RMB replacing USD as No1 currency globally?(04)
4,Prediction on possible routes by China PBOC on next phrase RMB internationalization in near future
After the outbreak of the new COV19 in 2020, the overall layout of the global supply chain began to increasingly reveal new trends of fragmentation, regionalization, and localization. Particularly,After the outbreak of the Russia-Ukraine conflict in 2022, the financial sanctions imposed by the United States and its allies on Russia had tainted the reputation of US Treasury Bonds as the safest asset in the world, and also discredited the SWIFT system on a certain degree as the “Pubic Utility” for global payment and settlement system. This not only created new challenges but also brought new opportunities for the course of RMB internationalization.
In order to cope with new challenges and grasp new opportunities,it is believed that the People’s Bank of China ought to readjust its strategy of RMB internationalization accordingly. The adjusted strategy can be summarized as followed:
A, accelerate RMB pricing & settling functions in world cross-border commodity trading transactions;
B,increase the provision of high-quality RMB-denominated financial assets to Foreign institutional investors both in onshore and offshore market;
C,speed up the down-to-earth construction of the cross-border RMB payment and settlement system and closely integrate it with China CBDCs practices;
Some of these points have to be further elaborated as we go along,such as:
First, the Chinese government should seize the opportunity of the transferred supply of oil and gas resources from West to East after the Russia-Ukraine conflict, and accelerate the promotion of RMB valuation and settlement in cross-border commodity trading transactions. Due to recent restrictions on the import of Russian natural gas by European countries, the latter had to increase its natural gas exports to China. For example, in September 2022, PetroChina and Gazprom signed the “China-Russia Eastern Route Natural Gas Purchase and Sales Agreement”, agreeing to pay 50% to 50% on the relevant fees both in Rubles and RMB. Under normal circumstances, once a commodity-denominated currency was determined, it would produce strong path dependence and positive network externalities. Therefore, the Chinese government should seize this rare chance brought by the major geopolitical shifts due to the Russia-Ukraine conflict to strengthen the RMB’s commodity pricing function for good.
Second, the Chinese government should seize the opportunity of the scarcity of global safe assets after the Russia-Ukraine conflict, and increase efforts to provide foreign institutional investors with high-quality RMB-denominated financial assets both in the domestic market and offshore market. The US government’s practice of freezing Russia’s foreign exchange reserves had in fact weakened the status of US Treasuries Bonds as the primary global safe asset. The Chinese government could seize this opportunity and step up efforts to issue high-grade RMB-denominated Bonds (such as Chinese government Treasury Bonds, financial bonds, and local government bonds in selected provinces with strong solvency) both in domestic and international financial markets. This move is able to not only promote the internationalization of the RMB, but also help relevant entities to raise funds at a lower cost and exchange rate fluctuation risk.It can be said as “kill two birds with one stone”.
Third, the Chinese government should speed up the construction of the cross-border RMB payment and settlement system (CIPS), and integrate the construction of the cross-border payment and settlement system with the digital RMB cross-border settlement pilot and the multilateral Central Bank Digital Currency bridge linkages. First, the People’s Bank of China should strive to carry out exchanges and cooperation between CIPS and the EU’s INSTEX payment system, Russia’s SPFS payment system and other cross-border payment and settlement systems. Second, the People’s Bank of China should actively combine the construction of CIPS with the digital RMB cross-border settlement pilot. Compared with the payment and settlement of traditional currencies, the payment and settlement of digital currency has the natural born characteristics of multi-center governance and distributed ledgers, which helps to break the monopoly of the current highly centralized cross-border payment platform. Third, the People’s Bank of China should actively participate in the cooperative experiment of the multilateral Central Bank Digital Currency bridge (m-CBDC Bridge). The digital currency bridge may largely eventually give birth to a digital currency-based international payment and settlement system independent of the existing SWIFT system, which may become an important alternative aside from the dominance of the US Dollar, and may also become a mainstream direction for the future of the international monetary system.
