies and move toward market-based
policies. At present, in terms of asset and branch networks, the financial
system of the PRC is still dominated by state-owned banks with limited
competition.
Fourth,
improve the legal system and rule of law as a way to improve market
efficiency and hence reduce the cost of market transactions. An efficient
legal system should protect property rights and enforce business contracts.
Fifth,
give independent status to the central bank in order to achieve its short-run
stabilization objective of controlling the inflation rate.
This
should be supported by a flexible exchange rate policy and sustainable fiscal
and debt rules in the public sector.
Sixth, develop liquid, deregulated and open financial markets with a
wide range and large volume of financial assets and high level of turnover.
With a limited private equity market in a socialist PRC, the financial instrument
is dominated by the government debt market either issued by the central
government, or provincial and local governments, or state-owned banks and
enterprises. ●
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