Beijing, 8 Aug (ZXS) -- Question: What will the internationalization of the renminbi bring to the world?

——Interview with Li Xin, Secretary of the Party Committee of the School of Economics and Management of Hainan Normal University and part-time researcher of the International Finance and Economic Research Center of Wudaokou School of Finance, Tsinghua University

Written by Wang Mengyao

On August 8, the new Special Drawing Rights (SDR) currency basket with the renminbi's weight raised to 1.12% will mark the first anniversary of its entry into force. Over the past year and more, the internationalization of the RMB has continued to advance steadily. Recently, a number of institutions issued reports that the profound changes in the global political and economic pattern have created new opportunities and development space for the internationalization of the RMB.

What are the risks of the existing international monetary system? What can the internationalization of the renminbi bring to the world? Recently, Li Xin, Secretary of the Party Committee of the School of Economics and Management of Hainan Normal University and part-time researcher of the International Finance and Economic Research Center of the PBC School of Finance of Tsinghua University, was interviewed by the China News Agency's "East-West Question".

The following is a summary of the interview:

China News Agency: What are the risks and shortcomings of the current international monetary system dominated by the US dollar?

Li Xin: First, the current international monetary system dominated by the US dollar is the fundamental cause of global inflation. In general, developed countries can be considered as "financial countries" that provide capital, such as the United States; Developing countries, on the other hand, can be considered "trading nations". In order to avoid the depreciation of the dollar, the "trading countries" have to use the trade income to purchase US Treasury bonds or corporate bonds, etc., to maintain the stability of the dollar value and lower the level of long-term interest rates in the United States.

The low interest rate environment further stimulates the growth of consumer demand in the United States, which in turn promotes the demand for imports in the United States, forming a unique "commodity-capital" dual circulation relationship between "trading countries" and "financial countries". However, the basis for the long-term stability of this circular relationship is the money supply of the "financial countries", and the supply of cheap goods provided by the "trading countries" maintains a relatively stable equilibrium relationship. Once the systemic balance is disrupted, such as the blockage or even disconnection of commodity supply chains caused by the epidemic, or the Fed's quantitative easing policy increases the system money supply, it will lead to the supply of goods being lower than the supply of funds, and the structural imbalance of the system will push up the depreciation of the dollar and global inflation.

Aerial photograph of containers stacked at the Port of Oakland, USA, August 2023, 8. U.S. imports from China fell 7 percent in the first five months of 2023 compared to the same period last year, according to the U.S. Census Bureau

Second, the current international monetary system dominated by the US dollar is the main cause of the sovereign debt crisis in developing countries. The Fed's interest rate hike has pushed up global interest rates, increasing the cost of servicing the US dollar external debt of emerging economies and developing countries; The Fed's interest rate hike raised the interest rate level, resulting in a narrowing of interest rate differentials between the United States and other developing countries, the return of funds from developing countries to the United States, the depreciation of local currencies in developing countries, and the further increase in debt repayment risks; The Fed's interest rate hike pushed the dollar index higher, causing international commodity prices to fall and weakening the debt servicing capacity of developing countries that are mainly resource exporters.

A balloon with the symbol of the pound sterling appears outside the headquarters of the Bank of England in London, England, August 2023, 8, during a protest against the possible Bank of England raising interest rates again. Photo courtesy of Visual China

Third, the current international monetary system dominated by the US dollar has long eroded the credibility of the US dollar, increasing the risk of a US dollar crisis. Historically, the United States has repeatedly passed its own problems to other countries, whether it is the quantitative easing policy implemented during the US subprime mortgage crisis in 2008 or the unlimited quantitative easing measures of the Federal Reserve under the impact of this round of the epidemic, its essence is the monetization of the US fiscal deficit, that is, the US Treasury issues bonds while the Fed buys bonds. In the context of global over-dependence on the dollar, the monetization of fiscal deficits has led to the inflation of the dollar asset bubble, resulting in the deterioration of the balance of payments and foreign exchange reserves of the dollar holding countries, and weakening the credit of the dollar and the value of the dollar as a global reserve currency. A currency crisis occurs when the market believes that the dollar's value for money relative to other countries' currencies is declining.

On April 2023, 4, at a Bed Bath & Beyond store in Garden City, New York, USA, consumers entered the store to compete for clearance goods. U.S. home goods retail giant Bed Bath & Beyond previously announced that it and some of its subsidiaries have filed for bankruptcy protection in New Jersey. Photo by Liao Pan

China News Agency: On June 6, Argentina used RMB to repay its foreign debt; Recently, the renminbi replaced the US dollar as the international currency for crude oil cooperation between Russia and Pakistan; For the international community, what is the driving force for participating in the internationalization of the RMB?

Li Xin: First, holding RMB can not only provide certain liquidity support when facing balance of payments difficulties, but also help reduce exchange rate risks in international trade. Since the 2008 international financial crisis, China has signed bilateral currency swap agreements with developed economies such as the Eurozone, South Korea, Singapore and the United Kingdom, and developing countries such as Malaysia, Argentina, Mongolia, Thailand, and Indonesia. Bilateral local currency swaps are actions taken in the context of financial turmoil based on the consideration of providing liquidity support. But such currency swap agreements go far beyond liquidity support and have far-reaching significance, especially in international trade. At present, in international trade, the US dollar is still the main settlement currency. Since the global financial turmoil, the US dollar has fluctuated sharply, bringing greater risks to global trade. Through local currency settlement, international trade with China can be settled using relatively stable RMB, which will greatly reduce the exchange rate risk in settlement.

On August 2023, 8, the 16th China-South Asia Expo and the 7th China Kunming Import and Export Fair opened in Kunming. The picture shows exhibitors from Bhutan. Photo by Liu Ranyang

Second, the use of RMB settlement helps reduce transaction costs in international trade. China is a major trading partner of more than 140 countries and regions in the world, and its total trade in goods ranks first in the world. Holding and directly using RMB as the trade settlement currency can reduce the exchange costs caused by transactions using US dollars.

Third, holding and using the renminbi could help push away from the dollar's shackles and weaken the threat of U.S. long-arm jurisdiction. The United States has abused its dollar hegemony to launch unilateral sanctions against Iran, North Korea, Russia and other countries at will, setting aside international law and relying on domestic law to impose huge fines on enterprises and financial institutions in third countries such as France, China, Germany, and Japan. This kind of long-arm jurisdiction and private use of public instruments has forced many developing countries to reconsider the currency and location of wealth storage, and forced Europe and other places to consider bypassing the monopoly of the dollar hegemony and its payment system. China is gradually promoting the renminbi trading system for iron ore, gold, oil and gas, providing important policy space and trading platforms for many raw material exporters to get rid of the shackles of the US dollar.

In addition, holding and using RMB can help promote cooperation with China in commodity trading, infrastructure financing, industrial park construction, cross-border e-commerce, and new platforms such as the Internet and the Internet of Things.

China News Agency: What are the unique advantages of the renminbi compared with other international currencies such as the euro and the yen?

Li Xin: First, digital currency is becoming a major trend in global financial development, and the development of digital currency by the People's Bank of China is at the leading level in the world.

Second, the renminbi is more stable than other international reserve currencies such as the euro and the yen.

Third, China is not only a manufacturing country, but also a potential consumer power, and holding RMB is more conducive to promoting the development of trade and investment with China.

Citizens pass by the People's Bank of China in Beijing. Photo by Jiang Qiming

China News Agency: What are the specific aspects of RMB internationalization?

Li Xin: The internationalization of the RMB is embodied in both trading and holding.

In general, holdings are mainly reflected as a share of official foreign exchange reserves and as a share of international banking liabilities. Compared to 2016, before the renminbi joined the SDR basket of currencies, both indicators have increased in 2022. Indicators in terms of transactions generally include bond financing, trade finance and international payments. In 2022, the proportion of RMB bonds in the balance of international bonds and the proportion of international bond issuance also increased. RMB trade finance has also increased its share of global trade finance; The share of international payments declined slightly.

Generally speaking, in recent years, the internationalization of the RMB has been steadily advancing in terms of both international transactions and international holdings. However, it is undeniable that the proportion of RMB in international transactions and international holdings is significantly lower than that of the US dollar, and there is still much room for improvement.

China News Agency: What does the internationalization of the RMB mean for the world?

Li Xin: The improvement of the internationalization level of RMB has three main implications for the world:

The CIFTIS China National Convention Center exhibition area in Beijing welcomes visitors. Photo by Jiang Qiming

First, the international use of RMB helps reduce transaction costs, stabilize exchange rate expectations, promote multilateralism, and is an important financial support for the development of globalization;

Second, improving the settlement of RMB in trade, balance of payments and other fields, to a certain extent, will help strengthen global financial security;

Third, the high-quality development of China's economy has become a stable anchor of the global economy, and the internationalization of RMB is conducive to promoting the formation of China's high-level opening up pattern and promoting the high-quality development of China's economy. (End)

Respondent Profile:

Li Xin, Secretary of the Party Committee, Professor and Doctoral Supervisor, School of Economics and Management, Hainan Normal University, and part-time researcher of the Center for International Finance and Economics (CIFER), PBC School of Finance, Tsinghua University. His main research interests focus on open macroeconomics such as global value chains, RMB exchange rates, international capital flows, and human capital. He has published more than 40 papers in Chinese and English in core journals at home and abroad, presided over four provincial and ministerial projects such as the National Natural Science Foundation of China, published four monographs in Chinese and English as the first author, and successively won the Zhang Peigang Development Economics Outstanding Achievement Award, Beijing Philosophy and Social Sciences Outstanding Achievement Award, An Zijie International Trade Paper Award, Ministry of Education Higher Education Scientific Research Outstanding Achievement Award, Ministry of Commerce Business Development Research Achievement Award and other provincial and ministerial awards, and was awarded Beijing Outstanding Young Talents.