Kiel Institute Focus
|No. 27 March 10, 2015 |
by Yuanfang Li and Wan-Hsin Liu
RMB Internationalization and the Role of Shanghai Free Trade Zone
The government of the People’s Republic of China (China, hereafter) is widely perceived to play an active role in designing and maneuvering the process of internationalization of RMB (Renminbi, Chinese currency). Initiated with a pilot program allowing RMB usage in trade settlement in 2009, it has gained increasing significance in China’s policy agenda. The goals are to facilitate China in getting out of the dollar trap, to reduce FX risks and associated costs weighing on the trade sector, and to increase its own stake and influence in the global financial system. Although the term of “RMB internationalization” has never been directly used in China’s official documents, the Chinese government has actively promoted the use of RMB step by step, first in cross-border trade, then in foreign and outward direct investment (FDI and ODI), and lastly in foreign portfolio investment and bank lending, to different extents. These policy moves have echoed the urge for currency diversification, when the deficiencies in the current international monetary system and the FX risk facing China’s foreign assets became apparent during the recent global financial crisis.