REMARKS BY MR. JAVIER GUZMÁN CALAFELL, DEPUTY GOVERNOR AT THE
BANCO DE MÉXICO, ON "THE RENMINBI AS A GLOBAL RESERVE CURRENCY:
A CENTRAL BANK'S PERSPECTIVE", AT THE CENTRAL BANKING
PUBLICATIONS' 6TH RENMINBI ROUNDTABLE. Mexico City, May 10, 2017.1
I am very glad to have the opportunity to participate in this event. My gratitude
to the organizers for their kind invitation.
In recent years, central banks around the world have displayed a growing
interest to include assets denominated in currencies from emerging market
economies (EMEs) as part of their international reserves. In addition to the
continuous search by reserve managers of an adequate balance between risks
and returns on their portfolios, this has also been influenced by the improved
economic fundamentals and the resilience shown by several of these
economies to the difficulties arising from a complicated and, at times,
turbulent global environment.
The case of the Chinese renminbi is of particular note. Indeed, its rapid
internationalization of recent may well be regarded as a natural development
following China's increased significance within the global economic and
financial systems. However, there are clearly other explanatory factors.
Particularly important among these are the measures implemented by that
country's authorities towards this outcome.
Although a currency's degree of acceptance beyond its issuer's borders varies
across a wide array of dimensions, there are a number of attributes it must
possess to achieve a significant international role and, ultimately, global
reserve status. At one level, a currency's qualification as an efficient unit of
account and medium of exchange allows it to be amply used for the pricing
and settlement of cross-border transactions, both commercial and financial. In
addition, and perhaps more relevant for its role as a reserve asset, a global
currency must be widely regarded as a reliable store of value, meaning that
foreign investors, including official reserve managers, are willing to hold assets
denominated in that currency.
Of course, the fulfillment of these conditions entails a rather lengthy process
and achievement of this goal, as well as the speed at which it takes place, is
closely linked to both prevailing and expected conditions in the issuer country.
Paramount among these is the strength of the economy's fundamentals, and
especially domestic macroeconomic and financial stability. Further to this, the
issuer country's economic size and centrality in regional or global production
and trade networks is an important driver of demand for its currency at the
international level, while capital account openness and the consequent
currency's convertibility, as well as the depth of domestic financial markets,
provide further assurance to global investors.
Considerable progress has been made in several relevant fronts towards the
internationalization of China's renminbi over the last years. Its growing use as
a medium of exchange and unit of account is evident. The renminbi's
participation in global payments has increased from virtually nil in 2010 to
slightly less than 2 percent in early 2017, and a similar pattern is observed in
the share of China's total international trade that is settled in its own
currency.2 Also, the most recent BIS triennial survey on foreign exchange
turnover,3 shows that the renminbi was last year the world's eighth most
actively traded currency and the first among emerging market economies,
after having nearly doubled its share in all foreign exchange transactions over
the course of three years.4
Significant progress has also been achieved in enhancing the renminbi's use as
a store of value by central banks and monetary authorities. The latest release
of the IMF's Currency Composition of Official Foreign Exchange Reserves
(COFER) survey includes specific data for this currency for the first time since
records exist. According to this information, albeit low at levels slightly over 1
percent as of the end of 2016, the renminbi's share in the world's total
allocated international reserves is not far from other, more established reserve
currencies such as the Australian and Canadian dollars (1.9 and 2 percent,
respectively), and far above that of the Swiss franc (0.2 percent).5
As noted above, these developments respond to a significant extent to China's
increased importance in the global economy. In 2014, China overtook the
United States as the world's largest economy, as measured by GDP on a
purchasing power parity-adjusted basis, representing around one sixth of
global output. Since then, the differential between these two economies has
continued to widen and, according to the latest projections by the IMF,6
China's participation in the global economy is expected to increase to over one
fifth of total output by 2022, nearly a tenfold increase since 1980. China's
participation in global merchandise trade has followed a similar, even more
dramatic, pattern, as its share of global imports and exports has climbed from
around 1 percent in the early 1980s to over 11 percent currently.
However, there are other factors, beyond China's significance in the global
economy, that explain the rise of the renminbi as an international currency. In
particular, the Chinese authorities have been implementing a number of
measures specifically aimed at this goal.
To promote the use of the renminbi as an investment currency, a first set of
efforts included the creation and development of offshore markets in which
foreign institutional investors were allowed, although on a selective basis and
subject to limits, to perform banking operations as well as to trade and even
issue financial securities denominated in renminbi. More recently, the removal
of important roadblocks to renminbi internationalization has been observed,
as a gradual relaxation of restrictions on foreign access to onshore markets has
begun to take place. In this respect, it is worth to highlight, due to its particular
relevance for central banks, measures allowing them to have largely
unimpeded access to the domestic fixed-income and foreign exchange
markets, further aided by enhanced data transparency and a greater role of
market mechanisms in the determination of interest and exchange rates.
Recent measures connecting the Stock Exchange of Hong Kong with its
counterparts in the mainland, thereby facilitating foreign access to onshore
equity markets, are also worth mentioning.
After the accession by China to the World Trade Organization in 2001, strategic
trade agreements with other emerging markets, particularly in Asia, have been
enacted. In addition, a number of mechanisms facilitating the flows of outward
direct investment and either direct or indirect lending from China have
encouraged the wider use of the renminbi for the measurement and
settlement of cross-border flows and, through this channel, as a reserve
currency.7 The latter includes the so-called "Belt and Road Initiative", the China
Development Bank, the Export-Import Bank of China, and recently created
multilateral organizations such as the New Development Bank and the Asian
Infrastructure Investment Bank, in combination with the growing global
network of foreign exchange swap lines between the People's Bank of China
and central banks abroad.
Notwithstanding the remarkable advances of recent years, progress towards a
deeper and more extended internationalization of the renminbi remains
limited and with important geographical differences in both outcomes and
perspectives.8
On the one hand, China's greater significance and influence in Asia compared
to that at the global scale, certainly add to the renminbi's other advantages in
explaining the important role of this currency at the regional level. The latter
is explained partly by the numerous official measures and initiatives purposely
aiming at greater economic interaction between China and other Asian
countries. However, trade is undoubtedly the main force driving the wider
cross-border use of the renminbi in the region. Indeed, recent trade figures
show that around one half of Chinese imports originate in Asia, a development
that is in turn reflected in the renminbi's dominant role as reference for the
determination of the value of other currencies in the region, above and beyond
those of the dollar or the euro,9 while also featuring prominently as the
currency of choice for payments with China. Going forward, the current
prospects of continued growth of the Chinese economy, albeit at lower rates
than in the past, in conjunction with likely deeper and more extensive linkages
between China and other economies in the region, as well as anticipated
reforms in the former allowing a freer use of its currency externally, support
the expectation of a further strengthening of these trends over the next
several years. The importance of trade in enhancing the international role of
the renminbi is also illustrated by the fact that this currency has become the
dominant reference in other emerging market economies outside Asia with
strong trade ties with China.
On the other hand, it is undeniable that the renminbi's role as a major reserve
currency at the global level is still relatively modest. This is clearly illustrated
by the fact that China's global economic significance, as measured for instance
by its 18 and 11 percent shares in total (PPP-adjusted) output and merchandise
trade, respectively, is still far from being matched by the renminbi's 1 percent
participation in global international reserves.
To some extent, this may be explained by the significant network-increasing
returns (that is, the increased likelihood of a currency being used as either a
means of payment, unit of account or store of value deriving from its use for
such purposes by other parties) backing the persistence of the US dollar as the
main global currency and reserve asset. However, it must be kept in mind that
given China's trade and financial linkages worldwide, network effects could in
fact rapidly move in favor of underpinning a much wider use of the renminbi
globally.
Therefore, the main challenge the Chinese authorities face in allowing the
renminbi to achieve a more relevant global currency status, seems to be
related to the implementation of additional efforts in a number of areas. In my
view, action is particularly important in connection with the following:
1. The further liberalization of the capital account. I fully agree that the best
approach here is one emphasizing gradualism and prudence, as a movement
in this direction must be accompanied by reforms in a number of other, key
areas, to avoid adverse implications for macroeconomic and financial stability.
Given China's economic size, this is important not only from a national but
from a worldwide perspective. My impression here is that the room of
maneuver for the Chinese authorities is not very wide. While a more ambitious
pace for the internationalization of the renminbi requires a speedier and more
comprehensive liberalization of the capital account, to be successful the latter
in turn needs a stronger financial system, as well as further efforts to upgrade
governance of the corporate sector and to allow more flexibility of the
exchange rate. Furthermore, capital account liberalization efforts have been
affected by some actions implemented recently to tackle pressures on the
renminbi, particularly those derived from tighter capital flow regulations and
enforcement, such as restrictions on the purchase of foreign currency by
individuals and more strict limits on outbound foreign direct investment flows.
2. The domestic authorities have taken important steps towards the
liberalization of the onshore renminbi's exchange rate over the last few years.
However, the overall framework still falls short of a fully supply and demand-
driven renminbi market, and failing to effectively fill this void may continue to
raise concerns about the possibility of government control over the currency's
valuation, particularly vis-à-vis the US dollar, for either stabilization or
stimulative purposes. It is also important to consider that the transition to a
more market-oriented foreign exchange regime may be difficult and subject to
wide swings. Indeed, the challenges deriving from a complex external
environment are accentuated by domestic developments as the Chinese
authorities attempt to simultaneously achieve multiple relevant tasks,
including a diminished role of the state in the allocation of resources in the
economy, a shift in the growth strategy towards consumption and services and
away from investment and manufacturing, as well as the tackling of a number
of outstanding vulnerabilities. Against such a backdrop, global investors may
remain wary of trades in the renminbi.
3. While significantly developed over the last years, the domestic financial
markets still need further depth, transparency, and sophistication, while the
insufficient degree of connectivity with the global financial system continues
to be reflected in low levels of foreign participation. This is observed across
virtually all relevant markets. China's stock exchanges figure among the
world's largest in terms of market capitalization, but foreign ownership at only
slightly above 1 percent pales in comparison to those in other emerging
markets such as Brazil (30 percent) and Russia (23 percent). Likewise, China's
bond market, the world's third largest, as attractive as it may be in terms of
returns and risk, is dominated by domestic participants, as foreign
participation remains low at around 2 percent.10 Of course, this is explained to
a large extent by outstanding restrictions to foreign participation in domestic
financial markets but, in light of their current features, it is reasonable to
assume that demand factors may also be present.
4. As in other areas, important efforts towards greater transparency have been
made by the Chinese authorities recently. In this respect, it is worth to note
the progress made in monetary, financial and external statistics, as well as the
decision to subscribe to the IMF's Special Data Dissemination Standard and
Coordinated Portfolio Investment Survey, and to report for the first time the
currency composition of a representative portion of China's reserves and
international banking liabilities.11 However, important data gaps remain.
According to the IMF, the latter are inconsistent with China's systemic
importance, with the most pressing issues relating to national accounts,
government finance statistics and bank/shadow bank linkages and foreign
exchange exposures.12 Indeed, enhanced transparency of official statistics
would help alleviate potential concerns about the state and prospects of the
economy and domestic financial markets, and underpin the renminmbi's
international role.
5. Although it is true that official reserve managers enjoy special benefits and
facilities to trade in renminbi in Chinese domestic financial markets in
comparison to their private counterparts, significant operational challenges
remain. Among these, a complex legal framework, rigid and frequently non-
negotiable rules mandated by the authorities, the potential for
misunderstandings arising from language issues, weak channels of
communication to overcome these difficulties, and frequent regulatory
changes, are limiting factors. The latter may force official investors to rely on
either private or official intermediaries to participate in onshore trading
activities, thus increasing the overall costs associated to holding renminbi-
denominated assets. But even some of these institutions find the
corresponding procedures challenging, and frequently use disclaimers when
providing advice on the interpretation of regulations, leaving responsibility for
compliance to the corresponding central bank.
To conclude, I only want to stress that the renminbi's footing in the
international monetary system should continue strengthening as a
consequence of China's growing economic importance at the global scale,
along a path leading to its further use as a reserve currency to levels
significantly beyond those observed at present. However, there are a couple
of considerations that need to be kept in mind in order to be able to make a
realistic assessment in this regard. First, it should be noted that such a process
is inherently slow and lengthy, not necessarily linear and subject to important,
and perhaps frequent, setbacks. Thus, whatever perspectives there may be,
they should be viewed from a long-term standpoint and paying particular
attention to the overall trend as separated from specific, often one-off,
developments. Second, and closely tied to the previous point, the speed at
which this process proceeds will be determined by the commitment and
capacity of the authorities to implement the measures required to consolidate
the renminbi's role as an international currency commensurate with China's
importance in the world economy.