Overseas pay way

Opportunities for renminbi in Southeast Asia

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After decades of development, the cross-border application of China's renminbi has evolved from the spontaneous use in border trade in the early days to increasingly diversified application scenarios in the global financial arena nowadays.

It is particularly evident in Southeast Asia where countries have forged closer economic and trade exchanges with China and seen growing regional connectivity over recent years: the China-Laos Railway opened last year, the construction of China-Thailand high-speed railway has started, and China and Vietnam have signed an agreement to link the two countries' railway networks. These initiatives have boosted the demand for the renminbi in cross-border payments in Association of Southeast Asian Nations members, injecting new impetus into local economic development.

A report on the internationalization of the renminbi released by the People's Bank of China, the country's central bank, shows that the cross-border renminbi receipts and payments in non-banking sectors hit a record high of 36.6 trillion yuan ($5.2 trillion) in 2021. During the same period, the cross-border renminbi receipts and payments between China and ASEAN countries reached 4.82 trillion yuan, up 16 percent year-on-year, among which, the cross-border renminbi receipts and payments under the category of direct investment in ASEAN countries hit 609 billion yuan, up 43.5 percent.

As a reserve currency, the Chinese renminbi's share in the International Monetary Fund's Special Drawing Rights basket rose from 10.92 percent in October 2016 to 12.28 percent in May 2022. The renminbi now accounts for 2.9 percent of global reserve currencies held by IMF members. Six ASEAN countries, namely Malaysia, Singapore, Thailand, Indonesia, Cambodia and the Philippines, have included the renminbi into their foreign exchange reserves. The offshore renminbi currency futures launched by Singapore Exchange, the world's third-largest foreign exchange trading hub, has attracted the participation of governments, global financial institutions and private investors, with the trading volume steadily growing.

The use of the renminbi in ASEAN countries has grown rapidly thanks to the efforts made by the PBOC to facilitate the renminbi clearing around the world. Singapore, Malaysia, Thailand and the Philippines have set up renminbi clearing business. The renminbi Cross-border Inter-bank Payment System now covers all ASEAN countries. In 2021, an extra 16 financial institutions in ASEAN countries became indirect participants of CIPS, with the total value of China-ASEAN cross-border renminbi settlement hitting 3.3 trillion yuan.

The cooperation among central banks has played a key role in promoting bilateral currency settlements. By the end of 2021, the PBOC had signed bilateral currency swap agreements with a total value of over 4 trillion yuan, with the central banks and monetary authorities of over 40 countries and regions, including Malaysia, Indonesia, and Thailand.

The bilateral currency swap agreements meet the demand for the renminbi in cross-border trade and investment and provide liquidity support to financial markets. In June, the PBOC and the Bank of International Settlement signed the accession arrangement — Renminbi Liquidity Arrangement, which initially includes Bank Indonesia, Bank Negara Malaysia, the Hong Kong Monetary Authority, Monetary Authority of Singapore and the Central Bank of Chile. The arrangement aims at meeting liquidity demand for the renminbi and enhancing the regional financial safety net.

ASEAN countries have also explored new ways in bilateral settlement. In March 2021, the PBOC and the National Bank of Cambodia signed a bilateral local currency cooperation deal, expanding the scope of local currency settlement to transactions made under all current and capital accounts opened by the two countries, and for the first time allowing non-Chinese overseas banks to take part in inter-bank market intra-regional trade.

In September 2021, the PBOC and the Bank Indonesia forged a cooperation framework for the use of local currencies in trade and investment settlements, and launched the inter-bank intra-regional market for the renminbi and rupiah trading. Under the framework, Chinese and Indonesian enterprises can use rupiah or yuan in cross-border payments. Particularly, Indonesian enterprises can use the renminbi in the settlement of trade with a third-party country, a new practice in the internationalization of the renminbi.

The establishment of financial infrastructure and measures taken to facilitate cross-border trade have reduced the costs for the renminbi trading in overseas markets, and increased the renminbi's appeal to enterprises. As a result, more and more enterprises are willing to use the renminbi in cross-border settlements.

As the largest trading partner of China, ASEAN has potential real demand for the renminbi. According to statistics of the General Administration of Customs of China, the trade volume between China and ASEAN hit 5.26 trillion yuan in the first 10 months of this year, accounting for 15.2 percent of China's total foreign trade. China's central role in the regional production chains also amplifies the renminbi's pricing in trade and investment. Regional cooperation arrangements, such as the Regional Comprehensive Economic Partnership and Chiang Mai Initiative Multilateralization, could promote the use of local currencies including the renminbi, which in turn will push regional trade and financial integration.

Developing local currency bond markets is an effective approach to promote the intra-regional application of local currencies. According to statistics by the Asian Development Bank, in the first quarter of this year, the outstanding amount of the renminbi bonds issued by the Chinese mainland, including government debts and corporate debts, reached $18.755 trillion, making up 79.9 percent of all outstanding debts of emerging economies in Asia.

It has become a consensus of Asian countries to encourage the use of local currencies in intra-regional trade, investment and emergency relief, to reduce currency mismatch risks, to facilitate the transformation of savings to investment in the region, to fill the investment gaps and to increase the growth potential of the region.

The renminbi could play a key role in this regard. China's A-shares have been included in the MSCI Emerging Market Index, and renminbi bonds have been added to the Bloomberg Barclays Global Aggregate Index. China boasts the second-largest bond market in the world with growing appeal to global investors. Green bonds denominated in the renminbi play a leading role in the world. The development of the renminbi bonds will bring new opportunities for asset allocation in Asia and facilitate the use of the renminbi in the region.

China is also exploring ways to use the digital renminbi in cross-border transactions. The PBOC is a frontrunner in central bank digital currency research and use. Around the world, central banks and international financial institutions are exploring global cooperation in cross-border payments using digital currencies. Although the digital renminbi was not originally meant for cross-border payments, it is a natural product with the expansion of payment channels.

The author is a senior fellow at the Institute of World Economics and Politics at the Chinese Academy of Social Sciences. The author contributed this article to China Watch, a think tank powered by China Daily.

Contact the editor at editor@chinawatch.cn