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The internationalization may be a kind of camouflage. The short-term aim is to help the export-oriented enterprises to survive the financial crisis.

On July 2, the Peoples Bank of China (PBOC) published the Measures for the Administration of Pilot RMB Settlement in Cross-border Trade. One day later, its relevant details were also given out. On July 6, the first cross-border RMB settlement in Mainland China was done. The cash was transferred from Bank of China (Hong Kong) to its Shanghai Branch. On the same day, the Bank of Communications, Industrial and Commercial Bank of China, Bank of Construction and China Merchant Bank respectively finished the trade settlements with the outside cooperative banks.

Presently, the pilot cities include Shanghai, Guangzhou, Shenzhen and Dongguan. The interim pilot areas outside Mainland China are Hong Kong, Macau and the ASEAN. There are 400 companies in total as the first pilot enterprises. Against the background of export depression due to the financial crisis, the introduction of cross-border trade RMB settlement is considered to be a support for the export-oriented companies in Mainland China to survive the financial crisis, as well as an attempt of RMBs internationalization.

Export-oriented Enterprises May Benefit from That

According to the experts, the enterprises, as the main bodies of the cross-border trade RMB settlement are undoubtedly the direct beneficiaries. The pilot enterprises in Mainland China can choose another currency with stable currency value, through which they can conduct the international trades with lower cost and better efficiency.

The exports and imports enterprises in Mainland usually conduct the settlement with the US dollar, Japanese yen or euro. But the exchange rate risk arising from the settlement is assumed by the enterprises in Mainland China. Since the exchange reform in 2005, the exchange rate of the RMB against the US dollar has increased by 20%. Due to the impact from the financial crisis, the large fluctuation of the value of US dollar has put the Chinese export-oriented enterprises under great negative impact.

After the RMB settlement is adopted in the cross-border trade, the enterprises can effectively shun the exchange rate risk. For example, when the settlement is conducted with the US dollars, an enterprise orders a batch of goods with the value of 1 million US dollars. With the current exchange rate of 6.8 yuan against one US dollar, the financial cost of buying goods is 6.8 million yuan. The goods arrived in the destination ten days later but then the exchange rate is 7 yuan against one US dollar. Therefore, the enterprise has to pay 7 million yuan. If this deal can be settled with RMB, the enterprise can directly pay 6.8 million yuan through cross-border settlement and doesnt need to worry about the risk brought by the change of exchange rate.

Apart from shunning the exchange rate risk, the enterprises can reduce the trade cost through the cross-border trade RMB settlement. For example, to issue a letter of credit usually needs 1.5 points for an enterprise, and the exchange settlement needs another one point. More cost is needed in hedging the foreign exchanges. The settlement with RMB can save 3% to 5% of the export cost for the companies.

Whats more important is that this can help the enterprises to lock the costs and revenues and take the initiative in long-term planning.

The enterprises outside Mainland China can also avoid exchange rate risk if choosing RMB as the settlement currency. In addition, choosing RMB as the settlement currency can help the outside enterprises to further develop the Chinese market since the Chinese enterprises prefer RMB.

According to the report of Wenhui Newspaper, to develop the cross-border trade RMB settlement can strike three goals at the same time. The first one is to reduce the enterprises costs and lower the stress of Chinas foreign trade; the second one is to consolidate Hong Kongs position as an international financial center; the third one is to make RMB have the first step of internationalization.

In addition, some experts say that Shanghai will also benefit from this system.

RMB Is Seeking Internationalization

With the setup of pilot areas and enterprises of cross-border trade RMB settlement, RMB was promoted from valuation currency to settlement currency, which was thought to be a milestone in the process of RMBs internationalization. This means the Chinese capital market will be more open.

Since the breakout of financial crisis in last September, a lot of defects of the international monetary system led by the US dollar have been exposed. China, as the largest developing countries, is also affected by the depreciation of the US dollar and the depressed foreign demand. The huge amount of foreign exchange reserves and the economic growth pattern which depends upon the foreign demand too much forced China to get rid of the reliance on the US dollar.

This April, Director of the PBOC Zhou Xiaochuan wrote an article named Reform the International Monetary System, suggesting broadening the uses of Special Drawing Rights (SDR) of the IMF to create a global super-sovereign reserve currency. This suggestion was paid a lot of attention to. The EU, Russia and India subsequently required a reform to the international monetary system led by the US dollar and put an end to the domination of the green paper.

However, the leading position of the US dollar can not be impaired quickly. The US dollar assets always take a dominant place in the international reserves. The data shows that the global foreign reserves in 2008 were 6.7 trillion US dollars while the US dollar assets reach 4.2 trillion. In IMF, the USA has more than 15% of the vote rights, which enables it to deny any programs or proposals.

Therefore, Ye Tan, a financial expert in China, thought that the process of RMBs internationalization starting with the RMB settlement is more realistic than advocating the SDR.

According to her analysis, China needs more safe reserved assets. The SDR may create super reserve currency, but the condition is quite rigorous. Before the setup of fair SDR, the core is still the US dollar.

Therefore, the best way for China is, on the one hand, to call for the building up of fairer global reserve system; and, on the other hand, to accelerate the process of RMBs internationalization.

The experts concluded the internationalization of RMB as two “three-steps”. The first one is the “three-step” of terrain. Currently, RMB has realized the peripheralization, which means that the Chinese currency is useful in the peripheral countries and regions as the “hard currency”. The second step is the realization of regionalization – the RMB can be used in a certain region like euro in Europe. Whats following is to spread the scope of RMB to the whole world, which is the final internationalization.

The second “three-step” is for the monetary function, leveling from settlement currency to investment currency and finaly to reserve currency. This “three-step” must be realized with the internationalization of the terrain.

“The Emperors New Suit”?

The Wall Street Journal published an article saying that the internationalization of RMB may be a camouflage if we look into the development phase of Chinas economy and the measures recently taken. At least, this can not be realized in a short time.

Actually, the internationalization of a currency means the country where the currency originates from has dominant power in the world. This needs the “national credit” based on the great economic, political and military power. After the breakdown of the Bretton Woods System, the internationalization of a currency is more like a spontaneous choice of the market. Therefore, Chinas attempt of the RMBs internationalization has no optimistic outlook.

In addition, the introduction of RMB settlement doesnt mean that the internationalization of RMB has got into the right track, because this can only transfer the risk but can not perish it. The export-oriented enterprises in China transfer the exchange rate loss to the foreign companies which buy their products with the RMB settlement. Therefore, those foreign companies are not willing to conduct the settlement with the RMB, unless the Chinese products have predominant advantage in quality and price.

Then there comes out the key of the internationalization. If China wants RMB to be accepted by the foreign countries, it must have products that others want to buy. Right now China is still far away from reaching this goal. Once reaching this objective, the real internationalization of RMB can be said to be fully realized.