China has ample room to expand use of currency as trade leverage increases

China has ample room to expand the global use of renminbi through trade and commodity settlement, supply chain finance and offshore market development, senior economists said, adding that the process will be gradual and largely hinges on continuing financial market reforms across the globe.

As the existing US dollar-dominated architecture sees an erosion of global trust and buckles under the strains of geopolitical conflict and the weaponization of financial infrastructure by some countries, the internationalization of renminbi will help make the global monetary system more inclusive and resilient, they added.

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In an exclusive interview with China Daily, Zhu Min, former deputy managing director of the International Monetary Fund, said that the trend of renminbi internationalization is "unstoppable", and that the technical pathway is "already mapped out".

Zhu pushed back against a long-held assumption that the renminbi could not become a major international currency without achieving full convertibility and a fully liberalized capital account.

"We need to correct this old mindset," he said.

He pointed to the IMF's Special Drawing Rights basket, a collection of five major international currencies that gives renminbi a 12.48 percent weighting after the dollar and the euro, as proof that such constraints are not necessarily insurmountable.

Expanding the use of the renminbi in cross-border trade settlement serves as a viable and crucial pathway toward its further internationalization, experts said.

"For a currency to become truly global, settlement is a critical gateway," said Miao Yanliang, chief strategist at China International Capital Corp. "And in that respect, China's trade leverage is growing."

Miao noted that China is the world's largest trading nation, the largest importer of crude oil and a dominant consumer of copper, iron ore and soybeans. "That trade position gives China a unique advantage to gradually enhance the convenience and acceptance of renminbi settlement," he added.

In recent years, geopolitical shifts have accelerated the renminbi's adoption, with some commodity sellers increasingly exploring settling trade in renminbi.

Shi Kang, chair professor at the PBC School of Finance at Tsinghua University, said that the recent disruption of shipping through the Strait of Hormuz has highlighted the vulnerabilities of the existing dollar-centric oil trading system.

"In the coming period, we will see more oil trade settlement gradually shifting away from the existing dollar-based system," Shi said.

Zhu added that strengthening the renminbi's role as a "financing tool in global supply chains" would also bolster its international standing.

Although China accounts for nearly one-third of global manufacturing output — equaling the combined share of the United States, Japan, Germany and South Korea — its currency plays only a modest role in international finance, Zhu said, describing this as "a clear mismatch".

"The US' real economy has weakened, but it still underpins an enormous dollar system," he said. "Geoeconomic shifts inevitably drive changes in finance and beyond."

A stronger renminbi is not only an inevitable choice for China's development, but also a necessity for global financial stability, Zhu stressed, saying that the renminbi could be used more extensively within global supply chains to align with China's manufacturing strength.

For a currency to become truly internationally strong, Zhu said, it must not only be usable for cross-border transactions, but also be held as a store of value and eventually repatriated or reinvested, all of which requires deep bond markets, robust derivatives markets and a liquid offshore market.

Offshore RMB to expand

Miao from China International Capital Corp suggested that China could increase the supply of offshore renminbi, including expanding the availability of government bonds and high-grade renminbi-denominated bonds, to provide global investors with secure renminbi holdings and to support the domestic economy.

In another development, the Ministry of Finance plans to issue a total of 84 billion yuan ($12.4 billion) of renminbi-denominated sovereign bonds in Hong Kong this year. The first two issues, totaling 29.5 billion yuan, were made in February and April.

The world is facing an urgent need for more diversified safe-haven assets and liquidity, said Shi from Tsinghua University.

That is a gap that the renminbi, backed by China's proactive institutional opening-up, is increasingly positioned to fill, Shi added.

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"We do not want to replace the dollar system, nor are we trying to develop a separate system," Shi said. "China's goal is to address the weak links in the current monetary system, allowing more currencies to participate and thus enhance global financial stability."

Marc Uzan, executive director of the Reinventing Bretton Woods Committee, said central banks are diversifying reserves, more energy deals are being priced in nondollar currencies, and countries are settling trade in local currencies.

Uzan acknowledged, however, that the dollar's structural advantages remain significant, and "a swift end to dollar hegemony is unlikely". He said he expects a multipolar future in which the dollar and renminbi will each play a larger role, alongside regional currencies.

Contact the writers at wangkeju@chinadaily.com.cn