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Legal Development of the Internationalization of the RMB

August 2012 - Finance. Legal Developments by Jingtian & Gongcheng.

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I. Introduction  

The US dollar has been the most widely held currency in the Allocated Reserves for decades. Throughout the last decade, an average of two thirds of the total Allocated foreign exchange reserves of countries have been in US dollars.

However, US dollar dominant position in global reserves is very much challenged ever since the financial crisis happened at the end of 2008, because of the growing share of Unallocated Reserves, and because of the doubt regarding dollar stability in the long term. Although the U.S. dollar has put forth a relatively strong performance recently, the market still sees a weakening of the currency in the long-run. Seeking an alternative unit of currency in foreign trade and investment has always been on the agenda of high-level regional and international economic summits. As the second largest economy in this world, China is making effort to have much more initiative and exert more impact on the global economy, and the internationalization of the renminbi is one of its important measures taken in recent years. Basically, the renminbi internationalization includes two aspects: its full convertibility and being one of the international reserve currencies.

II.      The Full Convertibility and being the Reserve Currency

It is generally agreed by economic scholars that the internationalization of renminbi means renminbi should be convertible freely and becomes one of the international reserve currencies. Dr. Shen Jianguang, the chief Asia Economist Mizuho Securities Asia Limited and former economist of IMF stated this concept should include following four aspects: (a) liberalizing the capital projects; (b) the construction of overseas market of renminbi currency (offshore); (c) marketization of the interest rate and (d) formation of a flexible exchange rate based on the market principles. These four aspects are connected so closely that should be developed together.

III.    The Planed Measures Taken by Chinese Government

The Chinese government intends to push the renminbi internationalization from two dimensions which are range and time.

From the range dimension, there are three steps to realize the internationalization of renminbi: first, realizing the peripheralization of renminbi, which means renminbi will be developed into a hard currency among the regions and countries adjacent to China; second, realizing the regionalization of renminbi, which means the regions renminbi affected will be enlarged comparatively; finally, realizing the globalization of renminbi, which means not only renminbi can be transferable freely worldwide, but also becomes an international reserve currency.

From the time dimension, Chinese government has made a 20-years long development plan, which also has three steps: first, in the medium term (about five to ten years) renminbi will gradually become a wide accepted international trade settlement currency; then, in the next term (after 10 years) after Chinese government progressively liberalized capital controls, renminbi will become an increasingly important international investment currency; during the last term (after 20 years), renminbi will gradually become a reserve currency.  

These two dimensions are implemented synchronously.

Currently, China is in the first process of achieving the peripheralization and aiming at developing the renminbi into a widely accepted international trade settlement currency. In this period, the construction of renminbi offshore market is extremely important. Based on the advantage of being an international financial center, which will contribute to enlarge the scale of oversea renminbi financing market to compete with U.S. dollar and Euro worldwide, Mr. Li Xiaojia who is the Chief Executive, Executive Director of Hong Kong Exchanges and Clearing Ltd. concluded that for Chinese government the most important offshore market is Hong Kong, Furthermore, developing renminbi offshore market should go through three stages: forming, growth and maturity (First Financial Daily, November 15, 2010) as the chart (1-a) indicates below.

(1-a) the processes of developing renminbi offshore market[1]

According to what Li said, during the forming stage, the basic renminbi products opening to individuals are fix-interest products. After getting through renminbi backflow, profit will become the driving force of people holding renminbi; In the growth stage, the renminbi Hong Kong offshore market will liberalize more active, high-yield renminbi products, such as cooperate bonds, stocks and index futures to attract much more trade partners to use renminbi on cross-border trades. The last stage, maturity stage, in which the renminbi Hong Kong offshore owns a considerable scale and liquidity and its renminbi products will be much more various, lots of enterprises will choose renminbi as their trade settlement currency. Then a virtuous cycle will be formed (Li Xiaojia, 2010). At present, Chinese government is still in the first stage.  

Based on these planed measures, the author will introduce the major legislations enforced by the Chinese government recent years in the next following section.

IV. Legislations History  

On July 10, 2008, the General Office of the State Council made adjustments to the internal organizations and their functions of PBOC. The most important adjustment is the setup of Exchange Rate department[2], whose function is developing the renminbi offshore market according to the process of the internationalization of renminbi. This is the first time the Chinese government officially mentions this concept. In 2011, Zhou Xiaochuan stated that PBOC started to use the "renminbi cross-border use" to replace the renminbi's internationalization.  

Based on the features of Chinese economy, economists believe China should impel its renminbi internationalization in a double-track approach, which means Chinese government should develop its domestic market; meanwhile, it should push the constitution of the overseas market going forward as well.

A. Domestic measures: 

On July 10, 2008, the PBOC established an exchange rate administrative division to develop the renminbi offshore market in according to the process of the internationalization of renminbi.

On December 25, 2008, Chinese government started its pilot program of renminbi settlement for cross-border trade. Guangzhou, Guangxi, Yunnan, Yangtze River delta, Hong Kong and Macau have been chosen as pilot regions.  

On July, 2009, the six ministries[3] of Chinese government jointly issued The Administrative Measures for Pilot Program of RMB Settlement for Cross-border Trade, which officially started the pilot of renminbi cross-border trade settlement. It stipulates the business scope, operation mode, the selection of pilot enterprise, the selection of liquidation channel and other problems the pilot of renminbi cross-border trade settlement may come across. There were 365 pilot enterprises in the whole country.  

In June 2010, the pilot program of renminbi settlement for cross-border trade expands to 20 provinces and cities of the mainland, and its overseas settlement places extend to all of regions and countries in the world.  

On June 21, 2011, the PBOC issued the Circular of the People's Bank of China on Clarifying Issues Concerning Cross-border RMB Business. This circular makes explicit provisions for the renminbi settlement for the foreign direct investment.

On March 5, 2012, the six ministries of Chinese government jointly promulgated a Circular on the Issues Related to Export Goods Trade in RMB Settlement Enterprise Management. Under this circular, enterprises with import-export rights which engage in export trade in goods may use renminbi in trade settlement in accordance with the Measures for the Administration of Pilot Renminbi Settlement in Cross-border Trade.

Through these implements Chinese government is gradually liberalizing its capital project to the trade partners overseas step by step, but obviously, the current liberalization is still limited and directed by the government to prevent the external capital's extreme impact on its domestic market.

B. Offshore measures[4]:  

â– Hong Kong

On November 19, 2003, PBOC issued People's Bank of China Announcement No.16 of 2003, and declared:  

PBOC will provide clearing arrangements for banks in Hong Kong engaged in personal Renminbi business including RMB deposit-taking, exchange, RMB cards and remittances, so as to facilitate economic, trade and personnel exchanges between the Mainland and the Hong Kong SAR and to channel he RMB in Hong Kong back to the Mainland in an orderly manner. (PBOC, November, 2003)  

Since February 2004, banks of Hong Kong have opened above stated renminbi business to individuals. Nevertheless, due to the exchange limitation, according to which no more than 20 thousands renminbi per person per day was allowed and the profits of these renminbi products were limited which lead to the very small renminbi flow from the mainland China to Hong Kong.  

Then, Chinese government carried out a series of measures to push the construction of renminbi Hong Kong offshore market forward: since 2006, banks of Hong Kong have approved Hong Kong citizens to open their renminbi check account; on January 10, 2007, the PBOC announced that approved mainland financial institutions can issue renminbi bonds in Hong Kong.; on July 19, 2010, the PBOC and the Bank of China (Hong Kong) Limited, signed a Revised Settlement Agreement on the Clearing of RMB Business, according to which, participating banks in Hong Kong can provide renminbi services to various corporate and institutional customers without exchange limitation; Since 2010, Chinese government has approved several banks of Hong Kong as the overseas financial institutions invest the inter-bank bonds market.  

At the end of 2011, Chinese government has opened the mini QFII, under which institutions will be allowed to channel renminbi held offshore into investments in China within certain quotas, and the started amount is 20 billion yuan. Before mini QFII, foreign investors can only invest in local-currency stocks and bonds in China under the Qualified Foreign Institutional Investor (QFII) scheme, after converting foreign currencies into renminbi.

These reform methods not only have contributed to accelerate renminbi backflow effectively, but also made the Chinese trade partners much happier to use renminbi on the cross-border trade. In the meanwhile, the PBOC is also accelerating the process of flowing renminbi outside the mainland China. The most important methods to achieve this goal is to keep moving the international loan and investment forward, liberalize the personal cross-border renminbi business and make renminbi functional as a international reserve currency, according to Xing Liujing, the secretary of the monetary policy committee of PBOC. On March 29th, China Development Bank (CDB) and its BRICS' counterparts have signed agreements to formalize cooperation in local currency lending, in a bid to further facilitate trade and investment among the five countries, said chairman of CDB Chen Yuan. Under the agreements, namely the Master Agreement for Extending Credit facilities in Local Currency, and the Multilateral Letter of Credit Confirmation Facility Agreement, each country will make its own currency loans available to other four member countries. "Using our own currencies to issue loans and settle payments can minimize exposure to exchange rate fluctuations, reduce our reliance on third-party currencies, and facilitate trade and investment," said Chen in a financial forum gathering of CDB and its Brazilian, Russian, Indian and South African counterparts. This can be considered as a very significant sign of the intention of the Chinese government to flow renminbi outside mainland China, which eventually will combine with the renminbi backflow policies together to form the international circle of renminbi.  

â– other regions and countries  

Recent years, China has signed bilateral currency settlement and payment agreements with Russia, which stipulate individuals and corporations from both countries, will be able to conduct settlements and payments using renminbi, the ruble and other freely convertible currencies.

Furthermore, from December 2008 to March 2012, except Hong Kong, China has signed currency swap agreements with15 countries and regions, including Korea, Malaysia, Indonesia, Belarus, Argentina, Pakistan, Singapore, Mongolia, Thailand, New Zealand, Kazakhstan, the United Arab Emirates, Iceland, Uzbekistan and Turkey.  

It indicates that renminbi has been welcomed by Chinese neighboring regions and countries so far and China is progressing steadily on the way of renminbi's peripheralization.

V. Conclusion  

Chinese government presents an optimistic and aggressive way to push the renminbi internationalization forward. In the Report on the Work of the Government on March 5, 2012, Wen Jiabao, the current Premier of the State Council of PRC said "we will work steadily to make the RMB convertible under capital accounts and expand the use of RMB in cross-border trade and investment." (Delivered at the Fifth Session of the Eleventh National People's Congress)  

Renminbi being a candidate for inclusion in the SDR basket and playing a greater role in the global economy is widely considered promising, such as in the recent Sino-American economic summit 2012, the US government indicates to support renminbi's inclusion in the SDR basket. 

[1]The chart was drew and translated by the author according to, last visit: 05-18-2012;
[2]At the end of 2009, the Exchange Rate department has been changed into the Monetary Policy Department â…ˇand its description of function deleted the relevant statement about the internationalization of renminbi.
[3]Six ministries are The People’s Bank of China, Ministry of Finance, Ministry of Commerce, General Administration of Customs, State Administration of Taxation, and China Banking Regulatory Commission
[4]Although Hong Kong belongs to China, due to historical background, it is considered as offshore market by Chinese government. Hence, this paper lists the measures Chinese government taken towards Hong Kong under the category of “International measures”.

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