Better Understanding the Renminbi’s Internationalization
In the evolving landscape of international finance, the internationalization of China’s currency, the renminbi, has become a focal point of discussion. While this doesn’t suggest that the renminbi is on track to replace the US dollar, its growing influence on the international stage does represent China’s strategy to reduce its dependence on the dollar and mitigate external vulnerabilities.
In just over a decade, the renminbi has climbed from being the 35th most-used currency in 2010 to the fifth most used in 2023. As figure 1 shows, in 2010, renminbi payments via banks accounted for just 3 percent of total cross-border payments, with receipts at a mere 0.5 percent. In 2022, this share increase to over 40 percent. Moreover, at least 80 central banks now hold renminbi reserves, totaling approximately $274 billion in the third quarter of 2023.
Figure 1: Renminbi international receipts and payments via banks, 2010–2019, annual (RMB trillion, percentage of total)
These are some examples of the renminbi’s increasing role as an international currency. But how did it achieve this rise, especially with China still maintaining capital controls?
Increasing the international acceptability of a currency is a multi-faceted process that depends on a variety of conditions, like the issuing country’s economic size, market liquidity and capital account liberalization. My new journal article, published in Research in International Business and Finance, explores the development of payment infrastructure with international reach as an additional factor, which has been overlooked in the academic literature.
In this article, I trace the evolution of the renminbi’s cross-border payment network, comparing its development to the early stages of the U.S. dollar’s internationalization. I argue that China’s approach to payment system development can be described as a blend of ‘imitation and innovation.’ The expansion of the renminbi’s payment network reflects, to some extent, the institutional structures that have historically supported the global role of the dollar. However, there are notable differences, particularly in the level of public sector involvement and the speed at which these systems have been established, as Table 1 summarizes. This comparison suggests that for latecomers, central banks play a more prominent role in kickstarting the internationalization of their currency.
Table 1: Differences between the renminbi’s and the dollar’s cases international payment infrastructures
The debate over payment infrastructure has recently gained attention due to the “weaponization of the dollar“—the U.S. leveraging its dominant currency status to exert economic pressure on other countries, often through sanctions or restricted access to the global financial system—and the efforts of some developing countries to establish parallel infrastructures. For instance, the BRICS nations recently declared interest in studying the feasibility of creating an independent cross-border settlement system.
Renminbi Internationalization and Payment Infrastructures
The status of international currencies is highly path-dependent, making it challenging for any new entrant to join the ranks of established international currencies. Economic literature attributes this pattern to network externalities and economies of scale—meaning it is easier and cheaper to use a currency already widely accepted.
For this reason, countries aiming to expand the cross-border use of their currency need to adopt policies to kickstart this process. In China’s case, some of these policies include the People’s Bank of China (PBOC) establishing currency swap agreements—arrangements that provide liquidity to foreign markets—the establishment of offshore clearing banks, the creation of investment channels and the development of payment infrastructure.
Regarding the evolution of the payment infrastructures, they have gradually evolved since 2009. Initially, the renminbi transactions relied on correspondent banking relations and only trade transactions were allowed. Over time, the scope of renminbi transactions expanded to include foreign direct investment (FDI) and other current account activities which were accompanied by a substantial increase in renminbi correspondent banking relationships abroad. The development of China’s financial institutions, along with the establishment of offshore renminbi clearing banks, further fueled this internationalization. However, technical and operational challenges, such as messaging format differences and time zone discrepancies, hindered cross-border payments. In response, the PBOC launched the Cross-Border Interbank Payment System (CIPS) in phases starting in 2015, addressing these issues by offering more standardized message formats and extended operational hours, thus making RMB transactions more efficient.
By 2023, CIPS had seen significant growth in both participation and transaction volume as Figure 1 shows, further solidifying the global reach of the renminbi. The key driver for this is that CIPS helps reduce transaction frictions making it easier for companies and financial institutions to use the renminbi. For instance, during the first phase of the CIPS (from 2015 to 2018), CIPS established its operations using the internationally accepted ISO20022 message code and minimizing technical errors that delayed renminbi payments. Although CIPS can operate independently from the SWIFT messaging service, its messaging system was made compatible. In the second phase of operations (after 2018), CIPS expanded its working hours to 124 hours per week to overlap with the operating hours of clearing houses on all continents, enabling instant renminbi payments worldwide. As of 2023, the majority of countries linked to the renminbi payment network depended on CIPS, often supplemented by offshore clearing banks, with exceptions of the United States and Argentina which relied just on clearing banks, as Figure 2 shows.
Figure 2: RMB clearing banks and CIPS direct participants, as of November 2023
In development studies, it is often argued that latecomers use state-led strategies to overcome the economic disadvantages of their initial “backwardness,” meaning they are lagging behind in terms of economic development. A similar dynamic can be observed in currency internationalization strategies, where central banks play a key role in developing payment infrastructures that help initiate the process of currency internationalization. While the establishment of cross-border payment systems helps lower the barriers to currency internationalization, it does not necessarily result in the replacement of the dominant currency in the international monetary system.
Looking Forward: Can Payment Infrastructure Support a Multicurrency System?
The study also touches on the broader implications of China’s approach. In a context where other emerging markets developing economies are experimenting with creating regional payment infrastructures – like in Africa or among Gulf States – China’s experience can shed light on how to address key technical challenges and minimize risks. What is more, in a world where technological advancements are often seen as the key to creating a multicurrency international system, China’s experience suggests that institutional innovation can be just as important. By strategically adopting and adapting existing models, emerging market economies like China can enhance their currencies’ international roles without necessarily relying on new technology breakthroughs as distributed ledger technology (DLT).
Ultimately, the renminbi’s internationalization is still in its early stages, and it is unlikely to fully replace the dollar anytime soon. However, the development of a robust payment infrastructure shows that central banks can play a pivotal role in jumpstarting a currency’s global rise. As China continues to expand the renminbi’s international use, its experience offers valuable lessons for other emerging economies looking to increase their financial resilience
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