While the renminbi is being more widely used in China”s cross-border payments with Regional Comprehensive Economic Partnership member countries, the US dollar remains the dominant currency used in settlements and payments between other RCEP members, and RCEP cross-border clearing mainly relies on the SWIFT system.
In Japan, the Republic of Korea, New Zealand and Australia, the use of renminbi is very limited. And the members of the Association of Southeast Asian Nations, although economically dependent on China, rely on the United States for security.
The regionalization of the renminbi has a long way to go.
First, compared with high-standard free trade agreements, the RCEP needs to strengthen its role in promoting regional economic integration.
Many RCEP members have signed high-standard free trade agreements. Seven of them are also members of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. On top of that, many bilateral free trade agreements have been signed between the RCEP members. With strong protection of regional supply chains by CPTPP rules, non-CPTPP members in the RCEP are at a disadvantage, with risks of losing supply chains.
Moreover, the RCEP rules are primarily about traditional topics such as trade, investment and facilitation, with very few related to deeper integration. The agreement only has some indirect impact on regional monetary integration, because it does not cover monetary and financial cooperation, nor currency pricing, payment or trade settlement.
Second, in ASEAN countries, the Japanese yen has an advantageous position over the renminbi, which is expected to further strengthen as a result of the heightened confrontation between China and the US.
The yen takes up a larger share of global foreign exchange reserves than the renminbi, whose amount is about 40 percent of the yen’s. The yen had long been the fourth most-used global currency, only overtaken by the renminbi in recent years.
With deepening economic and trade cooperation, Japan is ASEAN’s second-largest trading partner, followed by the US. Japan has signed currency swap agreements with five ASEAN countries, namely Indonesia, Malaysia, the Philippines, Singapore and Thailand. As one of the main destinations for ASEAN countries’ exports of final products, Japan is an industry chain leader in Asia and globally, which also contributes to the yen’s advantageous position in trading among ASEAN countries.
Third, China’s financial market, its financial openness and liberalization are not yet sufficient to support the widespread international use of the renminbi. Despite continuous opening up of the bond market, it is still immature with relatively small holdings by overseas institutional investors.
With the Chinese capital account only partly open and the renminbi not yet fully convertible, offshore renminbi deposits are far too limited in scale to enable the use of the renminbi as a third-party currency in cross-border settlement and payment.
To promote the internationalization of the renminbi under the RCEP framework, there are a few measures China can take.
First, it should promote the effective implementation and upgrading of RCEP rules to build a high-standard free trade area. To achieve this, it is necessary to work out details for implementing professional services, economic and technical cooperation and intellectual property protection. Existing laws and regulations need to be revised as soon as possible to meet the requirements of the RCEP rules. It should also work together with developed economies, such as Japan and the ROK, on projects to support developing countries within the region. More studies and actions should be made to upgrade the RCEP to align with high-standard free trade agreements.
Second, complementary cooperation with other RCEP members should be deepened in order to enhance China’s position in the regional industry and value chains. This includes deepening cooperation with Japan and the ROK in automobiles, machinery and electronics manufacturing, as well as emerging sectors such as big data and artificial intelligence; attracting Japanese and Korean enterprises to invest in China, and making good use of existing China-Japan, China-ROK industrial parks; tapping into China’s advantages in the digital economy to strengthen relevant cooperation with ASEAN; and enhancing cooperation with Singapore in electronics, machinery manufacturing, biomedicine and green development.
Third, connectivity of both financial infrastructure and rules should be improved to optimize the environment for using the renminbi globally. Infrastructure for regional renminbi cross-border payment among RCEP members should be built. Channels for renminbi cross-border outflow, overseas circulation and cross-border inflow should be improved. The capital market needs to be further opened up, so as to increase renminbi assets investment channels for overseas institutions and individuals, as well as to smooth the cross-border inflow of renminbi. In this process, it is imperative to strike a balance between facilitating the international use of renminbi and preventing risk.
Fourth, China should strengthen currency and financial cooperation with other RCEP members, especially with the ASEAN countries, and strive to reach cooperation agreements with them. Many countries are now aware of the risks of dollar dominance in the international monetary system due to the US’ abuse of the SWIFT system to impose sanctions. Also, due to aggressive rate hikes in the US, many countries are suffering from dollar shortages and are more eager to seek alternative currencies.
RCEP members vary widely in terms of economic strength, political and economic systems, and values, making it quite hard to achieve comprehensive currency cooperation. Therefore, China may choose to strengthen cooperation with ASEAN countries while remaining open to others.
An Asian monetary and financial cooperation mechanism should be built, covering the Asian monetary fund, regional financial organizations, the Asian bond market, bilateral and multilateral currency swap networks, coordination of currency and exchange rate policies, etc.
The author is a researcher at the Academy of Macroeconomic Research at the National Development and Reform Commission. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.
Contact the editor at editor@chinawatch.cn.
