Prospects for Internationalization of the Renminbi in 2016

In 2015,there were significant strides in increasing the cross-border use of the renminbi,and this reflected advances in opening the nation's capital account,measures to increase convenience in using the currency and an expansion of the offshore renminbi market. The renminbi also gained admission to the International Monetary Fund's basket of global currencies known as Special Drawing Rights (SDR),demonstrating that there is an increasingly important role for the currency in the arena of global payments. This important decision will mean that more countries will hold some of their foreign exchange reserves in renminbi. Despite fluctuations on domestic and foreign financial markets,the renminbi can make further gains in its effort to play a bigger role on the world stage in 2016.

Progress in 2015

Cross-border use of the renminbi has been increasing in recent years. The Bank of China Cross-border Index,which reflects renminbi use in cross-border transactions by measuring "cross-border outflows,foreign circulation and cross-border returns" of the currency,had reached 266 points as of October 2015,a gain of 16 points from the level at the end of last year and 2.6 times the base value (100 points) of 2011.

The progress seen in 2015 was generally made in the following areas:

First,there was a general maturing of policies supporting renminbi internationalization. This meant that a framework for the convertibility of the currency on the current account and for direct investment was largely in place. There was a relaxation of regulations on renminbi fund pools,making cross-border fund transfers more convenient. At the same time,new policies for cross-border use of the renminbi under the capital account were rolled out. Foreign central banks and sovereign wealth funds,for example,were allowed to invest in China's interbank market,though within certain quota limits. Foreign institutions were allowed to issue "panda bonds" to raise funds in China and four  free trade zones (Shanghai,Guangdong,Fujian and Tianjin) all introduced new policies to encourage cross-border use of the currency.

Second,the use of the renminbi under the current account was further expanded. Since 2009,cross-border renminbi flows have developed rapidly based on foreign exchange settlements related to trade and investment. The renminbi is now the second largest currency in China's cross-border payments picture -- next to the dollar -- and has entered the top tier of currencies used in global payments. During the first eleven months of 2015,the renminbi accounted for nearly 30% of China's overall cross-border payments. Cross-border renminbi settlements under the current account have reached 6.43 trillion yuan,and renminbi settlements for merchandise trade accounted for about one quarter of China's  imports and exports,according to Customs data.

Third,capital and financial market business became a new focus of attention. During the first 11 months of 2015,settlements of outbound direct investment and foreign direct investment were 657.5 billion yuan and 1.33 trillion yuan,respectively. The total value more than doubled the level of the same period last year and the expansion far exceeded the pace of increase under the current account. With the steady advance of the "One Belt,One Road" strategy,which seeks to boost trade and investment with China's neighbors,the renminbi is playing an increasingly important role in outbound investments. In the future,with the further opening up of the domestic financial market and the promotion of renminbi capital account convertibility,the proportion of renminbi settlement under the capital account is expected to rise further.

Fourth,the external environment for renminbi internationalization has undergone profound changes. Since the exchange rate reform of August 11,2015 (a move that effectively devalued the currency) the renminbi exchange rate has been buffeted by market fluctuations. These fluctuations have affected the appetite of some foreign corporations for the Chinese currency. But this may also reflect other factors. Over the last year,progress in liberalizing renminbi interest rates reduced the gap between foreign and domestic rates. That left less room for development of currency exchanges related to portfolio products.

Fifth,there was continued expansion in offshore market cooperation. Currently,more than 189 countries and regions have made use of the renminbi for cross-border payments involving China. As of the end of November 2015,the People's Bank of China had signed renminbi clearing agreements with more than 20 countries and regions. It had also signed bilateral currency swap agreements with 33 countries and regions totaling more than 3.1 trillion yuan.

Sixth,the offshore renminbi market continued to expand. The Offshore Renminbi Index value was 1.40% at the end of the third quarter of 2015,0.2 percentage point above the end of the previous year,according to the Bank of China. At present,offshore renminbi deposit balances were about 2.38 trillion yuan,while the stock of offshore renminbi bonds stood at about 530 billion yuan and the daily trading amount of offshore renminbi foreign exchange accounted for around 4.25% of total global foreign exchange trade. That made the renminbi the world's fifth largest currency in terms of foreign exchange trading volume. Meanwhile,there were more investment products on the offshore renminbi markets,ranging