• China is driving international RMB adoption for a digital and sustainable future
  • Opening up and engagement with the global capital market is paving the way for broader RMB acceptance
  • RMB use in cross-border trade settlement increased alongside the emergence of new products and services

Market confidence in the renminbi (RMB) has increased among global financial institutions (FIs) and companies. According to the annual survey conducted by China Construction Bank in partnership with The Asian Banker, the overall outlook on RMB internationalisation is encouraging. The three segments of respondents, domestic Chinese companies, overseas companies and global FIs, believe that the digital RMB and sustainable finance are among the key drivers for increased RMB use.

The COVID-19 pandemic had a significant impact on global trade and investment, and this was reflected in the survey results. While the RMB use remained stable in trade settlement, its use in cross-border direct investment and offshore financing dropped. Nevertheless, developments in the RMB market improved the acceptance of the RMB in international use, including more diversified demand for RMB products, overseas companies’ increasing willingness to use the RMB, and overseas FIs’ stronger wish to cooperate with Chinese counterparts.

FI and overseas companies’ perception of key challenges to RMB internationalisation, such as China’s economic outlook, currency volatility, interest rate fluctuation, capital controls, policy uncertainties as well as China-US trade tensions, have improved significantly in 2021. China was the only large economy to record gross domestic product growth amid the COVID-19 pandemic.

Driving international RMB adoption for digital and sustainable future

There was a divergence of attitudes among the three segments of respondents on the impact of key issues from global trade, digital currency and green finance on the future of RMB internationalisation,.

For Chinese companies, 85% and 83% indicated that the success of the Regional Comprehensive Economic Partnership and China-Europe Comprehensive Investment Agreement negotiations respectively will increase or maintain the international use of the RMB. Eighty-two percent of Chinese companies said that green finance has a positive impact on the international use of the RMB.

This year’s survey highlighted the difference in the level of green finance between China and other parts of the world. Overall, FIs’ holding of RMB-denominated green finance assets and products are still in its infancy. The proportion of RMB-denominated assets among various green finance assets is limited to below 15%. RMB-denominated small and medium-sized enterprise loans and housing loans accounted for a higher proportion of green finance assets than green and social bonds.

As FIs begin to pay more attention to RMB-denominated green finance products in 2021, they expect that the scale of such assets will increase. Of the FIs, 44% indicated that they will increase their holdings of RMB-denominated green bonds or certificates of deposits.

China is pushing forward the development and use of its digital currency and exploring cooperation on the digital currency with various regulatory and market entities around the world. The People’s Bank of China (PBOC) and the Hong Kong Monetary Authority (HKMA) have cooperated to conduct small-scale technical tests on the cross-border use of the digital RMB in April 2020. The trial was focused on the use of related apps, network connection and application scenarios.

In February 2021, with the support of the Bank for International Settlements Innovation Hub Centre in Hong Kong, the Digital Currency Research Institute of the PBOC and the HKMA, and the central banks of Thailand and the UAE have jointly initiated a multilateral central bank digital currency (mCBDC) bridge research project to explore the application of CBDC in cross-border payments.

Overall, a majority of respondents were optimistic that the digital RMB will promote the internationalisation of the currency. Specifically, 89% of Chinese companies, 70% of FIs and 69% of overseas companies believed that the digital RMB will promote RMB internationalisation, an increase of five, three and eight percentage points respectively compared with the previous year.

 

Opening up to global capital market paves way for broader RMB acceptance

China has been opening its domestic financial markets to foreign players, and this will have positive impact on the demand and use of the RMB. The Qualified Foreign Investor (QFI) scheme has emerged as the main channel for foreign institutional investors to access China’s financial markets, after the merger of the Qualified Foreign Institutional Investor and Renminbi Qualified Foreign Institutional Investor regimes into a single QFI scheme in November 2020.

The clearing efficiency of the Cross-Border Interbank Payment System (CIPS) has attracted the participation of more foreign FIs. This year’s survey results show that 53% of FIs used CIPS to conduct over 30% of RMB cross-border transactions. The proportion of RMB cross-border transactions processed through CIPS is expected to continue to rise. Of the FIs, 42% are expected to use CIPS for more than 40% of their RMB cross-border transactions in 2021, compared with 29% in 2020.

 

In terms of the preferred offshore RMB centres, 64% of Chinese companies and 25% of overseas companies preferred Hong Kong. This year, the proportion of Chinese companies that chose Hong Kong as

their main offshore RMB centre increased by 29 percentage points compared with the previous year. Aside from Hong Kong, 25% of FIs conducted their offshore RMB transactions in the New York, an increase of almost 10 percentage points from the previous year. Singapore and London were also popular offshore RMB centres for FIs in 2020.

RMB use in cross-border trade settlement increased alongside emergence of new products and services

The use of RMB cross-border products and services has become more diversified. Firstly, the respondents indicated a relatively high level of cross-border RMB cash management usage, at 46% of Chinese companies, 37% of overseas companies and 40% of FIs. Secondly, 23% of FIs, 25% of Chinese companies and 20% of overseas companies engaged in offshore RMB wealth management. Thirdly, 25%, 36% and 26% respectively took part in offshore merchant service and payment (including cooperation with third parties).

Meanwhile, Chinese companies, overseas companies and FIs maintained a high level of RMB use for cross-border trade settlement despite challenges in the external environment. For the three segments of respondents, 79% of FIs, 74% of overseas companies and 62% of Chinese companies indicated that they increased or maintained the level of RMB use in trade settlement in 2020.

This year’s survey indicated that overseas RMB-denominated assets will become more attractive. FIs were optimistic about their holdings of overseas RMB-denominated assets, and 64% expected to increase or maintain their holdings in 2021. Thirty-four percent of overseas companies and 33% of Chinese companies expected to increase their overseas RMB-denominated asset holdings in 2021. Meanwhile, the proportion that indicated that they will reduce their holdings has dropped.

The cross-border use of the RMB has become more convenient and the overall survey results indicated strong underlying support for the currency. Importantly, the continued commitment of the Chinese authorities to reform and open up the domestic financial market, backed by new digital financial infrastructure, new regional free trade agreements and leadership in the emerging sustainability and green agenda, bode well for the growth of RMB-denominated businesses in the future.

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