China Takes Further Steps Towards Internationalizing the Renminbi

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By Xiaolei Gu

Mar. 14 – The China Development Bank (CDB) has taken the initiative to bring out an agreement among the BRICS nations by pledging to extend credit in renminbi (RMB) to the group’s four other members, according to a report by the Financial Times.

To this effect, a memorandum of understanding is scheduled to be signed by the CDB and its counterparts in Brazil, Russia, India and South Africa on March 29, 2012 in New Delhi. Under the agreement, the CDB will reportedly make RMB-denominated loans available to the development banks of its BRICS counterparts, while the group’s other members will also be able to extend loans denominated in their respective currencies. The main objective of this memorandum is to expand trade relations among the BRICS countries, but it also represents another push by the Chinese government to promote the use of RMB in more foreign trade and financial transactions.

Although the U.S. dollar has put forth a relatively strong performance recently, the market still sees a weakening of the currency in the long-run. Seeking an alternative unit of currency in foreign trade and investment has always been on the agenda of high-level regional and international economic summits. In that regard, the upcoming accord among the BRICS nations is seen as another step by China towards internationalizing the RMB and challenging the U.S. dollar’s position as the premier international currency.

Implications of RMB as an international currency
RMB as an international currency means that it will be used and held beyond China; not just for transactions with residents in China, but also for transactions between non-residents outside of China. In other words, RMB will be used instead of the national currencies of the parties involved in an international transaction, be it for goods, services or financial assets.

If RMB successfully grows into a reserve currency, China will embrace new growth opportunities and enhance its political influence in the world. However, in the meantime, the internationalization of RMB is incompatible with China’s fixed exchange rate and domestic-oriented monetary policy. The Chinese government will be faced with much greater capital account liberalization, which implies an end to China’s managed foreign exchange regime.

Evolution of RMB as an international currency


  • Hong Kong Banks offer RMB services including deposit taking, currency exchange, remittance, debit and credit cards, and personal checks.


  • Mainland policy and commercial banks are allowed to issue RMB bonds in Hong Kong.


  • China signs bilateral currency swap arrangement with South Korea (RMB180 billion). RMB takes the place of U.S. dollars as the major currency in the arrangement.
  • China signs bilateral agreements with Mongolia, Vietnam, Burma and eight other countries to trade in the currency they prefer.


  • RMB cross-border trade settlement pilot scheme launched, covering 400 corporations from five cities across China.
  • China signs bilateral currency swap agreements with Malaysia (RMB80 billion), Belarus (RMB20 billion), Indonesia (RMB100 billion), and Argentina (RMB150 billion). RMB is used as the major currency.


  • RMB cross-border scheme introduced in 2009 was expanded to cover 20 provinces and cities in 2010. Trade transactions between eligible enterprises in Mainland China and corporations in any other part of the world are allowed to be settled in RMB.
  • Foreign companies are allowed to purchase, borrow and transfer offshore RMB freely outside China, creating a more active and liquid foreign exchange, money market and investment market.
  • Pilot scheme launched for eligible institutions to invest in Mainland’s interbank bond market.
  • China signs bilateral currency swap agreements with Iceland (RMB3.5 billion) and Singapore (RMB150 billion).


  • RMB cross-border trade settlement pilot scheme is expanded to the whole nation.
  • Pilot scheme launched for settlement of overseas direct investment allowing approved institutions to conduct direct investments overseas in RMB.
  • China signs bilateral currency swap agreements with New Zealand (RMB25 billion), Uzbekistan (RMB700 million), Kazakhstan (RMB7 billion), South Korea (expanded to RMB360 billion), Hong Kong (RMB400 billion), Thailand (RMB70 billion), and Pakistan (RMB10 billion).


  • China signs bilateral currency swap agreements with the United Arab Emirates (RMB35 billion), Malaysia (expanded to 180 billion), Turkey (RMB10 billion), Mongolia (expanded to RMB10 billion), and Australia (RMB200 billion).

Benefits of RMB as an international currency for Chinese companies

  • Less exposure to foreign exchange rate movement and reduced foreign exchange risk
  • Mitigates currency mis-matches between revenues and costs
  • Lower domestic costs of capital raising and transaction
  • Access to cheap RMB-denominated loans from abroad
  • Easier cross-border M&As by Chinese companies

Benefits of RMB as an international currency for global companies trading with enterprises in Mainland China

  • Less exposure to exchange rate fluctuations of U.S. dollar and Euro
  • Ability to hold RMB as a store of value
  • Ability to sell in RMB and expand customer base
  • Access to RMB-denominated loans from Chinese banks, and access to Chinese investors in general

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