I have read and understood the rules on cheating, plagiarism and appropriate

referencing as outlined in my handbook and I declare that the work contained in this
assignment is my own, unless otherwise acknowledged.

Signed: Siti Maghfirotul Ulyah

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COURSE TITLE: SEMINARS ON SPECIAL TOPICS (I) (III)

COURSE CODE:

FN5001301FN5003301

DATE: 10 January 2016

STUDENT NAME: Siti Maghfirotul Ulyah

STUDENT NUMBER: M10318801

The Globalization of Renminbi : The Process and Implication

1
1.1

The Globalization Process

The Renminbis Motivation to Go Global
To identify the potential aspect of RMB, we can look at the list of the world

payment currencies. Below is the chart of the top 20 world payment currencies to
compare the position of RMB in 2013 and 2104.

Figure 1. World currency

Source : SWIFT, World Bank

After nearly one year firmly positioned at number 7, the RMB has entered the top
five of world payment currencies since November 2014, overtaking both the Canadian
Dollar and the Australian Dollar by value. Two years ago, in January 2013, the RMB
was ranked at position number 13 with a share of 0.63%. In December 2014, the RMB
reached a record high share of 2.17% in global payments by value and now competes
the Japanese Yen which has a share of 2.69%.
The RMB breaking into the top five world payments currencies is an important
milestone said Wim Raymaekers, Head of Banking Markets at SWIFT. It is a great
testimony to the internationalisation of the RMB and confirms its transition from an
emerging to a business as usual payment currency. The rise of various offshore
RMB clearing centres around the world, including eight new agreements signed with
the Peoples Bank of China in 2014, was an important driver fuelling this growth
(Anonim, RMB into the top five, 2015).

To see the evolution of RMB as the top 5 world payment currency, I provide the
time series plot of all top 10 world payment currency from December 2012. Below is
the figure:

Figure 2. Payment currency evolution

Source : SWIFT, World Bank

Based on Figure 2, the rank of RMB increased significantly from year to year. In
December 2012, the position of RMB is in number 14th. Then a year later (2013), the
position increases to be number 8. The latest one, in December 2014, the position
increases again to be the top 5 in world payment currency.
Overall, global RMB payments increased in value by 20.3% in December 2014,
while the growth for payments across all currencies was 14.9%. The RMB has been

showing a consistent three digit growth over the past two years with an increase in value
of payments by +321%. Over the last year, RMB payments grew in value by 102%
compared to an overall yearly growth for all currencies of 4.4%.
In conclusion, the decision for China to join SDR is whether it is content to have
a global reserve currency, or if it aspires for the RMB to one day be as important to
trade and finance as the dollar is now. There are both benefits and costs in being the
leading global reserve currency such as the default currency for world trade and
financial transactions, the most widely used unit for savings, and so on.
Besides that, One Belt, One Road (OBOR) is one of the reason. OBOR is one
of the defining visions of the administration of Xi Jin Ping, the president, and ranks
high in his China Dream, a hankering to recapture atavistic glories and restore China
to a position of economic centrality and moral superiority in world affairs. But without
an internationally respected currency, these interconnected ambitions will be hard to
realize. Its economic sovereignty will continue to be circumscribed unless it can
extricate itself from the US dollar zone, which it occupies by dint of conducting its
merchandise trade primarily in the greenback and then recycling its US dollar surpluses
into the American debt markets.
China government saw clearly that its endeavor to separate itself from the
influence of the US dollar will be stillborn unless it can nurture a viable RMB zone
to replace it. This means opening its RMB capital markets to foreign investment
inflows, so that companies that trade in the red-back, central banks that hold it on
reserve and fund managers around the world can hope to be rewarded.
China took two key lessons from the great financial crisis. It realized that the US
could be an unreliable economic partner, so that remaining inside the US dollar zone
would always risk turbulence. It also understood, as a crisis-ridden US had no difficulty
in selling its debt to the world, that in financial terms the possession of a global reserve
currency meant never having to say you are sorry (Anonim, Chinas geopolitical goals
require opening of markets, 2015).
Thus, since its elevation to a national policy in 2009, Chinas campaign to
internationalize the RMB was an endeavour that appealed to two of the most basic
priorities of Communist party power. Those were self-reliance and security.

1.2

Special Drawing Right

The SDR is an international reserve asset, created by the IMF in 1969 to

supplement its member countries official reserves. The SDR is neither a currency, nor
a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF
members. Holders of SDRs can obtain these currencies in exchange for their SDRs in
two ways: first, through the arrangement of voluntary exchanges between members;
and second, by the IMF designating members with strong external positions to purchase
SDRs from members with weak external positions. In addition to its role as a
supplementary reserve asset, the SDR serves as the unit of account of the IMF and some
other international organizations. (IMF, 2015)
SDR value is currently based on a basket of four major currencies, and the basket
will be expanded to include the Chinese RMB (RMB) as the fifth currency, effective
October 1, 2016. SDRs can be exchanged for freely usable currencies. As of November
30, 2015, 204.1 billion SDRs had been created and allocated to members (equivalent to
about $285 billion).
The SDR interest rate provides the basis for calculating the interest charged to
borrowing members, and the interest paid to members for the use of their resources for
regular (non-concessional) IMF loans. It is also the interest paid to members on their
SDR holdings and charged on their SDR allocation. The SDR interest rate is determined
weekly and is based on a weighted average of representative interest rates on short-term
debt instruments in the money markets of the SDR basket currencies.
Below is the figure of the weight of each currency in the I.M.F.s basket of
currencies (SDR) before and after RMB approved by IMF as one of the reserve
currency.

42% 42%

45%
37%

40%

31%

35%
30%
25%
20%

15%

11%

8%

9%

11%
8%

10%
5%

0%

0%
British pound Japanese yen

Euro

2010

U.S. dollar

Chinese
renminbi

2016

Figure 3. Weight of each currency in the I.M.F.s basket of currencies (SDR)

Source : IMF

Figure 3 shows that the weight of RMB after joining SDR is 11%. RMB reduce
the weight of the others currencies except US dollar. The weight of British pound is
reduced by 3% (from 11 % to 8%). The weight of Japanese yen is reduced by 1% (from
9 % to 8%) and the weight of Euro is reduced by 6% (from 37 % to 31%).
Inclusion in the SDR will only deepen expectations that China let market forces
decide the RMBs exchange rate. The point of the SDR is to weave disparate currencies
together into a single, diversified unit; some have suggested, for example, that
commodities be quoted in SDRs to reduce the volatility of pricing them in dollars. But
if China maintains its de facto peg to the dollar, the result of adding the RMB to the
SDR will be to boost the dollars weight in the basket, undermining its purpose.
1.3

Why is the RMB being considered to be part of the SDR?

The two main criteria for SDR inclusion are (1) share in global exports and (2)

currency is "freely usable" (as defined by the IMF). China clearly meets the first
criterion as its share of total global exports in 2014 amounted to 12.5%, surpassing the
US' 9%, as explained before. The question on the "freely usable" criterion remains
under debate.
The push for inclusion into the SDR has led to the acceleration of financial
liberalization reforms. Targeted reforms to further increase RMB convertibility have
been introduced. These include the opening of more offshore RMB clearing centres,

increasing foreign access into onshore markets (QFII and RQFII), expansion of
offshore investors by residents (QDII enhancements) and the widening of the currency
trading band. Interest rate framework is also being reformed with the recent
introduction of the deposit insurance system and the relaxation of deposit and lending
rate caps. The next section will explain more about that.

1.4

The Effort of China Government to Join SDR

To join SDR, China spend a long time to structure its policy. Below are the

chronological of Chinas internalization process.

Table 1. Chinas Internalization Process
System/policy

Period

Process

Dual Exchange Rate

1985-1993

RMB pegged to USD at around 2.5 RMB per USD

Unified Exchange Rate

1994

Policy Liberalization

Regional Development

2002

RMB devalued to 8.3 USD per RMB to enhance

competitiveness
QFDII can buy and sell RMB shares in China

2003

Personal RMB business in Hong Kong and Macau

2007

RMB Dim Sum Bonds in Hong Kong

RMB cross border trade settlement with Hong Kong,
Macau, and ASEAN
Extension trade with rest of the world investment in China
interbank bonds
(1) First RMB IPO

2009
2010

2011

(2) Restriction on foreign FDI lifted

(3) Cross border RMB borrowing and leading liberalized

Internationalization
Efforts

Latest five-year plan for reform of the industry :

(1) Relax controls on capital flows
2012-now

(2) Enhance the degree of convertibility of inward

portofolio investment
(3) Enlarge the outward portofolio investment
(4) Advance RMB convertibility

Source : INSEAD case

Based on Table 1, in 1994, China moved from dual exchange rate system to unified
exchange rate system in 1994. Managed floating rate regime established based on
market supply and demand. Moreover, first foreign exchange trading centre opened in
Shanghai, starting Chinas foreign exchange market. Exchange rate is set around RMB
8.7 per USD.
China began the process of liberalizing its financial markets in 2002 by allowing
Qualified Financial Institutions to buy and sell RMB shares in China. It went on to
develop its regional reach by allowing personal RMB business in Hong Kong and

Macau, and the issuance of dim sum bonds in Hong Kong. Before 2002, China joined
the World Trade Organization (WTO) in 2001. This was one of the effort in trading
aspect.
In 2007, first RMB-denominated bond issued by China Development Bank, worth
RMB 5 billion, debuts on Hong Kong stock exchange, making it the first publicly-listed
bond to be traded and settled in RMB. RMB bond issuance by mainland banks total
RMB 20 billion by the end of 2007. Then in 2008, the PBoC signed bilateral currency
swap arrangement with the Bank of Korea, providing each other with RMB 180 billion
in short-term liquidity. The State Council also allowed cross-border trade between
Guangdong, Yangze Delta, Guangxi and Yunnan with Asian countries to be settled in
RMB. Moreover, China signed bilateral currency settlement agreement with
neighbouring countries including Mongolia, Vietnam and Myanmar.
In 2009, RMB trade settlement pilot scheme Hong Kong, Macau and ASEAN
launched in five pilot mainland cities. Hong Kong participating banks can provide trade
finance to foreign traders settling trade with Chinese traders in RMB. Besides, first
offshore RMB sovereign bond issued in Hong Kong by Ministry of Finance. Mainland
subsidiaries of Hong Kong banks allowed to issue RMB bonds in Hong Kong. Also,
PBoC set up a new department responsible for exchange rate policy. One of its key
function is to develop the offshore RMB market in accordance with the evolution of
internationalization of RMB. Moreover, the World Bank chief called the USDs role as
a reserve currency relatively secure but said over the next 10-15 years the RMB will
provide an alternative once it is internationalized.
In 2010, Pilot scheme for RMB trade settlement expanded to 20 provinces and
municipalities. Overseas trade settlement rolled out to the rest of the world. The first
off-shore RMB product platform is created in Hong Kong. Then, Bank of China (HK)
can clear RMB business, trade settlement, RMB bond issue expense and mainland
approved deals. RMB inter-bank bond market is opened to select offshore RMB
holders. Besides, RMB Overseas Direct investment trial launched.
In 2011, a PBoC circular on cross-border RMB transactions states that FDI in RMB
settlement business is at a pilot stage. RMB Qualified Foreign Institutional Investors
(R-QFII) also launched. Then in 2012, PBoC expanded the USD-RMB daily trading
band from 0.5% to 1.0%. The first RMB Qualified Foreign Institutional Investors (R-

QFII) quotas were allocated to clients of Hong Kong-based mainland brokerages.

Therefore, RQFII and QFII schemes are expanded significantly.
In 2013, the bank of England and the PBoC signed a 3 year GBP-RMB swap
agreement. Clearing banks to be chosen for Singapore, Taiwan and London. Series of
measures aim at simplifying RMB (CNH) cross-border transactions are announced.
Moreover, Shanghai free trade zone, including an offshore RMB centre, is approved.
On Monday, 30 Nov 2015, the decision was made by International Monetary Fund.
The IMF agreed to add the RMB to its reserve currency basket. The decision, which
marks another step in China's global economic emergence, came after the IMF
evaluated the Asian nation's standing as an exporter and the yuan's role as a "freely
usable" currency. In a statement, IMF Managing Director Christine Lagarde noted the
RMB's inclusion is a "clear representation of the reforms" taking place in China. "The
continuation and deepening of these efforts will bring about a more robust international
monetary and financial system, which in turn will support the growth and stability of
China and the global economy," Lagarde said (Pramuk, 2015).

2
2.1

The Implications
The Direct Implication
If lots of things were priced in SDRs, the IMFs decision would have forced

companies around the world to buy RMB-denominated assets as soon as possible, to

hedge their exposure. That would have prompted Chinas currency to strengthen
dramatically. Therefore, we can say that the direct implications of the IMF. decision
are narrow. The RMB will join the dollar, euro, yen and pound in an elite group of
currencies. But if the investors are not the reserve manager for some national treasury,
seeking to build emergency savings to buffer the vicissitudes of global finance, the
direct impact of Chinas inclusion in special drawing rights is limited.

2.2

Implications for the Key Stakeholders

The liberalization of RMB is helping to alleviate companies reticence to invest

heavily in China. As mentioned before, China now has the second largest economy (in
terms of GDP) in the world and also the worlds largest exporter. Many companies
(MNCs and SMEs) are willing to use RMB to pay for Chinese goods and make
investment in China. Therefore, when importers and exporters of goods choose to

transact in RMB, it can help China to apply RMB as international currency. In response,
China has begun to allow companies to invoice and pay for import and export
transactions in RMB rather than a foreign currency.
The barrier is, the RMB is still not fully convertible. It means that RMB is not
traded on the market but managed by the government. In contrast, most major
currencies are freely floated and determined by supply and demand in currency markets.
The value of a currency is similar, in principle, to the value of all goods and services.
The supply of RMB consists of mainland importers, exporters in Hong Kong, the
clearing banks, retail customers, and mainland tourists. The demand side for RMB
consists of mainland exporters, CNH bond and other securities issuers, offshore
investors, and offshore banks.
While there is no official timetable, some market analysts expect the RMB to
become fully convertible within the next five years. Moving too quickly is not without
risks. A currency whose value is determined by global market is vulnerable to exchange
rate shocks, and if movement of money in and out of a country is fully opened, it is
prone to large and sometimes violent capital flows (hot money). However, it is
important to note that full convertibility does not necessarily make a currency
international (Zhang, 2004).

2.3

Implication on the Bond Market

The inclusion of the RMB into the IMF SDR basket could potentially lead to

significant flows into RMB-denominated assets. If included, this will be a move

towards further internationalisation of the RMB -contributing to its increased use as an
investment currency.
Aside from central bank reserve allocation, some market analysts expect increased
allocation by global bond investors into the onshore bond markets, depending on their
quota access. As the quotas are increased and with a possible "bond connect" being
implemented, we should see increasing foreign investor allocation into RMB bonds.
China's bond market is the fourth largest bond market in the world (with a size of
US$ 5.3 trillion). As the regulators further open up the onshore bond market, the
potential inclusion of China in global investment-grade bond indices will potentially
generate significant inflows into the market. China government bonds are rated AA3
and AA-by Moody's and S&P, respectively. Although this would not be an immediate

result of the SDR inclusion, accelerated relaxation of market access to China would
increase its bond index weights in various bond indices that invest regionally or
globally.
For global government bond indices and global emerging market bond indices,
allocation to China bonds would also increase significantly. As improvements on
market access warrants inclusion into the global benchmarks, global investors will
subsequently increase their allocation. For example, based on market size, China's
inclusion into global government bond benchmarks like Citigroup's World Government
Bond Index (WGBI) may be around 5%. This is based on the current size of Citigroups's
stand-alone China Government Bond Index relative to the size of the WGBI. Similarly,
China allocation in global emerging market bond indices can also increase. Although
index inclusion may not occur immediately, investor positioning towards this is likely
to result in flows into the market.
According to the data from citigroup (as of May 2015), the data of Market Size of
Selected Countries in the Citigroup World Government Bond Index (WGBI) and the
Citigroup China Government Bond Index, China is in the seventh place. The highest
market size is still US, followed by Japan, Italy, France, UK, Germany, and then China.
Therefore, it is estimated that foreign ownership of government bonds in China is still
low at less than 2 percent, while other bond markets in Asia like South Korea and
Malaysia are at 11% and 31%, respectively (Sarmago, 2015). This means that there is
still room for foreign investor allocation to China bonds.

The Future of RMB

The RMB will not be seen as a safe haven currency unless economic reforms are

accompanied by broader legal, political and institutional reforms that are necessary to
inspire the trust of foreign investors, said Eswar Prasad, an economist at Cornell and
author of The Dollar Trap, in an email. Chinas government has made it abundantly
clear that such reforms are not on the cards. (Anonim, The Chinese renminbi joins the
IMFs reserve-currency basket, 2015)
Chinas leaders in the years ahead could decide that being a world financial
hegemon carries too many costs, in which case the RMB will be more like the British
pound or Japanese yenimportant currencies, certainly, but not so important as to
create continuing political and economic burdens on their nations.

In bringing the RMB into the SDR, the IMF had to determine that it is freely
usable. This is a large leap of faith in a currency which is still heavily managed, so
before coming to this decision, the IMF asked China to make changes to its currency
regime. However, it would be foolhardy to predict that China will suddenly give the
market totally free rein. That would go against its deep-seated preference for gradual
reform. But while basking in the glow of its SDR status, China must also be aware of
the responsibility to minimize currency intervention that comes with it. A weaker RMB
may well be the result.

References
Anonim. (2015). Chinas geopolitical goals require opening of markets. Retrieved
from Financial Times: http://www.ft.com/intl/cms/s/2/ee74deea-15d1-11e5be54-00144feabdc0.html#axzz3t9tmWSa2
Anonim. (2015, January). IMF. Retrieved from http://www.imf.org
Anonim. (2015). RMB into the top five. Retrieved from SWIFT:
http://www.swift.com/about_swift/shownews?param_dcr=news.data/en/swift_
com/2015/PR_RMB_into_the_top_five.xml
Anonim. (2015, November 30). The Chinese renminbi joins the IMFs reservecurrency
basket.
Retrieved
from
The
Economist:
http://www.economist.com/news/business-and-finance/21679341-its-newstatus-might-make-weaker-yuan-chinese-renminbi-joins-imfs
Pramuk, J. (2015, November 30). IMF agrees to include China's RMB in benchmark
SDR
currency
basket.
Retrieved
from
CNBC:
http://www.cnbc.com/2015/11/30/imf-agrees-to-include-chinas-rmb-inbenchmark-sdr-currency-basket.html
Sarmago, B. (2015). The Implications of the RMB Inclusion in the IMF SDR. Retrieved
from nikko asset management: http://en.nikkoam.com/articles/2015/07/theimplications-of-the-rmb-inclusion-in-the-imf-sdr
Zhang, H. (2004, June). The Globalization of the Renminbi : Feeeling the Stones on the
River Bed. INSEAD.