Internationalization of the Renminbi and its Global Ambition

Key Insight

Beginning in 2009, China launched a significant initiative to increase the international use of the renminbi, which had previously been minimal. Key features of this program included expanding the ability of Hong Kong residents to open renminbi bank accounts, boosting the currency's use in invoicing China's substantial trade flows, and establishing a renminbi bond market in Hong Kong, where these 'dim sum' bonds are issued. By the end of 2014, the results were impressive: outstanding dim sum bonds reached Rmb 400 billion ($65 billion), renminbi deposits in Hong Kong totaled Rmb 1 trillion (12 percent of the territory's total deposits), and 22 percent of China's trade was settled in renminbi. This rapid international expansion, which extended to financial centers like Singapore and London, was comparable in many ways to the internationalization of the Japanese yen in the 1980s.

Despite this growth, the renminbi is still far from being a major international currency. In 2013, it ranked ninth in foreign exchange market trading, involved in only 2 percent of global currency trades by value. This pales in comparison to the US dollar (87 percent), the euro (33 percent), and the yen (23 percent). Even secondary currencies like the British pound, Australian dollar, and Swiss franc traded three to five times more frequently than the renminbi. Furthermore, the dim sum bond market, despite its rapid expansion, remains a tiny fraction of the US$22 trillion global international bond market. The natural economic evolution of China, becoming the world's biggest exporter in 2009 and largest trading nation (imports plus exports) in 2013, created an inherent demand for its currency to be used internationally.

Policy motivations also drove the renminbi's internationalization. The 2008 global financial crisis, which saw China's exports fall by nearly 20 percent due to a freezing of the market for dollar-denominated letters of credit, prompted Chinese officials to believe that increasing renminbi-financed trade would enhance resilience against future international financial shocks. Additionally, the People’s Bank of China (PBOC) utilized internationalization to compel domestic financial liberalization. Recognizing that China's closed and repressed financial system was becoming inefficient for future growth, the PBOC faced internal resistance to reforms. By developing a renminbi market in Hong Kong where interest rates could be set by the market, the PBOC created a controlled experiment whose success could make the case for mainland interest rate liberalization. However, the renminbi's potential to become a global reserve currency and challenge the US dollar remains limited. While its inclusion in the IMF's special drawing rights in November 2015 was symbolic, the dollar is over 40 times more frequently traded and accounts for approximately 60 percent of global central bank reserves, with the renminbi's share likely less than 1 percent. The experience of the Japanese yen in the 1980s, which peaked in international importance but then declined due to slow growth and a reluctance to fully open financial markets or run trade deficits, highlights the necessity of deep, open, and trustworthy financial markets and a willingness to run trade deficits for a currency to achieve sustained global prominence. China's current commitment to relatively closed financial markets and trade surpluses, making its financial sector the least open among major economies, constrains the renminbi's long-term global currency potential.