A Key Step Towards Internationalization Of RMB

China is eager to include Renminbi in SDR, as reiterated by Yi Gang, vice president of the people's Bank of China, at a press conference held in Beijing last Thursday in March 12th.

A potential obstacle is that the renminbi is not and may never be convertible currency, which is the standard premise for reserve currency.

But as David Research David Lubin of Citi Research pointed out in a report released last Thursday, such concerns may be put aside.

China's share of global exports has continued to grow since it replaced the US as the world's largest exporter in 2007.

Nearly 1/4 of China's current account pactions are settled in Renminbi.

It is true that compared with the US dollar, euro, or even pound, the global payment paction handled by the global bank Financial Telecommunication Association (SWIFT) is still negligible, but it is not much worse than the yen, and has recently surpassed the Canadian dollar to become the fifth most commonly used currency in the world.

In addition, the renminbi is the second most commonly used currency in trade finance, though it is lagging behind the first dollar.

Therefore, China is in Renminbi.

Great progress has been made in ambition.

This ambition is not small.

If it succeeds, it will not only reduce the financing costs of Chinese enterprises and help them expand overseas, but will also play a supporting role in creating a financial order with China as the core to challenge the Bretton Woods system founded after the Second World War and dominated by the West.

How to bring the renminbi into the basket of SDR currencies will push China to achieve its goal? As Rubin points out, the renminbi will be included in the SDR basket as well as the US dollar, euro, yen and pound sterling, and it will not force central banks to actually hold Renminbi as a reserve, though it will allow SDR holding banks to hold Renminbi indirectly.

However, it is important that the inclusion of the SDR basket will allow the renminbi to bypass the convertibility criteria that must be met by reserve currencies.

As Rubin points out, according to IMF, "reserve assets must be calculated and settled by convertible foreign currencies."

According to this regulation, the central bank holding Renminbi can not report it as part of its foreign exchange reserves.

But if the renminbi is added to the SDR basket of currencies, it will automatically become a reserve currency in accordance with its definition. Lupin estimates that this will probably lead to the adjustment of IMF rules.

If so, central banks will be free to use the renminbi as part of their foreign exchange reserves.

This will mark a great progress in China's strategic objectives.

"Creating Renminbi debt is actually the only way for China to promote its internationalization of RMB," Lu Bin wrote. "China's continued trade surplus means that it is difficult to create net debt through the current account in the balance of payments.

Therefore, China needs to rely on capital pactions to achieve its objectives, and the inclusion of RMB in the SDR basket is an important way to achieve this. "

However, more importantly, if the RMB is added

Currency basket, it means the whole world.

Change of order.

Lupin referred to a famous speech made by Zhou Xiaochuan, governor of the people's Bank of China [micro-blog] in 2009, when Zhou Xiaochuan said that SDR should be the focus of the international monetary order as a "super sovereign reserve currency" and "detached from the economic situation and interests of any country".

China will share its core role in a system dominated by the US dollar so far.

How large is the opportunity for the renminbi to enter the SDR basket of currencies? Lubin pointed out that IMF has two criteria: one is the share of a country's global exports and the other is whether its currency is "freely available".

As mentioned above, the renminbi is far above the first standard.

The second criterion, though IMF's own rules, is not equivalent to "freely convertible".

Rubin pointed out that one of the criteria for deciding whether a country's currency can be freely used is whether it is "widely traded".

From this point of view, the renminbi seems to be consistent.

In addition, Lupin wrote: "IMF has made it clear that the decision to include Renminbi in the basket of SDR currencies is not a practice: it will need to be judged."

As Simon Mendi (Simon Mundy) reported last Thursday to the financial times, in order to take advantage of China's efforts to internationalize the renminbi, Samsung Mundy Electronics (Samsung) has drafted a plan to start trading Renminbi in South Korea.

The long journey of RMB internationalization seems irresistible.