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Assessing internationalization of renminbi
Since the Federal Reserve decided to implement its quantitative easing policy in response to the credit crunch in the United States in the midst of the 2008 financial crisis, fears of too much liquidity being pumped into the US economy, and thereby into the world economy, have gripped many governments, corporations and individuals around the globe
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ince the Federal Reserve decided to implement its quantitative easing policy in response to the credit crunch in the United States in the midst of the 2008 financial crisis, fears of too much liquidity being pumped into the US economy, and thereby into the world economy, have gripped many governments, corporations and individuals around the globe. The demand for an alternative to the world currency has risen since then.
While the US dollar has recently strengthened, many observers believe it will weaken in the long run and they seek alternatives, apart from the tainted euro, to use in cross-border transactions.
China’s intention to extend renminbi loans to other BRICS (Brazil, Russia, India, China and South Africa) nations, which was recently announced, is a bold step towards the internationalization of its currency.
A memorandum of understanding is due to be signed in New Delhi between the China Development Bank and its Brazilian, Russian, Indian and South African counterparts on March 29, 2012.
Prior to this offer to the BRICS nations, many other strategic policies had been introduced by Chinese policymakers ranging from multiple accommodative taxes, trade finance and capital account adjustments to facilitate the renminbi-internationalization process.
Meanwhile, the banking sector, particularly multinational banks, have sniffed the business potential of renminbi internationalization from a much earlier date.
In response, they launched the renminbi global clearing system. The People’s Bank of China also launched an interbank market and deliverable spot trading of the renminbi. The initiative was marked by the approval of an experimental renminbi settlement of cross-border trade in Shanghai, Guangzhou, Shenzhen, Zhuhai and Dongguan in July 2009. In addition, foreign corporations have issued renminbi-denominated bonds in Hong Kong since mid 2010.
This was initiated by the issuance of a renminbi-denominated bond the so-called Dim Sum Bond by the People’s Bank of China in June 2007.
Overall, these developments constitute the catalyst to smoothing the internationalization of the renminbi.
It is very likely that the process will accelerate and the realization of the renminbi as a global currency will come sooner that many expect.
With the internationalization of the renminbi now inevitable, what will it mean for China, the world, and more specifically Indonesia?
First, the internationalization of the renminbi will increase trade flows both from and to China. When cross-border trade flows are settled in renminbi, Chinese exporters and importers can cut transaction costs and minimize foreign-exchange fluctuation risks.
In times when global trade is becoming more competitive, even a small cut in costs is important to Chinese business. The internationalization of the renminbi will improve Chinese competitiveness in global trade and stimulate growth of China’s foreign trade which already exceeded US$3 trillion in 2011.
This means that trade between China and most of its trading partners will multiply at a much faster pace. The commodity-exporting countries will prosper driven by both the increase in trade volume and rising commodity prices led by increasing demand.
As a downside, however, it may hurt those whose main trade is simply importing manufactured goods from China. Those who suffer from large trade deficits with China will continue to increase their deficits at the expense of local manufacturers.
Second, China has been piling up US dollar reserves amounting to an estimated total of $3.2 trillion. This pile, mainly derived from China’s trade surplus combined with net capital inflows, has exposed China to the risk of a depreciating US dollar in the long run.
This explains the reason behind China’s investment policy of continuing to invest in US treasury bonds both to protect China’s exports to the US and to protect China’s asset values from dollar depreciation risks.
The internationalization of the renminbi will slow China’s dollar accumulation, which will minimize China’s dollar depreciation risk. This will undermine demand for the US dollar and increase the demand for renminbi, and perhaps will naturally push the renminbi toward its real market value.
By then, the inward dollar direct investment will likely decline, whereas the renminbi outward direct investment will likely rise. It will be no surprise that in years to come, more and more Chinese corporations will be establishing and buying companies elsewhere across the globe.
What does the internationalization of the renminbi mean for Indonesia?
As mentioned earlier, as a major commodity exporter, Indonesia may benefit from the increase of commodity exports to China. The possible downsides of renminbi internationalization are also obvious for Indonesia.
The increase in Chinese competitiveness will increase Indonesia’s demand for Chinese manufactured products, and will very likely hurt already weak local producers. A set of integrated industrial policies are needed to empower Indonesia’s manufacturers to compete in global trade.
However, the weakening competitiveness in one hand can be compensated the other way but a lot of homework still needs to be done.
In the growing momentum of massive outgoing renminbi direct investment from the People’s Republic, the flow of renminbi direct investment should not be missed.
Competing with many other Asian nations, not to mention Latin American and African nations, Indonesia should really get its house in order to attract the redbacks (renminbi) to come and park in the country as a long-term investment.
While many believe the internationalization of the renminbi will benefit emerging economies, for Indonesia, it is a double-edged sword that can either develop or diminish its economy.
The writer holds a master’s degree in international economic policy from Brandeis University, Massachusetts, the US
