China's Efforts to Internationalise the Renminbi (RMB)

China has been working towards making its currency, the Renminbi (RMB), a global currency. This effort intensified with President Xi Jinping's call for RMB's increased use in international trade and as a global reserve currency. Various factors, including the unpredictability of U.S. economic policies and the weaponisation of trade, have fueled this push.

Factors Influencing RMB Internationalisation

• The Global Financial Crisis of 2007-08 motivated China to reduce reliance on the dollar-centric system.
• China, as the world's largest trading nation, has increased RMB's use in cross-border trade settlement from 10% in 2017 to about 35% now.
• China and Russia settle 90% of their $245 billion trade in their national currencies, while China-Brazil trade sees 41% settlement in RMB.

RMB in Global Financial Markets

• Inclusion of the RMB in the IMF basket of reserve currencies was a symbolic move, with its share in global reserves rising to 2.3%.
• China's international debt market includes dim-sum bonds ($179 billion) and panda bonds ($55 billion), growing in popularity due to low interest rates.
• The Chinese inter-bank bond market is the second largest globally at $21 trillion, attracting international investors.

Expansion of China's Securities and Payment Systems

• China's securities market, worth $17 trillion, is opening to foreign investors, aided by initiatives like the Hong Kong-Shanghai Stock Connect.
• The China International Payment System (CIPS), established in 2015, integrates with SWIFT and sees increased usage, handling $25 trillion in transactions in 2024-25.

Innovations in Digital Currency

• China is pioneering a Central Bank Digital Currency (CBDC) through the mBridge project, facilitating instant cross-border settlements.
• This project involves central banks from China, UAE, Thailand, Saudi Arabia, and Hong Kong, handling transactions worth $55 billion.

Shanghai International Energy and Gold Exchanges

• The Shanghai International Energy Exchange hosts RMB-denominated oil futures, with Yuan holdings convertible to gold, reducing currency risk.
• Oil trade settled in RMB is currently about 5% but is increasing.

Implications of RMB Internationalisation

• China is integrating into global financial markets while avoiding full currency convertibility to mitigate volatility risks.
• RMB-based transactions offer a means to reduce global economic risks, not a direct substitute for the dollar.
• This shift may lead to geopolitical changes, potentially resulting in an RMB-dominated Asian economy.

Disclaimer: These are personal views of the writer and do not reflect the opinions of Business Standard.