RCEP provides a sound market basis for RMB internationalization

Chinese Premier Li Keqiang attended the fourth LEADERS 'Meeting of the Regional Comprehensive Economic Partnership (RCEP) on 15 November 2020, which was held by video. In the presence of the leaders of the 15 countries, the trade ministers signed the RCEP agreement. This marks the official launch of the world's most populous free trade area with the largest economic and trade scale and the greatest development potential.

Recently, China Obor Interviewed Guan Tao, global chief economist at Bank of China Securities and former director of the Balance of payments Department of the State Administration of Foreign Exchange, to share his insights on RCEP and the internationalization of the RMB.

China's Belt and Road Network: What impact will the signing of RCEP bring to the internationalization of RMB?

Guan Tao: THE RCEP is the largest free trade agreement in the world. The signatories account for about 30% of the world's population, 30% of its GDP and 30% of its intra-regional trade. If we can significantly reduce our tariff level under the RCEP tariff reduction agreement, it will surely promote trade between the ten ASEAN countries, China, Japan and the ROK, plus Australia and New Zealand, the 15 countries. This also provides a good market basis for the use of the RMB.

In the internationalization of RMB, we adopt a policy of treating both domestic and foreign currencies equally: as long as we can do business with foreign exchange, RMB can also do business basically. The next step should be the process of RMB's acceptance and recognition in the international market.

The next step in promoting THE internationalization of THE RMB is to adhere to the market-driven and independent choice of enterprises. In this regard, the market needs to be cultivated slowly, and the RCEP signing provides a good market for the internationalization of the RMB.

One belt and one road network in China: how does the internationalization of RMB relate to the construction of "One Belt And One Road"?

Since the "One Belt And One Road" initiative was put forward in 2013, China has taken many practical measures, including promoting the internationalization of the RMB, to serve the "One Belt And One Road" development. In recent years, economic and trade exchanges between China and the countries along the One Belt And One Road belt and road, including investment and financing, have been faster than the average level. With the closer economic and financial ties between China and the countries along the "One Belt And One Road", the use of RMB in some economic and trade activities between China and the countries along the "One Belt And One Road" should be more natural.

Thanks to the implementation of the One Belt And One Road initiative, we have been more active in promoting connectivity, bringing China and countries along the One Belt And One Road economic and financial ties closer. If we can use RMB more as the currency of pricing and settlement, it will help to reduce the cost of transactions. The process is from easy to difficult. Since the starting point of RMB internationalization is relatively low, it is a slow process to cultivate the international market using RMB. The more money is used, the lower the transaction cost and the better the liquidity, so this work should be gradually promoted in the process of "One Belt And One Road" construction.

However, we should also note that the local currencies of some countries along the "One Belt And One Road" are not convertible and are not traded on the international market. Therefore, in fact, it is difficult for RMB and these currencies to form a stable and continuous exchange rate, which brings certain challenges to our management of the exchange rate risk exposure of RMB and local currencies.

China's belt and road network: how to use "One Belt And One Road" to promote the internationalization of RMB in the future?

Guan Tao: The signing of the RCEP has provided a good market for the internationalization of the RMB. At the same time, we have noticed that more work can be done to further promote the internationalization of the RMB.

First, at the government level, there could be more cooperation between governments to create better conditions for the cross-border circulation and use of RMB. For example, currency swap agreements could be used to provide liquidity support for the yuan's movement abroad. We have signed bilateral currency swap agreements with the central Banks of more than 30 countries, with a total quota of over 3 trillion yuan. There is still room for progress in this regard.

From a corporate perspective, the current liquidity of the renminbi is poor, in part because products are not plentiful enough. This requires enterprises and institutions, especially some financial intermediaries, to actively get involved and design some products according to market demand to promote the use of RMB in countries along the belt and Road. If our products are competitive, we have the bargaining power. In fact, we can recommend the use of RMB for pricing and settlement when doing trade with countries along the "One Belt And One Road".

In addition, the opening of the domestic financial market also promotes the internationalization of RMB, and the international use of RMB can form a closed loop. For example, the international market used to think that the RMB was useless, but now the domestic bond market and stock market are open, so foreign investors can buy RMB assets in China through channels like stock exchange and bond exchange. In effect, it becomes a closed loop: foreign investors have an income in renminbi and a payment to buy renminbi assets. Therefore, in recent years, the policies and market environment for the cross-border circulation and use of RMB should be more friendly.