“To gradually realize the renminbi’s free convertibility” has been defined as one of the goals for the 12th Five-Year Plan (2011-15). During this period, with an unremitting push from the Chinese government, remarkable progress has been made in the RMB internationalization. By the end of 2014, the RMB already had become the second most-used currency for documentary credit transactions, fifth payments currency and ninth most actively traded currency globally. Also by the end of last year, China had inked bilateral currency-swap agreements with 28 countries, set up RMB clearing banks in 14 countries and regions, pushed forward the strategy of RMB offshore centers and promoted the RMB as one of the reserve currencies of the IMF’s Special Drawing Rights basket. These measures, however, were mainly driven by the financial market arbitrage, and failed to show much support to local real economies. The offshore market for RMB internationalization is still short of a solid foundation.
The “One Belt, One Road” initiative now offers fertile fields for RMB internationalization to grow deep roots. The routes encompass 65 countries, with a population of 4.4 billion, accounting for 65% of the global total. Their combined GDP accounts for 29% of the global total, and their trade volume amounts to more than 60% of the global total. China is the biggest trading partner for most countries along the Belt and Road routes. Many countries along the routes have robust demand for infrastructure and industrialization, and some Chinese industries, such as high-speed railway, nuclear power, construction engineering, smart grid, large and heavy equipment and construction materials, are globally competitive and have the capacity for exports. China’s manufacturing industry is not only high in quality and low in costs, but also highly competent in providing supporting facilities, and these features match perfectly with the demand of these countries. With the implementation of the “Belt and Road” strategy and through the connectivity of infrastructure facilities, it could help promote deeper integration between cross-border RMB operations and the real economy of these countries, and will help further consolidate the foundation for steady progress of RMB internationalization.
On the heels of continuous implementation of the “Belt and Road” initiative and the launch of the Silk Road Fund and the Asian Infrastructure Investment Bank, China will enter a new era as an active capital exporter. In 2014, China already had become a net capital exporter, with an annual non-financial outbound direct investment amounting to $102.9 billion, a year-on-year growth of 14.1%. Along with the acceleration of the “going global” moves by the Chinese enterprises, China is set to become the biggest capital exporter in the world. Under such a scenario, higher demand for opening the capital account will emerge, and curbs on the capital account will have to be further eased to satisfy the needs.
In the past few years, the pace to make the RMB convertible, a core move for speeding up the RMB internationalization, has been quickened. The launch of the China (Shanghai) Pilot Free Trade Zone in 2013 and the Shanghai-Hong Kong Stock Connect program in 2014 were all important steps by the Chinese government to speed up the liberalization of the capital market. At present, only a few sub-items of the capital account are still under control and are not subject to free convertibility. According to the classification of capital account transactions by the International Monetary Fund, only five out of the 40 sub-items are not freely convertible, that is, the opening level of China’s capital account has approached 90%. The five sub-items mainly involve personal cross-border investment and the issue of stocks and other financial instruments in the Chinese market by non-resident entities. The year 2015 is the time for reviewing the Special Drawing Rights and also the last year of China’s 12th Five-Year Plan. China will continue to promote the RMB free convertibility in an attempt to achieve the policy goal of basically opening the capital account.
However, conditions are yet to be ripe for full opening of the capital account. Generally, four basic prerequisites must be met before full convertibility under the capital account, namely, a stable macroeconomic environment, well-established financial supervision system, adequate foreign exchange reserves and stable and healthy financial institutions. International experience has proven that these preconditions are relative and are not necessarily the definite winning points for the success of opening the capital account. At present, China’s macroeconomic environment is stable and foreign exchange reserves are abundant, but the level of financial supervision is still very far behind the developed economies, the opening level of the financial industry is still in the primary stage, the financial system still has much room for improvement, and the country still lacks experience in coping with international financial risks. With all these factors, any premature opening of the capital account is likely to cause great risks to China. Although the “Belt and Road” plan serves as a big stage for RMB internationalization, it would be impossible to reap the benefits in the short term if the capital account is not completely open. This is also a major challenge for the RMB internationalization.
It is, however, worth mentioning that free convertibility under the capital account does not necessarily mean to achieve a completely free cross-border flow of capital. According to the IMF statistics, 70% of IMF members, whose currencies are freely convertible, still impose various restrictions on capital flows in such sectors as direct investment, real estate transactions and the capital market. On the basis of reflecting on lessons from the 2008 global financial crisis, the IMF also changed its long-held view on free convertibility under the capital account, and began to recognize the reasonability to impose certain restrictions or temporary controls on the capital account by its member countries. Therefore, even after China realizes the RMB free convertibility under the capital account, it would still be necessary to retain some controls in order to prevent impacts from cross-border capital flows, and to safeguard a stable value of the RMB and the safety of the financial sector.
The “Belt and Road” initiative provides the possibility for RMB internationalization to grow deep roots, but it should also be admitted that the RMB internationalization is a “double-edged sword.” On the one hand, exchange-rate fluctuations will mean greater exchange risks for enterprises, but on the other hand, the RMB cross-border settlements could also help enterprises to hedge exchange-rate risks. The development of the RMB offshore market could help enterprises lower the costs of overseas financing, the RMB futures could help investors to hedge exchange-rate risks, and the firm valuation of the RMB and the gradual progress in free convertibility under the capital account will be of immense help to Chinese enterprises in executing their “going global” plans.
