The Internationalization of the Renminbi

China's currency, the Renminbi, has grown in global prevalence in line with the country's rising status as an economic superpower. According to the most recent statistics, the Renminbi is the fifth most active currency for global payments, the eighth most active currency for foreign exchange trading, and the fifth most held reserve currency among central banks, while the volume of cross-border Renminbi settlements reached an all-time high of RMB36.61 trillion in 2021. In this article, we examine the internationalization process of the Renminbi, including key regulatory milestones in the opening up of China's financial market to external investors (see here for further information), the Renminbi's current position in international financial markets as a global payment, investment, and reserve currency, and the mechanisms and channels through which the Renminbi will take on an even greater role in the global economy going forward.


Note: some of our information is drawn from the People's Bank of China's annual RMB Internationalization Report (人民币国际化报告) publications, which have been released every year since 2015. The 2018 report is available in both Chinese and English (here), although reports in subsequent years were only published in Chinese. The 2021 report is available here (Chinese only).

 

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Introducing the Renminbi

The Renminbi (RMB), also known internationally as the Chinese Yuan (CNY), is the official currency of the People's Republic of China. In practice, the Renminbi is used in mainland China, whereas Hong Kong SAR, Macau SAR, and Taiwan each have their own respective currencies. The Renminbi is issued and regulated by the People's Bank of China (PBOC), whereas the Hong Kong dollar is regulated by the Monetary Authority of Hong Kong, the Macau pataca is regulated by the Monetary Authority of Macao, and the New Taiwan dollar is issued and regulated by the Central Bank of the Republic of China (Taiwan). The PBOC does not have direct authority over these other monetary authorities, although the PBOC does have some influence over the Monetary Authority of Hong Kong and the Monetary Authority of Macao.


USD/CNY exchange rate evolution
Source: XE.com

Brief History

From 1994 to 2005, the PBOC adopted a fixed exchange rate regime where the Renminbi was completely pegged to the US dollar. Starting in 2005, the PBOC gradually moved away from a fixed exchange rate regime to a managed floating exchange rate regime by factoring in market demand and supply forces to determine the Renminbi's exchange rate. In 2015, a reform was launched to use a reference bucket of world currencies as reference in determining the Renminbi exchange rate, as opposed to solely just the US dollar used previously. A new rule was also implemented where the State Administration of Foreign Exchange (SAFE) would use the previous day's closing rate to determine the reference rate for the next day, with a larger-than-before 2% fluctuation threshold allowed.



Timeline

In this section, we present some key milestones related to the internationalization of the Renminbi. It is noted that most of the milestones are regulatory and financial infrastructure developments pertaining to the international opening up of China's financial markets.


2003

  • Qualified Foreign Institutional Investor (QFII) scheme (see here) launched as a pilot program for qualified institutional investors to invest directly in China's main stock markets

2009

  • China's Ministry of Finance issues RMB-denominated sovereign bonds to offshore investors for the first time in Hong Kong SAR

  • Pilot program for the use of Renminbi settlements in cross-border trade transactions launched

2011

  • Renminbi Qualified Foreign Institutional Investor (RQFII) program launched (see here)

2014

  • Shanghai-Hong Kong Stock Connect scheme launched (see here)

2015

  • Cross-Border Interbank Payment System (CIPS) launched as a payment system which offers clearing and settlement services for participants engaged in cross-border Renminbi payments and trade

  • IMF adds the Renminbi to its Special Drawing Rights basket (further information in the next section) with a 10.92% weighting

2016

  • Shenzhen-Hong Kong Stock Connect scheme launched (see here)

2017

  • Bond Connect program (see here) launched as a way for offshore investors to invest in mainland China's fixed income products

2018

  • First RMB-denominated futures contracts for international trading by offshore investors listed on the Shanghai International Energy Exchange

  • MSCI adds China A-shares to MSCI Emerging Markets Index

2019

  • Chinese government and policy bank bonds added to the Bloomberg Barclays Global Aggregate Index

  • China A-shares added to FTSE Emerging Index and FTSE Emerging All Cap Index

  • Quota system ceased for QFII and RQFII (see here)

2020

  • QFII and RQFII expanded to include onshore financial futures

2021

  • Chinese government bonds are added to the FTSE World Government Bond Index


Stylized Facts

Next, we examine some stylized facts capturing the Renminbi's role in today's international financial markets and the global economy.


#1: The RMB Officially Became A Global Reserve Currency In 2016

In October 2016, the Renminbi officially became a global reserve currency by joining the IMF's Special Drawing Rights (SDR) basket, an international reserve asset created by the IMF in 1969 to supplement other reserve assets of member countries. The weight of the Renminbi in the five-currency SDR basket was subsequently increased from 10.92% in 2016 to 12.28% in 2022.


The current SDR basket comprises of the following five currencies with the corresponding weightings:

  • US Dollar (43.38%)

  • Euro (29.31%)

  • Chinese Renminbi (12.28%)

  • Japanese Yen (7.59%)

  • British Pound Sterling (7.44%)


IMF Special Drawing Rights Basket Breakdown
Data Source: IMF


#2: The RMB Is The Fifth Most Active Currency For Global Payments

The Society for Worldwide Interbank Financial Telecommunication (SWIFT) provides monthly rankings of currency activeness based on the values of transactions conducted globally via SWIFT. According to September 2022 SWIFT data, the Renminbi is the fifth most active currency for global payments by value, a position which the currency has held (albeit with some monthly fluctuations) since early 2015.


SWIFT Share of Global Payments By Currency
Data Source: SWIFT

Note: SWIFT has an RMB Tracker feature with monthly rankings and other information here.



Excluding mainland China, Hong Kong SAR accounted for 72.11% of the RMB payment transactions based on value in September 2022, followed by the UK (5.99%), Singapore (3.82%), Russia (3.58%), the US (2.99%), France (1.89%), Taiwan (1.70%), Australia (1.25%), Macau SAR (1.05%), and South Korea (0.99%).


SWIFT Top 15 Offshore Renminbi Economies
Data Source: SWIFT


#3: The RMB Is The Eighth Most Active Currency For FX Trading

Since 1986, the Bank for International Settlements (BIS) has been conducting surveys every three years to provide a comprehensive picture of the global foreign exchange markets (see here). According to the most recent Triennial Central Bank Survey of Foreign Exchange and Over-the-Counter Derivatives Market in 2019, the Renminbi is the eighth most active currency globally in terms of foreign exchange trading turnover, a position which the currency has held since 2016.


Daily Average Turnover of OTC Foreign Exchange Instruments By Currency
Data Source: BIS


In 2019, the average daily trading volume of the Renminbi was USD285 billion, up from USD202 billion in 2016 and USD120 billion in 2013.


Daily Average Turnover Of RMB-Denominated Foreign Exchange Instruments
Data Source: BIS


#4: The RMB Is The Fifth Most Held Reserve Currency Among Central Banks

The IMF gathers quarterly data on the foreign exchange reserves composition of 149 reporting countries and economies, also known as Currency Composition of Official Foreign Exchange Reserves (COFER) (see here). According to Q2 2022 COFER data, the Renminbi is the fifth most held foreign reserve currency worldwide and accounts for 2.88% of allocated reserves from reporting entities, a position which the currency has held since 2018.


IMF COFER Allocated Reserves Breakdown
Data Source: IMF


#5: The Volume of RMB Cross-Border Settlements Totalled RMB36.61 Trillion In 2021

According to data from the People's Bank of China, the volume of cross-border Renminbi settlements (defined as the sum of cross-border RMB-denominated inflows and outflows) increased steadily from RMB9.19 trillion in 2017 to RMB36.61 trillion in 2021.


RMB Cross-Border Settlements
Data Source: People's Bank of China

More than 240 countries and regions conduct cross-border RMB settlements with mainland China, with Hong Kong SAR accounting for nearly half of total settlements in 2021, followed by Singapore at 11.3%, the UK at 5.4%, Macau SAR at 3.9%, and Japan at 2.5%.


Geographical Distribution of Cross-Border RMB Settlements
Data Source: People's Bank of China


#6: The Volume Of RMB-Denominated Assets Held By Foreign Entities Reached RMB10.8 Trillion In 2021

According to data released by the People's Bank of China, the volume of domestic mainland China-based, RMB-denominated financial assets held by foreign entities grew from RMB3.7 trillion in 2015 to RMB10.8 trillion in 2021. The financial assets under consideration can be classified as either stocks, bonds, loans, or deposits. As shown in the graph below, stocks and bonds drove the increase of RMB-denominated asset holdings by foreign investors, with regulatory developments (see here) and the launch of various financial infrastructure (e.g. Stock Connect and Bond Connect) facilitating this increase.


RMB-Denominated Assets Held By Overseas Entities
Data Source: People's Bank of China

Future Prospects

Lastly, we conclude with a discussion of future prospects for the Renminbi as discussed in the People's Bank of China's RMB Internationalization reports.


Going forward, the People's Bank of China aims to continue promoting the internationalization of the Renminbi by removing restrictions on the cross-border usage of the currency, by improving the cross-border Renminbi policy framework, by strengthening the cross-border currency clearing system and other financial infrastructure, by integrating the offshore and onshore Renminbi markets, and by advancing the relevant regulations in order to curb potential financial risks. These efforts are anticipated to continue fostering the Renminbi's role as a global payment, investment, and, ultimately, reserve currency.


The Renminbi's Role As A Payment Currency...

As cross-border restrictions on the use of the Renminbi are gradually reduced in tandem with advancements in the policy framework, it is expected that an increasing number of market participants will adopt the Renminbi as a pricing and settlement currency going forward, particularly in markets where China has a strong trade presence such as the Belt and Road countries.


The Renminbi's Role As An Investment Currency...

The Renminbi is also expected to grow in importance as a global investment currency in line with the continued deepening and opening up (to foreign investors) of China's financial markets, and along with the developments in financial infrastructure that facilitate increasingly convenient access to such markets. Notably, the Renminbi's role as an investment currency is also spurred by the inclusion of A-shares and RMB-denominated bonds in various international indexes, including the MSCI Emerging Market Index, the Bloomberg Barclays Global Aggregate Index, the FTSE Emerging and FTSE Emerging All Cap Indexes, and the FTSE World Government Bond Index.


The Renminbi's Role As A Reserve Currency...

As China's role in the global economy continues to strengthen, and as acceptance and adoption of the Renminbi as a payment and investment currency continue to rise, it is expected that the Renminbi will gradually emerge and strengthen its position as a leading international reserve currency.

 

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