With the continuous enhancement of China's economic strength, the international status of the RMB is also gradually rising. According to the "currency composition of official foreign exchange reserve (COFER)" data released by the International Monetary Fund (IMF) recently, the total foreign exchange reserves of RMB rose to 287.46 billion US dollars in the first quarter of this year from 269.49 billion US dollars in the fourth quarter of last year, representing the ninth consecutive quarterly increase. The renminbi's share of global reserves rose to 2.45 per cent, the highest since the IMF reported the data in the fourth quarter of 2016.
Experts said that the current global economic pattern accelerated changes, countries on the RMB swap demand further increased, swap purposes are more diversified, providing a major historical opportunity for the internationalization of the RMB.
Internal and external factors promote the promotion of status
Data show that at the end of the first quarter of this year, the global foreign exchange reserves totaled 12.57 trillion US dollars, among which the US dollar accounted for 59.54%, the euro 20.57%, the yen 5.89% and the pound 4.7%, making the RMB the fifth largest foreign exchange reserve currency in the world.
Guan Tao, global chief economist at Bank of China Securities, said it was a combination of internal and external factors. In terms of internal factors, the main reason is that China's economy is stable and improving, and the business environment is constantly improving, which makes it more attractive to foreign investment. In particular, the domestic financial market continues to open wider to the outside world, and opening-up measures such as QFII and RQFII lifting investment quota restrictions and bond connection have been implemented one after another. China's stocks and bonds have been included in international stock and bond indexes and gradually increase their weight, increasing the demand for overseas RMB financial asset allocation.
"Externally, the abuse of economic and financial sanctions by key reserve currency issuers has accelerated the trend towards multi-polarity in the international monetary system. Moreover, the Fed's implementation of zero interest rates and unlimited quantitative easing has partially distorted financial asset prices. In the first quarter of this year, despite the rise in 10-year US bond yields, the average yield gap between Chinese and US government bonds was still 154 basis points, higher than the level before the COVID-19 epidemic, attracting foreign investors to increase their allocation of RMB bonds. Over the same period, foreign investors increased their net holdings of renminbi bonds by $63.3bn, up 11 per cent month-on-month." Mr Guan said.
Zhou Maohua, an analyst with Everbright Bank, believes that the steady rise of the RMB in the share of global foreign reserves is also related to the following factors: First, the stable trend of the RMB exchange rate. Among major international currencies such as the dollar and the euro, the yuan's exchange rate fluctuates least, meaning there is less risk in settling trades in the yuan. The second is the downward trend in global demand for dollar reserves. With the development of multi-polarization of the global economy, the proportion of the US economy in the global economy began to decline, the Federal Reserve and other central banks to implement unconventional policies for a long time, unilateralism and protectionism, as well as the US dollar has been politicized to some extent, so that the diversification of foreign exchange reserves has become a trend.
Internationalization goes to a higher level
In October 2016, the RMB was identified as a freely usable currency by the IMF and included in the basket of currencies that constitute the Special Drawing Rights (SDR) and separately included in the COFER database. IMF members would then be able to count their foreign assets denominated in renminbi as official reserves.
The renminbi's share of global foreign exchange reserves has more than doubled since 2016. China merchants securities chief Xie Yaxuan macroeconomic analyst, the yuan to further expand the scope of application of in the world, such as in cross-border settlement, cross-border trade payment, cross-border credit and usage of cross-border securities transactions on the increase, this means that the foreign exchange reserve, and continuous increase of recognition of the renminbi, willingness to invest in renminbi assets growing.
"The increase in the share of global RMB reserves means the internationalization of the RMB at a higher level, that is, the function of the reserve currency as an international currency is further consolidated and strengthened, and the market acceptance and recognition of RMB internationalization is further improved." Guan believes that balancing development and security is the bottom line of opening up to the outside world. International experience and lessons show that premature financial opening-up often ends in financial crisis. Therefore, the 14th Five-Year Plan and the Outline of the 2035 Vision Goal put forward the need to promote the internationalization of the RMB cautiously, which reflects the sober judgment of the central government on the situation at home and abroad.
"The economy is strong, the currency is strong. The internationalization of the RMB is a natural process. The key is to accelerate the construction of a new development pattern featuring domestic circulation as the main body and mutually reinforcing domestic and international cycles, and achieve high-quality development and high-level opening up. Only in this way can the international market continue to enhance the trust and recognition of the RMB." Mr Guan said.
There is no need to worry about big fluctuations in exchange rates
Industry insiders generally believe that the RMB exchange rate is expected to remain basically stable in the second half of the year, the safety and risk-aversion attributes of RMB assets will be further strengthened, and the proportion of RMB in the global foreign exchange reserves will still have a large room to increase.
"Judging from the trend, China's economy is developing well in the medium to long term and is deeply integrated into the global economy. The internationalization of the RMB is gradually accelerating. At the same time, the renminbi is one of the most stable currencies in the world and the diversification strategies of foreign exchange reserves will promote the renminbi's share in global foreign exchange reserves to rise. At present, the renminbi's share of global foreign exchange reserves does not match the size of the economy and there is still a lot of room for it to grow." "Zhou Maohua said.
Guan Tao believes that the three advantages contribute to the continued increase in the proportion of foreign exchange reserves. First, compared with zero and negative interest rates and quantitative easing in developed countries, China's monetary policy is still in a normal state. In the global shortage of safe assets, the positive yield of RMB government bonds has a higher global allocation value. Second, the basic pattern of China's long-term economic growth remains unchanged. Both the economic and financial systems have shown strong resilience in the face of the epidemic, which will further enhance the attractiveness of RMB financial assets. Third, when globalization is blocked, China firmly embraces globalization and further promotes institutional opening up, which is conducive to enhancing the confidence of foreign investors.
Market participants believe that the yuan's exchange rate has been relatively unaffected compared to other emerging market countries that have experienced sharp currency fluctuations as a result of the Fed's monetary policy shift, so investors need not worry about big swings in the yuan's exchange rate.
