Policy Paper 26 (January 2014) – The Internationalisation of the Renminbi (Rmb)

On 22 June 2013 the Bank of England concluded a Rmb200bn. (US$32.6bn.) currency swap agreement with the Peoples Bank of China in order ‘to promote bilateral trade between the two countries and to support domestic financial stability should market conditions warrant’ (Bank of England 2013; Noble 2013). This is the first such agreement with a G7 economy and highlights the manner in which China is promoting the international use of its currency through a series of bi-lateral arrangements. These are central to a broad strategy aimed at increasing the use of the Rmb in trade settlements, central bank reserves and bond issues. This seeks to build on China’s advantages in terms of share of world trade, long-term economic growth, credit worthiness and increasing importance as a source of investment and loans. Further advantage stems from the manner in which the highly managed Rmb with its link to the US$, has shown itself to be extremely stable, but with a gradual appreciation (34% since 2005), which makes it attractive to hold. Against this, the strategy has to navigate around the lack of Rmb convertibility, the still closely controlled Chinese capital regime, and the small and embryonic nature of its domestic financial markets, which conventional views see as major barriers to successful currency internationalisation. In addition, China has to persuade the world to accept a new international currency, displacing established ones, notably, the US$. Which in turn brings both the prospect of American opposition and the broader question of the rise of China as a major global power into the equation. Thus, for many observers the moves to internationalise the Rmb is part of China’s long-term aim of displacing both the dollar and the US positions in the global system. However, whatever China’s long-term goals, in seeking to understand the motivation for the internationalisation of the Rmb, it is not necessary to go beyond the economic disadvantages that China is experiencing from the limited use of its currency. This paper reviews the motives, advantages and constraints that China faces, the internationalising strategy that has been adopted, its success to date, and the likely outcome.


About the GPI

The Global Policy Institute is a research institute on international affairs. It is based in the City of London, and draws on both a rich pool of international thinkers, academics as well as policy and business professionals. The Institute gives non-partisan guidance to policymakers and decision takers in business, government, and NGOs.