From ASEAN to the World: The Maritime Silk Road Facilitates Monetary Circulation

written by Li Min / translated by Liu Yongjie, Xu Yuemeng

From ASEAN to the World: The Maritime Silk Road Facilitates Monetary Circulation

written by Li Min / translated by Liu Yongjie, Xu Yuemeng

In ternationalization of the RMB has always been the center of attention. Monetary circulation -- an approach that accelerates the process of the RMB internationalization -- has come into focus of all parties since the strategic initiative for building a new Maritime Silk Road was put forward with the purpose of promoting policy communication, road connectivity, trade facilitation, monetary circulation and people-to-people exchanges. To achieve internationalization, a national currency must truly perform all the functions of international currency as valuation, settlement, investment and reserve. Stimulating monetary circulation through the RMB cross-border settlement so as to fulfill the valuation and settlement functions of the RMB holds the key to the internationalization of the RMB, which has yet to be widely accepted as both investment currency and reserve currency at present.

A Nine-storeyed Terrace Must Be Constructed from Its Very Base

The impact of the global financial crisis and the European debt crisis highlights the fundamental weakness in the international monetary system, which is facing or undergoing profound changes. China is actively trying to gain an important position for its national currency in the international monetary system on the basis of ensuring its sustainable development.

In 2010, China overtook Japan to become the world’s second-largest economy behind the United States in terms of gross domestic product (GDP). The total trade volume of China ranked second in the world in 2011, and for three consecutive years China’s exports were ranked fi rst and imports the second in the world. China surpassed South Africa as the biggest gold producer in 2007. After over 20 years’ development, China’s capital market was ranked second in the world in 2010 in terms of total stock value, and the volume of commodity futures markets first in the world. The“hard power” of steady appreciation of the RMB exchange rate, such as suf fi cient foreign exchange reserves and stable political environment enabled the RMB to win growing recognition in the international community and became the solid foundation and realistic conditions for the internationalization of the RMB.

O n t h i s b a s i s, t o a c h i e v e internationalization, the use of the RMB are supposed to expand from neighboring countries to regions and the world from the perspective of regional expansion and to fulfill such functions as settlement, investment and reserve functions from the perspective of currency functions. In other words, people need to be willing to conduct transactions in RMB, and when the holdings of the Chinese currency increase, measures like interaction between offshore and onshore markets, and liberalizing capital account investment will be needed to stimulate monetary circulation. Only when the currency circulates easily can it increase the holdings by interested parties, which will fulfill the reserve function of the RMB, and make the RMB hold a more important place in the international monetary system. Global trade is thus a basic approach to promoting the internationalization of the RMB.

At present, over 90% of trade activities in the world need financing, guarantee, insurance or other financial services, all of which involve currencies without exception. China should give top priority to bringing into play our comparative advantages of trade and direct investment in Asia in an effort to increase the ratio of price making of the RMB in import and export trade. On the one hand, the circulation boosted by the RMB can increase the scale of international trade, and in turn, international trade can enable the RMB to perform the functions of valuation and pricing in the global market, which ensures that the currencyreinforces and is reinforced by trade. Therefore, China can use trade to boost the circulation of the RMB, which in turns can promote the internationalization of the RMB.

In Asia, the use of the RMB in ASEAN -- the region that neighbors China -- is undoubtedly an important step in the process of expanding the use of the Chinese currency from neighboring countries to some regions and finally to the world. Hence it is of crucial importance that China and the ASEAN countries facilitate monetary circulation so as to accelerate the internationalization process of the RMB.

From ASEAN to the World

China and ASEAN -- an important step for the RMB’s internationalization – have experienced a “Golden Decade” of development in mutual cooperation.

The prosperity of China-ASEAN border trade laid a solid foundation for the establishment of China-ASEAN Free Trade Area (CAFTA). Within this economic framework, cooperation between China and ASEAN has been full of vitality. The bilateral trade volume increased from 78.2 billion U.S. dollars in 2003 to 443.6 billion U.S. dollars in 2013. China remained ASEAN’s largest trading partner for four consecutive years, and ASEAN became China’s third largest trading partner, the fourth largest export m a r k e t a n d t h e second largest source of import. Negotiations on upgrading CAFTA have begun as China and ASEAN gradually deepen mutual cooperation. Enhancing financial cooperation forms the core of the upgraded CAFTA, and accelerating the internationalization of the RMB in ASEAN is the key and the top priority of the fi nancial cooperation between China and ASEAN. The internationalization of the Chinese currency will enter a new stage of development in ASEAN.

In ASEAN countries, there is an increasing tendency to use the Chinese currency in imports and exports. According to Huang Zhiyong, vicepresident of Guangxi Academy of Social Sciences, in Special Regions of Myanmar that border Yunnan Province, the RMB has become the day-to-day operating currency in local people’s life, and even replaces Kyat in the areas of northern Myanmar. In Cambodia, local government encourages people to carry on transactions in RMB. In Singapore, Malaysia and Thailand, the RMB gains growing acceptance and is widely used by the local people, who are able to pay for things in RMB and convert the RMB into the local currency in many stores. The cases listed above demonstrate that the use of the RMB is gradually expanding in ASEAN as the RMB is actively used by the local people and gradually accepted by the local government.

Apart from the development of trade, the increasing use and growing acceptance of the RMB, the internationalization of the RMB stimulates investment. Authorized by State Council of the People ’s Republic of China and approved by the National Development and Reform Commission, China-ASEAN Investment Cooperation Fund (CAF), an offshore private equity fund, was established in 2010, investing in infrastructure, energy and natural resources of ASEAN. By the end of December 2013, CAF has made investment in nine projects in Cambodia, Laos, Malaysia, the Philippines, Singapore, Thailand and Indonesia, which promotes the development of RMB

offshore market in ASEAN.

The exponential growth of China-ASEAN international tourism that concerns people in different countries facilitates the circulation of the RMB in ASEAN. Hence, there is a high probability that ASEAN will become a pilot region of RMB’s internationalization.

In 2013, Chinese President Xi Jinping put forward the proposal that China sincerely hopes to join with the ASEAN to build the 21st Century Maritime Silk Road, which was a timely boost for the RMB to become a currency in circulation within ASEAN and in the world.

The construction of the Maritime Silk Road will, on the one hand, attract increasing attention and win policy support for the region of China and ASEAN, promoting the upgrading of the cooperation between China and the ASEAN countries in investment, commodity trade and service trade. On the other hand, as a growing number of countries participate in building the Maritime Silk Road, the Chinese currency will circulate within a wider range and a larger region, which facilitates the expansion of the use of RMB in ASEAN and then in the world.

Building up Expectations

The internationalization of the Chinese currency will bring considerable bene fi ts to China, such as increasing Seigniorage, expanding international trade, reducing cost and exchange rate risks, raising China’s international position, promoting economic development and so forth. Currency circulation enables countries to exchange and settle transactions in the national currency in regular and capital projects, so as to significantly reduce the cost of circulation and increase the capability to guard against financial risks. Consequently, it can increase the competitiveness of China-ASEAN economy in the international market, which is conducive to achieving economic stability and development of the ASEAN countries.

With increased trials of cross-border RMB settlement, the business of cross-border trade settlement in RMB is characterized by relatively rapid growth in terms of total volume and improvement of business structures.

According to the statistics released by People’s Bank of China, the business of cross-border RMB trade settlement conducted by all banks in China has reached 7579.92 billion RMB on an accumulative basis by the end of June 2013, indicating that the Chinese currency has fulfilled the functions of valuation and settlement in the international trade. In addition, instead of relying merely on settlement of commodity trade, cross-border RMB trade settlement has expanded from border trade to regular-way trade, imports and exports, service trade as well as cross-border investment and financing, and from enterprises to individuals. Its scope has also expanded from the ASEAN countries to more countries and regions. These will enhance public confidence in RMB’s internationalization.

The internationalization of a currency is a lengthy and complex process, which cannot be accomplished in one action. At present, in cross-border trade settlement, the RMB is still confronted with such problems as unsmooth output channels, restricted flow back channels and small scales of offshore markets. These are in nature the “output problem” of how to expand the use of the RMB in international market. Furthermore, the holders of the RMB need channels to spend the Chinese currency. Investment and purchase of financial products can solve the “flow back problem” in RMB’s circulation and the “reserve problem” which happens after channels between output and fl ow back are clear. The internationalization of the RMB will happen naturally when these bottlenecks are removed one after another.

China -- the leading country to internationalize the RMB -- should implement prudent reform of monetary policy, improve the mechanism for liberalizing interest rates, deepen reform of the RMB exchange rate system, as well as actively and steadily promote capital accounts opening. In the meantime, China should strengthen cooperation in cross-border financial supervision, pay attention to the balance of payments, properly handle the relationship between the Chinese currency and other international currencies, and enhance international cooperation that contributes to the internationalization of the RMB. At the available opportunity of building the 21st Century Maritime Silk Road, China should enhance cooperation with the ASEAN members in internationalizing the Chinese currency.

At the 11th China-ASEAN Expo (CAEXPO), the listing of cash rate, the inauguration of currency business center, and the release of cross-border RMB index greatly facilitated currency circulation in China and ASEAN. It is believed that the RMB, promoted by the building of new Maritime Silk Road will achieve currency circulation and become an important part of the multipolar international monetary system in the future, which is full of hope.