Lingnan university

Master of Arts in China Reginal studies

Course Name: Managing Globalization: China’s

Response

Title: Further Globalization of China: The RMB

internationalization challenge ahead

Student name: CHEN Haojun

Student ID: 5054848

 Abstract

After the 2008 global economic crisis, China has promoted the internationalization of

the RMB. On one hand, it is China’s ambitiousness to try to challenge the hegemony

of the US dollar in the global financial system. On the other hand, it is one of the

ways for China to avoid external economic turmoil. Although some success that

China has achieved the internationalization of the RMB, there are still some

challenges that China has to overcome in the future. This essay introduces the

essential background and process of the internationalization of the RMB at first. Then

discusses the achievement and the challenges of the internationalization of RMB. In

the end will give some brief suggestions and personal opinions.

Keywords: RMB internationalization, global financial crisis, US dollar

Introduction

In 2008, the financial crisis in the US invited the global economic crisis, which caused

the economies of most countries to fall into trouble and regress; at the same time, it

also reflected the problems in the global financial and monetary system and the urgent
need for reform. Under this global background, the Chinese government has decided

to promote the policy of internationalization of the RMB (Hwang, 2014).

There are three reasons why China tried to begin the process of the

internationalization of the RMB. Firstly, as China has earned a huge US dollar surplus

through doing international trade business and cross-border financial business, the

crisis put a huge number of Chinese dollar assets at risk of depreciation. Hence, China

hopes to reduce its dependence on the US dollar through promoting the

internationalization of the RMB. Secondly, China has become the second large trading

country in 2008. If China continues to use the US dollar as the settlement currency,

China has to bear the risk of changes in exchange rates. With domestic economics and

international trade developing,

China has the capacity and potential to use RMB in international finance and trade.

Thirdly, the internationalization of the RMB can promote domestic economic,

financial, and social transformation to a certain degree. If the internationalization of

the renminbi can be successful, it will be conducive to the deepening of China's

reform and opening-up policy, enhance China's economic strength, and enhance

China's international influence (Hwang, 2014).

The achievement of the internationalization of RMB

With China’s economic development at a high speed, China has been the second-

largest economy and the largest emerging economy so far and the decline of the US

dollar after the 2008 economic crisis, the Chinese government have achieved the

meaningful progress in the internationalization of the RMB in a short period. Firstly,

the volume of international trade denominated in RMB has grown rapidly. In 2021,
the RMB’s share of the international payment system rose to 2.7%, surpassing the yen

as the fourth-largest international settlement currency. (Zhang, 2022) Secondly, the

central banks of some countries have held the RMB as their foreign exchange reserve.

Moreover, the RMB occurs a crucial influence on the exchange rates of some

countries’ currencies. Thirdly, some major oil producers have reached agreements

with China to settle the RMB, which means that the RMB is beginning to exert

influence in the international energy market and hopes to challenge the hegemony of

the petrodollar (Eichengreen and Kawai, 2015)

The challenges of the internationalization of RMB

Nonetheless, China has achieved some success in the internationalization of the RMB;

there are some critical risks and challenges that China has to face when it promotes

the internationalization of the RMB, and these challenges are from different

perspectives.

The challenges in the economy

Under the Triadic paradox theme, which is proposed by Paul Krugman, three

paradoxes in currency were proposed: free movement of capital, independent

monetary policy, and fixed exchange rates. China's central bank has long imposed

strict restrictions on the free conversion of the RMB, restricting the outflow of RMB

and the exchange of foreign currency. This currency policy becomes an obstacle to the

internationalization of the RMB and it has made it difficult for other countries to use

the RMB as a foreign exchange currency and settlement currency. Under this strict

foreign exchange policy and monetary policy, the amount of RMB circulating

overseas is difficult to support RMB as the foreign exchange reserve and settlement
currency of various countries. The serious foreign exchange currency policy makes

some foreign enterprises and investors not easy to get into the Chinese market and use

RMB as the settlement currency.

In addition, due to China's strict control of capital flows, this means that the

international circulation of the renminbi will be greatly restricted and affect the

circulation of the renminbi in the world. If the renminbi wants to become an

international currency, its international holdings and circulation must maintain a large

quantity, otherwise, it is difficult to meet the needs of international market

transactions. Therefore, China's long-term strict financial capital control policy is also

one of the economic factors restricting the internationalization of the RMB.

The challenges in the politics

From a political perspective, geopolitical conflicts also make a big difference in the

internationalization of the RMB. Chinese ideological differences with Western

countries, especially European countries, have become increasingly different in recent

years, especially on human rights, Hong Kong and Taiwan problems, and the recent

Russia-Ukraine war. These differences in political consciousness pose a major

obstacle to economic cooperation between China and the EU. In 2021, for instance,

the European Parliament passed by a large margin to freeze the EU-China

Comprehensive Investment Agreement, resulting in China's economic strategic

cooperation with Europe having to be shelved. European investors are also more

rational and pay more attention to risk aversion, especially in the uncertain prospects

of China-EU relations and dare not easily try RMB financial products. At the same

time, the RMB clearing system in Europe has not been very perfect so far, which

affects the settlement efficiency of RMB in Europe. (Zhou, 2015)

Sovereignty conflicts are one of the obstacles to the international of the RMB. The

South China Sea dispute is between China and Southeast Asian regional countries:

Vietnam, the Philippines, Malaysia, Brunei, and Indonesia. This dispute began in the

70s of the 20th century and eased slightly between the 90s and the beginning of the

20th century. In 2016, however, the Hague Court of International Arbitration ruled in

favour of the Philippines in the South China Sea arbitration case filed by the

Philippines, which also led to tensions between China and the relevant countries

bordering the South China Sea, and thus affected China's relevant economic

cooperation with these countries. Although the South China Sea issue has temporarily

cooled down with the rise of the Philippine’s Rodrigo Duterte and China's increased

military deployment in the South China Sea, the implementation plan of RMB

internationalization among ASEAN countries has also been blocked, seriously

affecting the process of RMB internationalization. China not only has sovereignty

conflicts in the South China Sea, but also has the same problem in the East China Sea

with Japan. China and Japan have a great deal of dispute over the claims of the

Diaoyu Islands in the East China Sea, although the two countries agreed to shelve the

dispute when they established diplomatic relations in 1972. In 2012, when Japan

nationalized the Senkaku Islands, China immediately sent the coast guard to the

relevant waters to cause military friction at sea with Japan, which led to a rapid

deterioration of Sino-Japanese relations, which profoundly affected the trade and

economic relationship between China and Japan.

The challenges in the culture

The internationalization of the RMB not only faces the challenges from economic and
political perspectives but also exists cultural problems. The language barrier is one of

the cultural challenges which makes a big difference to RMB internationalization.

Language barriers and corresponding translation difficulties in different cultural

contexts can also lead to the presence of knowledge. Chinese expressions have their

unique cultural features, so translating them verbatim into other languages can be

challenging. It is also hard to find exactly the same words and expressions between

two different languages because of the limitations and obstacles of cultural differences

in different countries. In addition, cultural differences and conflicts can also restrict

the flow and creation of knowledge between transnational organizations, which is also

one of the key issues facing renminbi internationalization. In the process of renminbi

internationalization, due to cross-cultural misunderstandings and cognitive conflicts,

existing policies and knowledge are not enough to solve these problems and obstacles

caused by cultural differences.

The religious issue is also a major challenge in the field of Chinese

internationalization of the RMB. For instance, in Islamic countries, their financial

system is very different from that of the rest of the world. There are challenges for

China to promote the renminbi in Islamic countries. First, because there are several

branches of different teachings within the Islamic sects, and the countries of these

different sects all practice the economic policies of Islamic teachings, they differ in

some of the details of their implementation. Second, the financial regulations of

Islamic countries are very different from those used in the world, and most of their

transactions are mainly based on the transfer of physical assets. These religious

differences lead to the need for the renminbi to be promoted in these countries to

effectively accommodate their religions. (Wang, 2018)

The personal suggestions for the challenges

The RMB internationalization has faced the challenges from economic, political, and

cultural perspectives. In the economic aspect, the Chinese government should

consider relaxing financial regulations to minimize the restrictions on the circulation

of the renminbi at home and abroad. In the political perspective, China has better try

to ease political contradictions with Western countries, conduct dialogue and

consultation with Western countries on human rights, Hong Kong and Taiwan issues,

and reduce contradictions between the two sides as much as possible. For territorial

disputes with neighbouring countries, dialogue is a relatively good option if China

wants to internationalize the renminbi. Putting aside or easing disputes with relevant

countries through dialogue is conducive to China's continued economic cooperation

with these countries and the internationalization of the RMB. In the cultural aspect,

China needs to understand the cultural and religious policies of the countries

concerned in advance to avoid hindering the internationalization of the renminbi

because of this problem. For example, it can train relevant cultural and religious

researchers to study the influence of the culture and religion of the countries

concerned on their financial and economic policies and how to deal financially with

them in the best possible way.

Conclusion

China has indeed made remarkable achievements in the internationalization of the

RMB, but the challenges are still not small, and these problems and challenges will

have a huge impact on the future trend of RMB internationalization. How China
resolves or alleviates these existing problems will determine the success of RMB

internationalization in the future. Economically, politically, and culturally, China

needs to adopt different solutions, and its policies will vary from country to country.

The internationalization of the renminbi will remain uncertain in the future, and

success will depend on China's own examination and response to these issues.

Whether the renminbi can successfully internationalize will also affect China's

globalization strategy.

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