The realistic way forward for RMB internationalization is via RMB denominated financing for projects under the Belt and Road Initiative. The evolution in global RMB clearing breaks the dominance of offshore clearing centres while RMB payment cards give more people the opportunity to use the currency.
This is the third in a series of articles on RMB internationalization. The first article discusses the RMB’s growing global role and the wins notched up so far. The second article discusses the exchange rate and capital controls and the constraints to full RMB internationalization. This article discusses the three areas relevant to RMB internationalization going forward.
RMB Denominated Infrastructure Financing
Over the next decade, a possible channel for furthering RMB internationalization is the Belt and Road Initiative (BRI). The BRI involves promoting of economic and social infrastructure projects in 152 countries and international organizations with the China-led Asia Infrastructure Investment Bank (AIIB) being one of the leading providers of credit.
The financing for these projects will come via a combination of bond issuance, loans and development aid with funds raised in financial centres like London, Frankfurt and Paris which already conduct substantial RMB business. Internationalization can be promoted by issuing RMB denominated bonds and loans or by invoicing sales in the currency. While the AIIB itself is not yet ready to use RMB denominated financing, this can certainly change if there is an official push towards this end.
Specifically, this would require allowing the RMB raised for BRI projects to be remitted freely to the mainland unlike the current restrictions that keep RMB proceeds from ‘Dim Sum’ bonds outside China. By selectively allowing BRI related RMB flowback to the mainland, it leaves the state in relative control of the size and direction of RMB flows compared with the total loss of control associated with full capital account convertibility.
RMB Global Clearing
The second area relevant to internationalization is global RMB clearing. So far three-quarters of offshore RMB clearing takes place in Hong Kong and the rest largely in London and Singapore. Offshore branches of Chinese banks in Hong Kong and other clearing centres have a monopoly over the RMB clearing market. Global RMB clearing will change this.
The China Cross-Border Inter-Bank Payments System (CIPS) allows global financial institutions to bankwire RMB funds to the mainland. Since its launch in October 2015 CIPS has expanded to include participating banks from 89 countries and its services are now operational across all global time zones. By connecting the onshore branches of the remitting bank directly with the beneficiary bank account, CIPS speeds up clearing and settlement and saves transaction costs. The usage of CIPS since 2018 has especially been boosted by participation from African countries that use it for payments related to BRI projects and countries facing US sanctions like Russia that use RMB to pay for their imports from China.
Payments Market
Another field relevant to RMB internationalization going forward is the global payment cards market as it allows more people to directly use RMB for their transactions. This is an attractive market as China is the world’s top spender on outbound tourism and the world’s forth largest for inbound tourism. The rising number of Chinese businesses with subsidiaries and employees stationed outside China also generates a lot of RMB flows into China.
Bank cards supplied by state controlled UnionPay have gained global acceptance as Chinese tourists use these cards to make transactions abroad. In 2012 UnionPay International was established as a subsidiary of UnionPay with the objective of gaining traction in the global payments processing market. Since then it has expanded its overseas physical card offerings as well as digital cards for e-wallet applications.
Locally issued UnionPay cards are especially popular for domestic payments in countries that are a part of the BRI. In the UAE, Russia and Uzbekistan it has partnered with companies to make UnionPay cards as their payroll cards. In some East Asian countries it has become the no.1 card brand for local payments. In some European markets, it has launched RMB-Euro dual currency debit cards for payments flexibility. For tourists visiting China who hold UnionPay cards, the company has partnered with the local tourism boards to simplify the Chinese Visa application procedure and provide other rebates.
Conclusion
The realistic way forward for RMB internationalization is via RMB denominated financing for BRI projects. This works as a middle ground between halting internationalization due to the state’s reluctance to give up control of local markets and boosting internationalization by fully opening up the local markets to destabilizing capital flows. Meanwhile, CIPS lays the plumbing for faster RMB payments. At the same time, promoting RMB payment cards at the retail level gives more people the opportunity to use the currency.
The next and final article in this series will be a sequence of annotated charts tracing the RMB internationalization journey.
Macrologue 