Expert Analysis - Eliminating Misunderstandings about the Internationalization of the RMB

Recently, some media and public opinion have raised many questions about the direction, effects and prospects of the internationalization of the RMB. Many of these views are misunderstandings about the internationalization of the renminbi, some of which are also due to misinterpretation of numbers and a lack of understanding of the latest trends.

There are still some viewpoints that have some logic in theory, but the severity of the problems they point out is far less worrying in reality than it describes.

Don't overestimate the pressure on trade settlement

One of the doubts: RMB trade settlement has become the main driver of the sharp rise in foreign exchange reserves, increasing the difficulty of monetary policy and reserve management, and running counter to the internationalization of the RMB.

The logic of this view is that since the current RMB trade settlement is mainly for import trade settlement, the original importer who purchased the foreign currency no longer purchases foreign currency due to switching to RMB settlement, the central bank is forced to purchase foreign exchange, and the RMB trade settlement becomes foreign exchange reserve. The main reason for soaring.

According to some scholars, from 2010 to now, due to the settlement of RMB imports, the central bank was forced to purchase more than 120 billion to 140 billion US dollars of foreign exchange assets.

First of all, it should be pointed out that, in principle, there is no direct correspondence between the choice of trade settlement currency and the change of foreign exchange reserves. For example, import payments can use trade credit, and it is not necessary to purchase foreign exchange from the central bank.

Even assuming that the use of renminbi to pay for imports causes the central bank to be forced to buy more dollars, the resulting pressure on reserves is only about a third of that figure.

These scholars overestimated the pressure on foreign exchange reserves caused by the renminbi trade settlement because several assumptions in its calculations have problems.

First, only seeing the import renminbi trade settlement will increase the pressure on the central bank to purchase foreign exchange, but did not consider that the renminbi export settlement will reduce the pressure on the central bank to purchase foreign exchange.

Second, assume that RMB import settlement accounts for 80%-90% of all trade settlements. This assumption overestimates the ratio of import settlements, thereby overestimating the pressure on reserves.

According to the statistics of the Hong Kong Monetary Authority, the proportion of import settlements through the Hong Kong renminbi trade settlement has declined significantly in the past two or three quarters. The proportion of import settlement was 81% in the third quarter of 2010, 75% in the fourth quarter, 67% in the first quarter of 2011, and 58% in the second quarter (the proportion in June was 47%, that is, the amount of RMB export settlement has exceeded the import settlement. The amount, or more, the returning renminbi has exceeded the renminbi flowing out).

Even though Hong Kong data may have a slightly overestimated national export settlement ratio due to different statistical metrics, domestic data are underestimated due to technical reasons that do not include all export settlements. Therefore, the most likely ratio of import settlements should be significantly lower than the assumed 80%-90%.

Third, with the gradual elimination of certain bottlenecks that hinder the settlement of RMB exports (see below), the scale of RMB export settlement is and will continue to grow rapidly, which will alleviate the pressure on foreign exchange reserves. In fact, according to Hong Kong data, in the past eight months (from October last year to May this year), the growth rate of RMB export trade settlement has been significantly higher than the speed of import settlement, indicating that this problem is improving.

How can we estimate the pressure on foreign exchange reserves more accurately? We believe that a more accurate method is to refer to the increase in corporate deposits in Hong Kong's renminbi deposits.

According to our estimation, Hong Kong's renminbi deposits account for more than 95% of global renminbi deposits. Therefore, it can basically represent the amount of renminbi purchased by foreign companies in foreign currencies due to differences in RMB import trade settlement and export trade settlement.

These net purchases, close to other factors, are close to the additional foreign exchange reserves of the People's Bank of China due to the imbalance in trade settlement.

From January 2010 to May 2011, the net increase in corporate deposits in Hong Kong was RMB 320 billion, equivalent to US$ 47 billion. In other words, the increase in reserves due to the imbalance in the settlement of the RMB trade is only about one-third of the estimates of the above scholars.

Compared with the full increase of China’s foreign exchange reserves (estimated at around US$750 billion) from January 2010 to May 2011, the increase in reserves caused by RMB trade settlement accounts for only 6.4% of the total reserve increase. It cannot be said that "The main push behind the soaring foreign exchange reserves."

If compared with the stock of all foreign exchange reserves in China ($3.3 trillion), the increase in reserves due to RMB trade settlement only accounts for 1.4% of the reserve stock.

More importantly, we should not mistakenly believe that the increase in foreign exchange reserves will inevitably increase domestic liquidity and inflationary pressures, or increase the central bank's hedging costs.

In other articles, we have discussed in detail the following points: Although the RMB import trade settlement will increase the reserve pressure, as long as this part of the liquidity is circulating overseas, it will not increase the domestic liquidity, so the increase of these reserves will not Leading to domestic inflationary pressures does not require hedging.

The reasons are as follows: Since the RMB is used to pay for imports, it may reduce the purchaser's purchase of foreign exchange, thus forcing the central bank to purchase foreign exchange and increase reserves. However, while the reserves increase, the corresponding RMB liquidity is paid overseas through RMB trade settlement. As a result, the domestic money supply is not affected. Therefore, the increase of such reserves will not increase inflationary pressure and does not require hedging.

Of course, some people may argue that some of these renminbi that have flowed overseas have returned to China through various channels, leading to liquidity or hedging pressure.

That is another question. At present, a considerable amount of deposits from the separated shores are returned to the Shenzhen Branch of the People's Bank of China. The People's Bank only pays 0.72% of the interest rate, which is a very low hedging cost compared with the 4% of the central bank's interest rate.

In addition, with the diversification and liquidity of RMB financial products in the offshore market, the use of RMB third parties (such as through the integration of RMB in Hong Kong, swaps into other currencies in third countries), and the RMB The development of RMB trade and investment between Hong Kong and other regions brought by ODI will enable more offshore RMB to “extracorporeal circulation” without causing pressure on domestic liquidity and hedging.

Don't exaggerate the expected effect of RMB appreciation

Question 2: Almost all of the RMB trade settlement is the settlement of import trade (ie “severely lame”), indicating that due to the appreciation of the RMB, overseas companies only accept RMB (and are not willing to pay RMB), so the current RMB trade settlement only caters to Speculation in overseas gambling on the appreciation of the renminbi; once the renminbi appreciates, the internationalization of the renminbi will go backwards.

We believe that the above views exaggerate the extent of trade settlement “suffocation” and seriously overestimate the role of RMB appreciation expectations in the current relatively small proportion of RMB export settlement.

As mentioned above, the proportion of import settlements through the Hong Kong renminbi trade settlement has been significantly reduced in the past two or three quarters.

It should be pointed out that the current problem of restricting the settlement of RMB export trade is not only the expectation of RMB appreciation, but also the extremely low US dollar loan interest rate, which reduces the attractiveness of the RMB as a financing currency, and many other financial infrastructure and institutional bottlenecks.

Encouragingly, as the offshore market matures, these bottlenecks are and will tend to ease, and the proportion of RMB export settlements in total trade settlement will gradually increase.

First, in the early days of RMB internationalization, the amount of RMB in the offshore market was very limited. It was difficult for overseas importers to obtain RMB (purchasing RMB in the market or obtaining RMB trade credit overseas), so it was impossible to pay for the import in RMB. (For China, RMB exports are settled).

With the increase in the size of RMB deposits in the offshore market (currently reaching about 550 billion yuan in Hong Kong), Hong Kong's RMB foreign exchange market and money market transactions have become increasingly active, and the ability to provide RMB trade credit in Hong Kong has begun to increase. Nature will grow quickly.

In addition, with the normalization of the US dollar and euro interest rates, the attractiveness of the RMB as a financing currency will also increase; RMB loans will become a major source of offshore renminbi liquidity, thereby further reducing the pressure on foreign exchange reserves growth.

Second, the infrastructure of Chinese-funded and foreign-funded banks in other countries and regions outside Hong Kong (such as the United Kingdom, Singapore, London, etc.) (such as account opening, secondary settlement, foreign exchange risk hedging) began to take shape, convenience It is improving, which will promote the export settlement of RMB in the future.

Third, since the beginning of the year, the People's Bank of China has introduced a policy of RMB offshore direct investment (ODI). With the growth of RMB foreign investment, the demand for imports (equipment, labor, etc.) from China brought about by these overseas Chinese-funded projects will grow rapidly, and this part of China's export is the easiest to achieve RMB settlement.

Fourth, the current RMB export settlement is still in the pilot stage, and only 67,000 export enterprises are allowed to participate. As long as the export pilot is extended to all export enterprises as soon as possible, it will definitely further promote the growth of RMB export settlement.

Accordingly, in order to improve the “suffocation” of RMB trade settlement, we should not slow down the pace of “renminbi going global”, but should further promote the development of the offshore market (allowing more overseas importers to obtain RMB payments). Services), promote RMB ODI, and promote the pilot of RMB export settlement to all export enterprises.

In addition, some time ago, the expected appreciation of the renminbi was strong, which really led some overseas export companies to accept the renminbi, while overseas importers were reluctant to use the renminbi letter of credit. But the role of this (known as speculation or arbitrage) factor should not be overstated.

The appreciation of the RMB as reflected in the NDF market in recent months has been greatly reduced (the current one-year NDF reflects a 1.2% appreciation of the RMB within 12 months, much smaller than the previous 4%-5% forecast).

The expected decline in the appreciation of the renminbi has begun to promote the growth of RMB export settlement, but it has not reversed the overall growth momentum of RMB trade settlement.

Since May this year, the RMB appreciation of the DNF market has been expected to drop sharply, but the total amount of RMB trade settlement is still growing at a rate of more than 10% per month.

Therefore, there is no evidence that the weakening of the expected appreciation of the renminbi will fundamentally reverse the trend of internationalization of the renminbi. To a certain extent, the weakening of the expectation of appreciation has not only reversed the overall trend of RMB trade settlement growth, but has made its structure more reasonable.

From the international experience point of view, in the process of internationalization of the US dollar, the Japanese yen and the Euro, although these currencies have appreciated over a period of time, temporarily increasing the demand for these currencies abroad, they are not dependent on continuous Currency appreciation to promote internationalization.

The relatively stable exchange rate of these currencies against other currencies and even the depreciation over time did not lead to a complete reversal of their currency internationalization. As far as the internationalization of the RMB is concerned, the expectation of RMB appreciation in the short term is indeed a factor in promoting the settlement of RMB import trade, but it is certainly not the only and permanent driving force.

China's huge international trade volume, rapid growth of foreign direct investment, the demand for RMB FDI by foreign companies, and the further active trading of offshore RMB financial products are all sources of overseas demand for RMB, and these sources do not depend on RMB. appreciation. This shows that the internationalization of the renminbi is taking advantage of the trend, rather than destructive.

Don't misjudge domestic liquidity and inflationary pressures

Question 3: Allowing RMB FDI will lead to new capital inflows, increasing domestic liquidity and inflationary pressures.

This view is a misunderstanding. Our research shows that replacing the foreign currency FDI with RMB FDI does not increase domestic liquidity and inflationary pressures compared to the baseline scenario (FDI investment in foreign currency). The reason is that in the case of a benchmark, when a foreign-invested enterprise makes direct investment in China with foreign currency, it will increase the pressure on the central bank to purchase foreign exchange, and the central bank's purchase of foreign exchange will create domestic liquidity.

Now, if FDI is replaced by the renminbi, the increased liquidity in the territory is the same as the baseline situation. In other words, the replacement of foreign currency FDI by RMB FDI will not create additional domestic liquidity and inflationary pressures.

In the article "The Impact of Offshore Markets on Domestic Monetary and Financial Issues" at the beginning of the year, Ma Jun explained this issue in more detail: If Hong Kong develops the offshore market to the size of two trillion yuan of deposits in the next two or three years. At this stage, the domestic and Hong Kong regulatory authorities have sufficient tools to control the impact of the development of the offshore market on domestic monetary policy and capital flows.

To promote the development of the offshore market and reduce the impact on domestic monetary policy, foreign companies should be encouraged to replace foreign currency FDI with RMB FDI, encourage RMB trade settlement, and promote the use of RMB by local and third countries in Hong Kong, especially foreign countries. Enterprises borrow RMB in Hong Kong and use it abroad.

At the same time, the financing and return of Chinese-funded enterprises in the RMB market in Hong Kong should be properly controlled.

The renminbi cannot be upgraded in one step.

Question 4: The internationalization of the renminbi is preceded by exchange rate reform, which is the end of the market, or the order is reversed.

Some scholars believe that since the value of the renminbi is seriously undervalued, the internationalization of the renminbi (such as the promotion of renminbi trade settlement) will only lead to arbitrage, without the real use of the renminbi in international trade and investment. The implicit conclusion here is that the renminbi must be upgraded in place before the renminbi can be internationalized.

This view has some truth in theory, but reality is more complicated than theory.

First of all, due to various well-known reasons, especially before the capital project is not fully opened, a large appreciation of the RMB in one step is impossible.

Second, the gradual exchange rate of the renminbi to the equilibrium exchange rate determined by market supply and demand also requires the gradual opening of capital projects, which is a process (at least a few years). At the same time, the internationalization of the renminbi must also be a long-term process.

For example, promoting the function of RMB in pricing, settlement, trade financing, and direct investment in international trade involves eliminating a lot of unnecessary controls, establishing various infrastructures, cultivating global market awareness of the renminbi, and cultivating talents. Waiting for work. For another example, the development of offshore markets also requires a lot of work, such as increasing liquidity, developing financial products, cultivating markets, and improving risk control capabilities.

Therefore, what we are facing is certainly not a question of the appreciation of the renminbi today and the internationalization of tomorrow.

What we are facing is how to gradually promote the internationalization of the RMB while the RMB exchange rate is gradually moving towards a balanced exchange rate (a few years) while the risk is controllable.

Another important benefit of starting the process of RMB internationalization now is to provide more impetus and pressure for other reforms.

If we determine the goal of RMB internationalization and strive to achieve basic convertibility of the RMB within five years, reforms such as exchange rate reform and interest rate liberalization will be required to be basically in place within five years.

For example, if the renminbi is basically convertible after five years, and then the renminbi exchange rate is still far from the equilibrium exchange rate, it will lead to the risk of large-scale cross-border capital flows. Therefore, the window of exchange rate reform should be the next five years.

In addition, if the renminbi is basically convertible after five years, the demand for renminbi abroad cannot be predicted. The operational target of monetary policy can no longer be pegged to the money supply, and must be turned to pegged policy interest rates, and the policy The effective transmission of interest rates requires the marketization of interest rates.

In other words, if the goal of RMB internationalization is given, the opportunity period of interest rate marketization is only five years. These reforms have been discussed for many years in the past, but they are difficult to push due to various factors. If there is a "hands-on" of the internationalization of the renminbi, it will be possible to achieve greater reform momentum.

Like other reforms, the internationalization of the renminbi cannot be without any cost. If you are not willing to bear the cost, then no reform can be carried out; in the long run, no reform will lead to greater costs. The focus of the debate now is how big this short-term cost is.

We believe that some of the problems encountered in the internationalization of the RMB (such as the problem of RMB import settlement greater than export settlement and the resulting pressure on reserves) are completely within the controllable range.

Moreover, the problem should be to speed up reforms (such as pushing the RMB export settlement pilot to the whole country as soon as possible and further promoting the depth and breadth of the development of the offshore market), rather than going backwards (restricting the development of RMB trade settlement and offshore market). In order to solve it step by step.

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