Unlocking the Potential: Major hurdles to China’s ambition to make RMB a global currency

The internationalization of the Chinese Renminbi (RMB) is a long-standing project undertaken by the Chinese government to enhance its global standing and reduce dependence on the US dollar. Since the introduction of the RMB as a reserve currency in 2015, its internationalization has accelerated, attracting more investors and trade partners.

However, the process has faced several challenges, including currency manipulation allegations, economic slowdown, and political tensions with major trading partners such as the US. In this article, we will explore the insights gained from two multilateral development banks, the New Development Bank (NDB) and the Asian Infrastructure Investment Bank (AIIB), on the challenges of RMB internationalization and how they are addressing them.

The NDB, established in 2014 by Brazil, Russia, India, China, and South Africa (BRICS) countries, aims to support sustainable development initiatives in emerging economies. As a multilateral development bank, the NDB has provided loans and credit lines to member countries in their national currencies, including the RMB. This move has helped to promote the use of RMB as an alternative currency to the US dollar, which has been the dominant currency in global trade and finance. According to an EFSAS report, the NDB issued its first RMB-denominated bond in July 2016, raising RMB 3 billion ($450 million) to fund green projects in China. This was followed by another RMB bond worth RMB 1 billion issued in September 2017 to support infrastructure projects in India.

The internationalization of the RMB has been a steady journey for the past few years, and itshows no sign of stopping. One of the key ways that the RMB has been internationalized is the establishment of RMB clearing centers across the globe. These centers facilitate trade and investment in RMB by providing clearing services and improving the ease of transactions. As of 2021, there are over 20 RMB clearing centers worldwide, with London being the largest of them all.

Another key factor in the RMB's internationalization is the creation of new investment channels. Chinese investors can now invest directly in foreign markets using RMB, making it easier to transact in foreign currencies. This has boosted the appeal of the RMB as an investment currency, with a growing number of international investors taking an interest in it.

In this context, the report titled “Challenges of RMB Internationalization – Insights from the NDB and the AIIB” provides an in-depth analysis of the challenges faced by China in promoting RMB, and the lessons learned from the establishment of two multilateral development banks initiated by China, namely the New Development Bank (NDB) and the Asian Infrastructure Investment Bank (AIIB).

One of the main challenges is the lack of confidence in the RMB as a stable currency, mainly due to the Chinese government's intervention in the currency markets. The government's policy of keeping the RMB artificially low to boost exports has been criticized by the US and other trading partners as currency manipulation, which has led to trade disputes and tensions.

Another challenge is the economic slowdown in China, which has weakened investor interest in the RMB. The Chinese economy faced a significant decline in growth in 2020 due to the COVID-19 pandemic, which led to a decrease in trade and investment with other countries. Furthermore, political tensions between China and the US have also affected the RMB's internationalization. The US government's imposition of tariffs on Chinese goods and restrictions on Chinese tech companies have threatened to isolate China from the global economy, undermining the RMB's prospects as a reserve currency.

The AIIB, another multilateral development bank established by China in 2016, has also been promoting the use of RMB in its lending activities. The AIIB's mission is to finance infrastructure projects in Asia, with an initial focus on the Belt and Road Initiative (BRI), a massive development program aimed at connecting Asia, Europe, and Africa with road, rail, and sea corridors. The BRI is estimated to require over $1 trillion in investment, making it the most extensive infrastructure project in history.

The AIIB has provided financing for several BRI projects in RMB, including a $500 million loan to fund a gas pipeline project in Azerbaijan in 2016. In an EFSAS report, the AIIB stated that it would continue to offer loans in local currencies, including the RMB, to support sustainable development initiatives in its member countries. However, the bank acknowledged that the RMB's internationalization faces several challenges, including the lack of flexibility in China's financial system, the government's intervention in the currency market, and regulatory hurdles in other countries.

To address these challenges, the AIIB has implemented measures to promote RMB internationalization, including expanding its RMB-denominated lending operations and strengthening its partnership with Chinese banks. The bank has also advocated for the development of RMB-based financial products, such as bonds and derivatives, to increase their availability in global financial markets.

In conclusion, the internationalization of the RMB remains a long-term project that faces several challenges. Despite efforts by the NDB and the AIIB to promote the RMB as an international currency, its prospects remain uncertain due to factors such as economic slowdown, political tensions, and lack of confidence in its stability. However, the ongoing BRI initiative and the increasing number of countries using the RMB for trade and investment indicate that the RMB will continue to play a significant role in global finance and trade in the future. The Chinese government's commitment to liberalizing its financial system and promoting RMB internationalization will also play a critical role in ensuring its success.