(Prof. Lee Wo-Chiang, Department of Banking and Finance, Tamkang University)
With the impending interest rate cut by the US Federal Reserve (Fed), the US dollar is weakening, while Asian currencies, including the Renminbi (RMB), are relatively strong. According to the latest monthly report released by the Society for Worldwide Interbank Financial Telecommunication (SWIFT), in June 2024, RMB accounted for 4.61% of the world’s payment currencies, ranking as the world’s fourth payment currency for the eighth consecutive month. Compared with the 2.37% in November 2022, it has almost doubled. In addition, RMB’s share of international trade finance has been growing rapidly since last year, reaching a record high of 5.99% in June, ranking second globally after the US dollar at 83.16% and surpassing the euro at 5.92%. In terms of RMB international reserves, according to the International Monetary Fund (IMF), when RMB first joined the SDR in 2016, it accounted for only 1.07% of the world’s reserves, while by the end of 2023, RMB reserves held by the world’s central banks will amount to 262 billion US dollars, accounting for 2.28% of the world’s reserves, which is a doubling of its share. In the first quarter of this year, the reserve size was US$226.3 billion, the share dropped to 1.96%, ranking fifth among major reserve currencies. According to incomplete statistics, at least 80 foreign central banks or monetary authorities have included RMB in their foreign exchange reserves.
Fairly speaking, it has been nearly 15 years since RMB’s internationalization began in 2009 with the launch of cross-border trade, but the pace of internationalization has not been as fast as expected. However, since 2023, the Russo-Ukrainian war and geopolitical risks have unexpectedly led to a rise in de-dollarization, and the RMB has rapidly risen to become the world’s fourth-largest payment currency, the second-largest trade finance currency, and the fifth-largest international reserve currency. Below are a few comprehensive indicators of RMB’s internationalization and a look at the possible future trend of RMB.
I. Cross-border RMB Index (CRI): The Q4 2023 CRI results released by the Bank of China (BOC) showed that the CRI index stood at 364, an increase of 7 points from the previous quarter, which is supposed to be a historical high. The reasons behind this include the share of RMB receipts and payments in foreign-related receipts and payments made by banks on behalf of their customers rose to 48.7% last year (2023), an increase of 6.2% from 2022; according to SWIFT customer remittance data, cross-border RMB receipts and payments took place in 161 countries and regions in 2023. Among them, the number of countries and regions involved in RMB customer remittances in the United Kingdom, Germany, Luxembourg, Switzerland, South Africa and Singapore continues to increase, and the network effect of the international use of RMB has gradually appeared. Judging from this trend, the cross-border RMB index will remain on a moderate upward trend in the first quarter of this year.
II. Offshore RMB Index (ORI): BOC released the offshore Renminbi Index (ORI) for Q1 2024 on July 18 at 2.07%, up 0.14% from the end of the previous quarter (1.93%). There were three reasons for the increase, including the expansion of the offshore RMB market due to a higher level of RMB cross-border usage; the continued expansion of RMB foreign exchange transactions and financing usage in the offshore market; and the improvement of the infrastructure of the offshore RMB market. On this basis, the outlook for the next few quarters should be optimistic.
III. RMB Internationalization Index (RII): The RII was compiled by the Institute of International Monetary Studies of Renmin University and was first formally disclosed in 2012; the larger the value of the RII, the higher the degree of internationalization of the RMB, which also implies that the RMB’s position in the global financial system has strengthened, and is closely related to factors such as the economic development of China, the growth of international trade, and the opening up of the financial market. The 2024 International Monetary Forum, jointly organized by Nankai University and Renmin University, released the “RMB Internationalization Report 2024” on July 27th. According to the Report, the quarterly average of the RII was 6.27 in 2023, a year-on-year increase of 22.9%, maintaining the long-term upward trend. The data also showed that as of the end of 2023, the RIIs of USD, EUR, GBP and JPY were 51.52, 25.03, 3.76 and 4.40 respectively, while RMB 6.27 ranked third. Over the past 5 years, the compound annual growth rates of the internationalization indices of USD, EUR, GBP, JPY, and RMB were -0.23%, -1.34%, -2.65%, 0.22%, and 16.56%, respectively, which shows that the growth rate of RMB’s internationalization is better than that of other major international currencies.
The US Fed has raised interest rates by a total of 20 yards (5%) since the start of the rate hike cycle in March 2022 until the end of July this year, and the Fed Funds rate is currently at 5.25-5.50%. As a result, US bond rates rose across the board, the US dollar strengthened, and most Asian currencies depreciated, with RMB depreciating by more than 11% during this period. In summary, the range of RMB exchange rate fluctuations has been relatively small so far this year, but the interest rate differential between China and the US has remained high, which has led to increased concern about the RMB/USD carry trade. When risk aversion rises, large-scale unwinding of carry trades will occur, triggering a larger and faster appreciation of the RMB exchange rate. As a result, the onshore and offshore RMB exchange rates closed at 7.27 on July 10, then due to the global stock market crash on August 1 and 5, the offshore RMB exchange rate appreciated by 800 pips to 7.08 and then fell back. Recently, the US dollar depreciated significantly, with the US dollar index falling below 102 on August 19th. The yen, on the other hand, appreciated strongly due to the Bank of Japan’s interest rate hike and the massive unwinding of global carry trades, and the RMB strengthened as well.
Undeniably, the internationalization of RMB is progressing steadily but not as fast as expected. Unless the BOC announces the opening up of its capital account, it will be a long way to go before RMB is fully internationalized. Looking ahead, with the Fed’s interest rate cut approaching, the US dollar weakening and the US-China interest rate narrowing, if uncertainties (such as a new US-China trade war) are ruled out, RMB should rebound moderately, which will also help with China’s financial market and economic recovery.
（Translated to English by Chen Cheng-Yi）
