New Market Drivers for Cross-border Renminbi Services
The drive to internationalize the renminbi has had mixed results so far. After a slow start there was a rapid expansion of the use of the currency for cross-border payments and settlements，and that was followed by the current phase of adjustment. But over the longer term，there is certainly cause for optimism.
According to central bank statistics，cross-border renminbi settlements reached 4.36 trillion yuan and direct investment renminbi settlements stood at 1.64 trillion yuan in 2017. This total included 3.27 trillion yuan of cross-border goods settled in renminbi，and 1.09 trillion yuan of service trade and other current account settlements. Outbound direct investments were 456.88 billion yuan and inbound foreign direct investment reached 1.18 trillion yuan.
If we look at comparisons over the 2015-2017 period，the picture is somewhat disappointing. Annual settlements from cross-border renminbi trade dropped from 7.23 trillion yuan in 2015 to 5.23 trillion yuan in 2016 and 4.36 trillion yuan in 2017. Over the same three-year period renminbi settlements on outbound direct investment rose from 2.32 trillion yuan to 2.46 trillion yuan，and then slipped back to 1.64 trillion yuan. What we can see over this period is that renminbi use in cross-border trade and investment dropped significantly.
According to the Society for Worldwide Interbank Financial Telecommunications (SWIFT)，the renminbi was the fifth largest payment currency in the world as of December 2015. One year later the renminbi had slipped to sixth place，accounting for 1.68% of the market. In the third quarter of 2017，the renminbi’s share of global payments and settlements was 1.70%.
If we look at offshore renminbi deposits，a similar pattern emerges. In Hong Kong，the main offshore market for the Chinese currency，renminbi deposits were as high as one trillion yuan at their peak in 2014. By the end of 2016 deposits had fallen to 546.7 billion yuan and by the end of the second quarter of 2017，renminbi deposits at Hong Kong financial institutions amounted to 535.5 billion yuan. Hong Kong’s offshore renminbi deposits had slumped to little more than half of their peak level.
From this we can see that the decline in the role of the renminbi has been in multiple segments of the market. Cross-border renminbi payments have fallen back in absolute terms，the currency’s share of global payments and settlements has lost ground and overseas deposits have declined. This is the result of a combination of factors，and it can be interpreted as a period of adjustment in a long-term process. Cross-border renminbi business needs to find a formula for a market breakthrough，and in order to accomplish that，policy responses are needed.
The ancient Greek mathematician and scientist Archimedes，in discussing the possibilities of the fulcrum and the lever，supposedly said: "Give me a place to stand and I will move the world." For today’s renminbi policy makers，the challenge is similar: They need a fulcrum，a lever and a place to stand to boost cross-border renminbi business. With the development of China’s economic reform and opening up，the Belt and Road Initiative and the commodity trade，may be the means to that end in the cross-border renminbi business.
Increased Cross-border Mobility
Growth in cross-border renminbi business needs to come from two-way fund flows. Only healthy and orderly cross-border movements can effectively translate into renminbi internationalization，and this means there is a need for new momentum behind inflows and outflows.
The renminbi is already an international currency. Momentum behind fund flows is closely related to interest rate differentials between the renminbi and other international currencies，as well as spot and forward exchange rates and the trends in international capital movements. As a result，interest rates，exchange rates and capital flows among the world’s economies are closely linked. The factor that can directly boost cross-border renminbi flows is the improvement of cross-border business policies. By improving and optimizing these policies，cross-border renminbi flows can be enhanced.
At the beginning of 2018，the People’s Bank of China promulgated the Circular on Further Perfecting the Policy of Cross-border Renminbi Business and Promoting the Facilitation of Trade and Investment (People’s Bank of China document No. 3，2018，hereinafter referred to as the Circular). The main purpose of the document was to accelerate the development of cross-border renminbi business.
The Circular fully supports cross-border renminbi settlement on behalf of enterprises and individuals. The Circular clearly states that enterprises can use renminbi to settle any cross-border transactions which could otherwise be settled in foreign currency. This document is of great significance，making clear that the renminbi enjoys the same legal status as other global currencies in international transactions. The Circular also makes clear that banks can seek business in cross-border settlements for individuals under the current account.
Although there are two-way cross-border movements of the renminbi these days，China is currently focused on promoting the inflow of capital into the domestic market. Article Four of the Circular states that it is necessary to facilitate foreign investors in using renminbi to make direct investments in China and Article Five states that it is necessary to facilitate the remittance of renminbi funds raised abroad by domestic enterprises for use in the home market.
Belt and Road Initiative Investment
The internationalization of any currency is closely linked to the economic strength of the country that issues that currency. No country’s currency can gain global acceptance without the support of a strong home economy. The same rule applies to the renminbi，and the internationalization of the national currency will develop in step with the expansion of China’s economy. At this stage，China’s economy continues to expand at a comparatively rapid pace. And one of the country’s key strategic programs -- the Belt and Road Initiative -- is likely to extend China’s global influence and economic power in the years ahead.
Following the progress of the Belt and Road Initiative，cross-border renminbi usage has made significant strides. For instance，42 of the 84 members of the Asian Infrastructure Investment Bank are from regions covered by the program. The Silk Road Fund，a US$40 billion investment fund，was set up to promote infrastructure，energy and other projects in the reg