Internationalization of the Renminbi: The Role of Trade Settlement

The renminbi (RMB) is not yet an international currency that could challenge the position of the dollar or the euro, but it is heading in that direction. Chinese officials support the limited goal of increasing usage of the RMB in international transactions, but they do not publicly advocate full reserve-currency status and free convertibility that such status would require. Yet international use of the RMB is an important element of China's reform agenda. China has announced the opening of offshore RMB centers in Hong Kong, Singapore, Taipei, London, Frankfurt, Paris, and Luxembourg, to the delight of offshore investors eager to invest in the RMB, which has not depreciated significantly against the dollar since 1994 and is widely viewed as having further room for appreciation given China's strong economic fundamentals. The ability of Chinese exporters and importers to make and accept payments in RMB is helping to drive the growth of offshore RMB markets. The excess of settlements in RMB by Chinese importers over RMB settlement by Chinese exporters leads to growing volumes of RMB deposits offshore. But the RMB cannot become a true international currency until Chinese authorities drop their strict limits on capital flows between China and the rest of the world.