Title: The Progress of Renminbi Internationalization: A Closer Look
Introduction:
China’s relentless efforts to establish the renminbi (RMB) as a major global currency have been captivating the attention of financial institutions worldwide. With China holding the second-largest economy, dominating global trade, and emerging as a robust financial center, the prospect of the RMB challenging the US dollar’s dominance is an enticing possibility. However, a recent report from Goldman Sachs sheds light on the progress of the RMB’s internationalization, revealing a mixed performance thus far.
RMB’s Share in International Payments:
While the RMB’s market share in international payments has more than doubled over the past decade, reaching 2.5% in May 2023, it still pales in comparison to the US dollar’s overwhelming 43% share. Additionally, the pound remains nearly three times as important as a currency for international payments. The RMB’s share of renminbi-settled trade in Chinese goods and services has improved, showing a 5.8 percentage point increase to almost 20% over the past decade. Nonetheless, Goldman Sachs notes that the overall increase in the RMB’s share is primarily driven by more active foreign trade in RMB-denominated securities, thanks to its inclusion in various indices.
RMB as a “Store of Value”:
One critical aspect of a currency’s global credibility is its status as a “store of value.” Unfortunately, the RMB falls short in this domain as well. Only 0.7% of international bonds are denominated in RMB, highlighting a lack of trust and confidence from market participants. Moreover, the RMB’s share of global central bank reserves has only tripled since 2016 to approximately 3%, comparable to the level of the Canadian dollar. These figures indicate that the RMB has a long way to go before it can be considered a reliable store of value on a global scale.
US Dollar Dominance and Beijing’s Leverage:
The US dollar maintains a vice-like grip on the global financial landscape, with its dominance perpetually in question. While concerns about the US “weaponizing” the dollar exist, the report raises the question of whether Beijing would leverage its financial policy. This uncertainty heightens cautiousness and limits the RMB’s potential as an alternative global currency, reinforcing the comfort investors find in the US dollar’s stability.
Delving Deeper: Insights and Perspectives
Expanding on the topic, we can explore related concepts and shed light on the challenges faced by the RMB in its path to internationalization. One key aspect is the capital controls implemented by Beijing to manage the currency’s value and prevent excessive capital outflows. These controls limit the RMB’s convertibility and undermine its attractiveness as a global currency.
Furthermore, China’s economic policies and geopolitical considerations play vital roles in determining the RMB’s trajectory. Factors such as the ongoing trade tensions between the US and China, geopolitical disputes, and regulatory inconsistencies can deter international market participants from embracing the RMB fully.
It is also important to consider the impact of technology on currency internationalization. The rise of digital currencies, such as cryptocurrencies and stablecoins, present both opportunities and challenges for the RMB. China’s development of a central bank digital currency (CBDC) could potentially enhance the RMB’s internationalization efforts by providing a more efficient and secure means of cross-border transactions.
Conclusion:
Despite China’s ambitious push for RMB internationalization, the Goldman Sachs report offers a reality check on the currency’s progress so far. While the RMB has shown some improvement in terms of market share and trade settlement, it still lags behind the US dollar and other major currencies. Challenges related to capital controls, economic policies, and geopolitical factors need to be addressed to bolster the RMB’s global standing.
Expanding the RMB’s use as a “store of value” and increasing its share in central bank reserves are pivotal steps towards becoming a major global currency. Additionally, China’s adaptability to the evolving landscape of digital currencies could present new opportunities for RMB internationalization.
In summary, while the RMB has made strides in certain areas, there is still a long way to go before it can challenge the dominance of the US dollar. The road to RMB internationalization is complex, requiring significant reforms, economic stability, and global confidence. Only time will tell if China can successfully position the RMB as a major global currency.
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Earlier this year China made a big deal about how the renminbi got its first time has leapfrogged the US dollar in their cross-border payments, following a strong push to “internationalise” their currency.
Many think it will inevitably become the next major global currency, given that China is already comfortably the world’s second largest economy, its largest trading power and a emerging financial centre with capital markets only the United States can compete in terms of size.
But how successful has Beijing been so far? A little bit in some areas, but little overall, according to a Goldman Sachs report titled “Checking the progress of internationalization in RMB” published yesterday.
Take the renmimbi’s share in international payments. According to SWIFT, the Chinese currency’s market share has more than doubled over the past decade, from 1.1% in 2013 to 2.5% at the end of May 2023.
But that remains paltry compared to the US dollar’s 43% share (which actually increased over the period). The pound also remains nearly three times as important as a currency for international payments.
The share of renminbi-settled trade in Chinese goods and services has increased by 5.8 percentage points over the past decade to almost 20%.
But Goldman notes that the overall increase in the currency’s share of China’s cross-border payments was mainly driven by more active foreign trade in RMB-denominated securities (thanks index inclusion!)
When it comes to the “store of value” part of being Kind Of A Big Deal, the renminbi also remains a mess. Only 0.7% of international bonds are denominated in the Chinese currency. Its share of global central bank reserves has tripled since 2016 to around 3%, but this is still only roughly the level of the Canadian dollar.
And as much as people keep talking about the US “weaponizing” the dollar, everyone does Really feel more comfortable that Beijing would never use the leverage of financial policy? If so we have a Spac for you to sell.
Either way, you can read GS’s full report here. It goes much deeper into all the various issues.
Further reading:
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