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Since it was put forward， the Belt and Road Initiative has attracted growing attention around the world. Xu Yanzhuo， an associate researcher at the Institute of World Economics and Politics under the Chinese Academy of Social Sciences， shared her views on the growing role of China’s currency in promoting cooperation under this initiative.
From a long term， global perspective， China and the countries along the land and maritime Silk Road routes have obtained a slew of benefits in infrastructure construction and production capacity cooperation， laying a concrete foundation for further cooperation. However， fi nancial risks remain a hindrance to transnational synergy. Facilitating the use of China’s RMB in countries involved in the Belt and Road Initiative can help Chinese investors get around bottlenecks in exchange rates， financing and debts， and further promote the currency’s status in the international monetary system.
The Belt and Road Initiative， a key measure for Chinese companies going global， serves as an important platform for the RMB’s internation- alization. In their operations overseas， Chinese companies need to handle a large amount of fi nancial business such as exchange， guarantee， debit and credit， and insurance. In less developed countries along the routes， however， one of the perplexing issues for these companies is fi nancial risks brought about by fl uctuations in policies.
The first and foremost risk comes from inconvertibility. A few countries along the Belt and Road regulate foreign exchange differently in light of the international balance of payments. Foreign businesses and investors are prohibited or confi ned in the transfer of their legitimate incomes， including capital and profi ts， to foreign countries. So companies that make large profi ts from contracting projects， sales and services have no way to exchange them to foreign currencies and transfer them.
In countries exercising tighter control on exchange， the U.S. dollar’s price keeps buoyant in the black market. Some countries have adopted a fl oating exchange rate， but the bar， to a certain degree， is still there， especially for the import of non-strategic goods.
The second risk is rate fluctuation. Chinese companies’ overseas projects are generally settled in local currencies， and the construction takes a long period of time， they are therefore exposed to a higher risk of rate fluctuations. For less developed countries with a simple economic structure， exports are particularly vulnerable against the international market， resulting in a defi cit in international balance of payments and abrupt fl uctuations in exchange rates. The adjustment to a nation’s exchange rate mechanism or policies further increases risks in this regard. For example， on November 3， 2016， the Egyptian Government announced its intention to free fl oat its currency， and the Egyptian pound against the U.S. dollar was revised downward from 8.8 to 13 overnight.
The third issue is overseas asset guarantee. As their business expands， Chinese companies have an accumulated amount of assets overseas. Currently， their international financing relies on seller’s credit， buyer’s credit， concessional loans， syndicated loans and offshore loans against onshore guarantees， but their overseas assets are unable to serve as a guarantee. To some extent Chinese companies’ capacity for overseas fi nancing has been hindered.
Road ahead
RMB internationalization in countries involved in the Belt and Road Initiative will eliminate the bottlenecks affecting Chinese companies in exchange rates， fi nancing and debts， and mark up the RMB’s status in the international monetary system. If settled in RMB， Chinese companies operating abroad will be able to avoid exchange risks in trade， contracting and services， and Chinese exporters will not need hedging receivables， thus slashing costs. On the other hand， banks providing loans in RMB will increase Chinese companies’ financing capacity and extend Chinese financial institutions’ presence overseas.
At present， there is a long way to go for the RMB’s internationalization. In particular， the RMB’s recent depreciation lowered expectations in the market. The latest statistics by Swift show that in June 2017， the RMB was the sixth most used currency， and 1.98 percent of international payments were settled in it， while a year earlier the RMB ranked as the fifth most used and accounted for 2.09 percent of settlements. However， the major reason for the dip is external policies on restricting capital outfl ow， rather than shrinking international trade. Therefore， it is anticipated that the RMB can reach even greater heights.
Efforts needed
International cooperation under the framework of the Belt and Road Initiative has created a benign environment for RMB internationalization. On the one hand， the cooperation has yielded plentiful results. During the Belt and Road Forum for International Cooperation last May， a list of deliverables was produced， including 76 items comprising more than 270 concrete results in five key areas， namely， policy， infra-structure， trade， fi nance， and people-to-people connectivity. Cooperation has expanded to mining， construction， manufacturing， fi nance， and science and technology. On the other hand， there is no dominant local currency in less developed countries along the Belt and Road routes， which means it is easier for them to accept and adapt to a new currency. With regards to the RMB， the currency has been included in the IMF’s Special Drawing Rights （SDR） basket， playing a rising role in international payments， investment and financing， and foreign exchange transactions and reserves. At present， more than a few developing countries are beginning to consider subscribing to RMB bonds to diversify their reserves in response to the spillovers of the U.S. monetary policy and the related risks in foreign exchange.
Meanwhile， China is becoming a major creditor on the platform of the Belt and Road. Many projects undertaken by Chinese companies are supported by Chinese fi nancial institutions. In other words， China is the largest lender in countries along the Belt and Road routes. Therefore， though RMB internationalization is still limited in scope and depth on a global scale， it is a historic opportunity for China to promote its currency’s global status and knock down obstacles in fi nancing for its businesses. Measures should be carried out in the following aspects.
Accelerating the building of the RMB’s cross-border payment system can facilitate RMB settlement in fields such as capacity cooperation and bulk commodity trade of energy， minerals and agricultural raw materials. Chinese fi nancial institutions should take advantage of their funds to iron out kinks in the RMB fi nancing and settlement. Furthermore， the usage of RMB will be tied up with project operations. Chinese financial institutions should tilt toward RMB financial products in international aid， investment and loans， and explore methods of RMB settlement in seller’s credit， buyer’s credit， concessional loans， syndicated loans， industrial investment funds and public-private partnerships.
Strengthening currency exchange between China and other countries along the Belt and Road， and extending the RMB swap from the forex reserve to a local credit system， are important to increase capital resources for developing the real economy. Since 2009， China has signed agreements on currency swaps with 31 countries and regions. In December 2016， the Egyptian central bank and the People’s Bank of China signed a currency swap agreement involving 18 billion yuan （$2.84 billion）， which provided Egypt with the same amount of liquidity to help ease the pressure from forex reserves. The currency swap will definitely tap capital resources for infrastructure and the real economy， and should be implemented at the market level. Trials of RMB business should be expedited in key industrial parks overseas where Chinese companies have congregated and have a strong demand for financing， investment and payment. By setting up offices in these industrial parks， Chinese financial institutions will be able to provide RMB-dominant fi nancial support systems and form an RMB transaction network in these areas. Chinese companies can then build platforms for international capital management within the industrial parks， so as to prevent and control financial risks and reduce costs.
Chinese financial institutions must be encouraged to provide supporting financial services to industrial capacity cooperation and increase RMB-dominant financial products such as RMB loans. Large-scale Chinese financial institutions have a leading role to play in RMB internationalization. Only when their RMB services are expanded to include cross-border liquidation， settlement and corporate investment and fi nancing， will the RMB overseas market begin to take shape.
To this end， China’s policy banks and large commercial banks should further improve their global networks， and provide their overseas offices with sufficient authorization. Due to the limited number of these banks’ branch offi ces in countries along the Belt and Road routes， the usage of the RMB is still confi ned in these regions. With regards to project financing， the government should encourage Chinese financial institutions to issue RMB loans with preferential interest rates.
From a long term， global perspective， China and the countries along the land and maritime Silk Road routes have obtained a slew of benefits in infrastructure construction and production capacity cooperation， laying a concrete foundation for further cooperation. However， fi nancial risks remain a hindrance to transnational synergy. Facilitating the use of China’s RMB in countries involved in the Belt and Road Initiative can help Chinese investors get around bottlenecks in exchange rates， financing and debts， and further promote the currency’s status in the international monetary system.
The Belt and Road Initiative， a key measure for Chinese companies going global， serves as an important platform for the RMB’s internation- alization. In their operations overseas， Chinese companies need to handle a large amount of fi nancial business such as exchange， guarantee， debit and credit， and insurance. In less developed countries along the routes， however， one of the perplexing issues for these companies is fi nancial risks brought about by fl uctuations in policies.
The first and foremost risk comes from inconvertibility. A few countries along the Belt and Road regulate foreign exchange differently in light of the international balance of payments. Foreign businesses and investors are prohibited or confi ned in the transfer of their legitimate incomes， including capital and profi ts， to foreign countries. So companies that make large profi ts from contracting projects， sales and services have no way to exchange them to foreign currencies and transfer them.
In countries exercising tighter control on exchange， the U.S. dollar’s price keeps buoyant in the black market. Some countries have adopted a fl oating exchange rate， but the bar， to a certain degree， is still there， especially for the import of non-strategic goods.
The second risk is rate fluctuation. Chinese companies’ overseas projects are generally settled in local currencies， and the construction takes a long period of time， they are therefore exposed to a higher risk of rate fluctuations. For less developed countries with a simple economic structure， exports are particularly vulnerable against the international market， resulting in a defi cit in international balance of payments and abrupt fl uctuations in exchange rates. The adjustment to a nation’s exchange rate mechanism or policies further increases risks in this regard. For example， on November 3， 2016， the Egyptian Government announced its intention to free fl oat its currency， and the Egyptian pound against the U.S. dollar was revised downward from 8.8 to 13 overnight.
The third issue is overseas asset guarantee. As their business expands， Chinese companies have an accumulated amount of assets overseas. Currently， their international financing relies on seller’s credit， buyer’s credit， concessional loans， syndicated loans and offshore loans against onshore guarantees， but their overseas assets are unable to serve as a guarantee. To some extent Chinese companies’ capacity for overseas fi nancing has been hindered.
Road ahead
RMB internationalization in countries involved in the Belt and Road Initiative will eliminate the bottlenecks affecting Chinese companies in exchange rates， fi nancing and debts， and mark up the RMB’s status in the international monetary system. If settled in RMB， Chinese companies operating abroad will be able to avoid exchange risks in trade， contracting and services， and Chinese exporters will not need hedging receivables， thus slashing costs. On the other hand， banks providing loans in RMB will increase Chinese companies’ financing capacity and extend Chinese financial institutions’ presence overseas.
At present， there is a long way to go for the RMB’s internationalization. In particular， the RMB’s recent depreciation lowered expectations in the market. The latest statistics by Swift show that in June 2017， the RMB was the sixth most used currency， and 1.98 percent of international payments were settled in it， while a year earlier the RMB ranked as the fifth most used and accounted for 2.09 percent of settlements. However， the major reason for the dip is external policies on restricting capital outfl ow， rather than shrinking international trade. Therefore， it is anticipated that the RMB can reach even greater heights.
Efforts needed
International cooperation under the framework of the Belt and Road Initiative has created a benign environment for RMB internationalization. On the one hand， the cooperation has yielded plentiful results. During the Belt and Road Forum for International Cooperation last May， a list of deliverables was produced， including 76 items comprising more than 270 concrete results in five key areas， namely， policy， infra-structure， trade， fi nance， and people-to-people connectivity. Cooperation has expanded to mining， construction， manufacturing， fi nance， and science and technology. On the other hand， there is no dominant local currency in less developed countries along the Belt and Road routes， which means it is easier for them to accept and adapt to a new currency. With regards to the RMB， the currency has been included in the IMF’s Special Drawing Rights （SDR） basket， playing a rising role in international payments， investment and financing， and foreign exchange transactions and reserves. At present， more than a few developing countries are beginning to consider subscribing to RMB bonds to diversify their reserves in response to the spillovers of the U.S. monetary policy and the related risks in foreign exchange.
Meanwhile， China is becoming a major creditor on the platform of the Belt and Road. Many projects undertaken by Chinese companies are supported by Chinese fi nancial institutions. In other words， China is the largest lender in countries along the Belt and Road routes. Therefore， though RMB internationalization is still limited in scope and depth on a global scale， it is a historic opportunity for China to promote its currency’s global status and knock down obstacles in fi nancing for its businesses. Measures should be carried out in the following aspects.
Accelerating the building of the RMB’s cross-border payment system can facilitate RMB settlement in fields such as capacity cooperation and bulk commodity trade of energy， minerals and agricultural raw materials. Chinese fi nancial institutions should take advantage of their funds to iron out kinks in the RMB fi nancing and settlement. Furthermore， the usage of RMB will be tied up with project operations. Chinese financial institutions should tilt toward RMB financial products in international aid， investment and loans， and explore methods of RMB settlement in seller’s credit， buyer’s credit， concessional loans， syndicated loans， industrial investment funds and public-private partnerships.
Strengthening currency exchange between China and other countries along the Belt and Road， and extending the RMB swap from the forex reserve to a local credit system， are important to increase capital resources for developing the real economy. Since 2009， China has signed agreements on currency swaps with 31 countries and regions. In December 2016， the Egyptian central bank and the People’s Bank of China signed a currency swap agreement involving 18 billion yuan （$2.84 billion）， which provided Egypt with the same amount of liquidity to help ease the pressure from forex reserves. The currency swap will definitely tap capital resources for infrastructure and the real economy， and should be implemented at the market level. Trials of RMB business should be expedited in key industrial parks overseas where Chinese companies have congregated and have a strong demand for financing， investment and payment. By setting up offices in these industrial parks， Chinese financial institutions will be able to provide RMB-dominant fi nancial support systems and form an RMB transaction network in these areas. Chinese companies can then build platforms for international capital management within the industrial parks， so as to prevent and control financial risks and reduce costs.
Chinese financial institutions must be encouraged to provide supporting financial services to industrial capacity cooperation and increase RMB-dominant financial products such as RMB loans. Large-scale Chinese financial institutions have a leading role to play in RMB internationalization. Only when their RMB services are expanded to include cross-border liquidation， settlement and corporate investment and fi nancing， will the RMB overseas market begin to take shape.
To this end， China’s policy banks and large commercial banks should further improve their global networks， and provide their overseas offices with sufficient authorization. Due to the limited number of these banks’ branch offi ces in countries along the Belt and Road routes， the usage of the RMB is still confi ned in these regions. With regards to project financing， the government should encourage Chinese financial institutions to issue RMB loans with preferential interest rates.