Burkhard Balz: The role of the renminbi in international payments
Keynote speech by Mr Burkhard Balz, Member of the Executive Board of the Deutsche Bundesbank, at the 5th European-Chinese Banking Day as part of the Euro Finance Week, Frankfurt am Main, 14 November 2018.
The much needed patience I spoke of earlier paid off handsomely for China in October 2016. The renminbi was officially added to the International Monetary Fund’s (IMF) basket for special drawing rights (SDR). Since then, it has occupied a place in this select group of currencies alongside the US dollar, the euro, the Japanese yen and the pound sterling. With that, the renminbi took its first formal step on its way to becoming an international key currency.
This was a step that crowned many years of political wooing and a process of cautiously opening up the Chinese capital markets, as well as a variety of programmes to give foreign investors access to China’s capital markets. Use of the renminbi as a reserve and investment currency was gradually increased as a result. The first milestone was reached in 2017, when Bond Connect, a joint venture of the China Foreign Exchange Trade System (CFETS) and Hong Kong Exchanges and Clearing Limited, was set up. Amongst other things, the idea behind Bond Connect is to make it easier for foreign investors to participate in trading in the Chinese fixed-income market. Close to 400 foreign investors have so far joined the interbank bond market via Bond Connect. In March of this year, Daimler took advantage of the opening up of the Chinese capital market to international issuers to become the first large German enterprise to issue a renminbi bond.
Factors affecting the internationalisation of the renminbi
The successful implementation of the strategy to internationalise the renminbi rests on the interaction between two core elements.
These are, first, the gradual liberalisation and international opening up of the capital markets, which I just described to you, and
second, the global broadening of the user base of the renminbi.
The inclusion of the renminbi in the IMF’s basket of currencies provides an element of support in China’s internationalisation efforts.
Yet purely foreign exchange policy aspects are no longer to be made the sole point of focus. Politically realistic considerations are also being increasingly placed in the foreground.
In this respect, a key role is played by China’s Belt & Road strategy, developed by China and first presented to the public in 2013. The idea behind this is to reopen the ancient “Silk Road”, which once led from China through Central Asia, the Middle East and central Europe to western Europe, and to supplement it by a maritime trade route. Plans exist for the Chinese state and participating companies to make investments worth billions in various infrastructure projects along these routes, thus stimulating trade between countries situated along these routes as well as between them and China.
At the same time, the Chinese hope that the payment flows stemming from these trading activities will help them to encourage use of the renminbi in those countries. The Chinese government’s hopes not only concern the success of the projects in the various emerging markets along the Silk Road.
Rather, it is hoped that trade relations with Germany as Europe’s largest economy will also be strengthened. In fact the German town of Duisburg, with the biggest inland port of its kind in Europe, represents the “western” end of the trade route often referred to as the “new Silk Road”. And in this context, the Frankfurt financial centre, given its position as a one of 23 renminbi clearing hubs worldwide, would be forming the link for payment flows between Germany and China.
Recently, however, China’s efforts have met with more and more obstacles. For example, the additional tariffs on Chinese goods and the threat of a trade war with the United States are damaging relations between the two countries, with negative repercussions for global equilibrium. This can have an adverse effect on the entire world economy, as there are only ever losers in a trade war. Imposing tariffs and retaliatory tariffs undermines an important foundation of our prosperity.
However, at the recent meeting of the International Monetary Fund (IMF) in Bali, both the United States and China indicated that neither was interested in an escalation of the trade conflict. I very much hope that this proves to be the case.
In debate, the Chinese government is often accused of taking advantage of a depreciation of the renminbi, risking a downward spiral in the process. Yet studies to date show that China has no wish for an artificial devaluation. At the meeting in Bali, Dr Yi Gang, President of the People’s Bank of China (PBoC), also promised that China would not initiate a spiral of depreciation in the trade conflict. Rather than take part in a race to the bottom, China would like the market to continue to determine the exchange rate.
This stance is a most welcome one. Against the backdrop of loosened monetary conditions, the PBoC successfully implemented a number of measures to halt the downward trend of the renminbi, which persisted until the middle of August. This is confirmed by the currency’s slight upward tendency. Given the uncertainty surrounding economic developments, however, there is still palpable concern regarding a depreciation and renewed capital outflows, all the more as China is one of the last big economies that is continuing to loosen parts of its monetary policy.
The full speech is available at https://www.bis.org/review/r181127b.htm