Renminbi Internationalization Amid the Coronavirus Pandemic

At a roundtable discussion organized by China Forex, Ba Shusong,executive dean of the HSBC Institute of Finance at Peking University and Vice President of the China Society of Macroeconomics,and Lu Zhengwei,chief economist of Industrial Bank and chief economist of HuaFu Securities,shared their opinions on the coronavirus and the renminbi internationalization. The conversation,which follows in edited form,was moderated by Zhong Wei,China Forex deputy editor.

China's economy has experienced rapid growth since the reform and opening policy got under way more than four decades ago. In more recent years，growth has moderated as the economy entered a stage of higher quality development. China has been steadily deepening its economic reforms and is now on track towards a comprehensive opening up. China now accounts for a significant share of the global economy and world trade. Moreover，it is very active in overseas investment. Against this background，the renminbi has become more widely used around the world，and the inclusion of the Chinese currency in the International Monetary Fund's Special Drawing Rights in 2015 has pushed internationalization to a new level. With the outbreak of the coronavirus pandemic and the global economy facing great challenges，should we continue liberalizing the renminbi against all these difficulties? Would this make a greater contribution to international financial stability?

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Zhong Wei: Welcome to this session's "round-table" discussion. Global financial markets have encountered severe turbulence due to the Covid-19 pandemic and other factors. The exchange rates of major currencies have moved in different directions in response to investor sentiment，the coronavirus outbreak，resource price volatility and central bank policy adjustments. The dollar index continues to strengthen，while dollar liquidity is relatively tight. Looking back to the Asian financial crisis and the sub-prime crisis，the renminbi played a positive role in stabilizing the global financial situation by staying strong against the US dollar. The renminbi exchange rate has also remained stable at a reasonably balanced level since the beginning of 2020. What are your views of the likely trend for the renminbi exchange rate this year?

Ba Shusong: The general standard for the international balance of payments is a stable current account balance of between -2% and 2% of GDP. China's current account balance fell below 4% of GDP in 2009-2010 and has been under 2% since 2013. The ratio of the current account surplus to GDP may fall below 1% under the impact of the pandemic. There might even be a deficit if the impact of the coronavirus becomes more severe. In terms of the structure of China's current account，the trade surplus in terms of goods showed a slow decline，while the service deficit has expanded rapidly since 2013，resulting in a decline in the current account surplus. In view of this trend，the renminbi will not see a significant appreciation in the near term，and it will remain basically stable at a relatively balanced level.

While global financial markets are experiencing repeated shocks from the pandemic，the renminbi exchange rate has maintained basically stable despite some two-way fluctuations. Expectations for the exchange rate are relatively steady，our cross-border flows of capital are generally stable，and the foreign exchange market is basically balanced. During the first quarter of 2020，settlements of foreign exchange were US$491.5 billion，while sales were US$452.5 billion，leaving a surplus of US$39 billion. Due to various factors including exchange rate conversions and changes in asset prices，the foreign exchange reserve balance fell 1.5% from the beginning of this year to US$3.06 trillion.

In view of the current account trend，as China and the US are at different stages in terms of getting the epidemic under control and making an economic recovery，the renminbi will maintain its stability. China is continuing to see a trade surplus with the US and has already managed a rapid recovery in the fight against the coronavirus. In terms of the capital account，the world is still suffering from the shocks from the epidemic and a "dollar shortage" still exists. This results in uncertainties in the trend for the renminbi. Compared to the decline in the current account surplus，the fluctuation of China's capital and financial account balance has increased significantly. With the acceleration of reform and economic opening up，cross-border capital flows will expand in frequency and scale. That inevitably will impact the exchange rate of the renminbi. In other words，the change in capital and financial accounts will determine the volatility of the renminbi exchange rate.

If we look at the current and capital accounts together，the renminbi exchange rate is likely to maintain two-way fluctuations around the level of 7 to one dollar.

Lu Zhengwei: During the global financial turmoil，tight dollar liquidity has strengthened the dollar index and weakened non-US currencies. As a result，the global capital risk appetite has declined，leading to a net outflow of funds from renminbi stocks and bonds in March. However，in order to save the market，the US has taken bigger moves than it had taken during the sub-prime crisis，including creating tools to buy corporate bonds and ETFs (even including junk bonds of some "Fallen Angels") and allowing global central banks to exchange dollar bonds for US dollars to ease liquidity. Therefore，the dollar liquidity stress is expected to ease faster than during the sub-prime crisis. Risk appetite will rise accordingly once dollar liquidity relaxes and investors pursue higher-yielding assets. In this regard，renminbi assets are highly attractive. The inclusion of renminbi stocks and bonds in international indices has also played a positive role. Moreover，in the medium term，the major pricing factor for the US dollar depends on the degree of monetary easing in Europe and the United States as well as the US fiscal deficit. In this regard，the Federal Reserve is faster in expanding its balance sheets than the European Central Bank. Over the medium term，the expansion of the US fiscal deficit will lead to bearishness toward the dollar index. This is favorable to the renminbi exchange rate.

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Zhong Wei: Cross-border flows of people and goods have been reduced significantly as a result of the global pandemic. Trade and investments around the world are facing new challenges. China's foreign trade was affected by the domestic epidemic at the beginning of 2020 and the  spreading of the outbreak in the second quarter. China's foreign trade orders also declined and the nation's outbound direct investments slipped back. In this context，what can we do to maintain the stability of China's balance of payments and further expand the international use of the renminbi?

Ba Shusong: By 2018，global export trade of intermediate goods had reached US$9.7 trillion，accounting for 52% of global exports of goods. Among them，China，the United States and Germany are the industrial centers of East Asia，North America and Western Europe. Covid-19 has severely impacted the major suppliers of intermediate goods. With the prolonged effects of the coronavirus，production in these countries will be affected by controls on the movement of people. With many enterprises dependent on the global supply chain，industrial output is likely to decline over the next two to three months. Under these circumstances，a stable currency will be conducive to the recovery of global industrial chains. Compared to the recent large fluctuation in the value of the US dollar，the renminbi has been more stable. This means the use of the renminbi in payments and settlements could avoid exchange rate risks to a certain extent.

We could promote renminbi settlements by exporters through currency swaps as a way to avoid unnecessary exchange rate risks caused by fluctuations in the US dollar. For the export of emergency materials，such as medical supplies，priority can be given to materials priced and settled in renminbi，so as to promote the internationalization of the yuan. From the perspective of enterprise internationalization，Chinese companies should actively participate in the restructuring of the global industrial chain and promote the international allocation of capital. Encouraging Chinese enterprises to go out and expand overseas，make investments and obtain financing，would be conductive to expanding the overseas use of the renminbi. As an important player in the global market，China has become a major trader with commodity pricing power. As the largest consumer and exporter，China already has considerable influence on commodity markets. To promote renminbi settlements in oil-related commodity trading would help reduce China's dependence on the dollar for imported oil.

Lu Zhengwei: The impact of the pandemic on China has been mixed. A decrease in foreign trade orders and a slowdown in direct investments will reduce dollar income，while a decline in outbound tourism will reduce dollar expenditures. On the financial account，China is facing certain capital outflow pressure due to tight US dollar liquidity and the decline in investors' risk appetite. However，over the medium term，the attractiveness of renminbi assets will become more prominent. In addition，there is no apparent deleveraging of foreign currencies as there was in 2015. Therefore，in general，China will maintain a relatively stable balance of payments in 2020，but "stabilizing foreign trade and investment" is still the top priority. We should take further initiatives to reduce tariffs，remove trade barriers，open trade and promote investment，open markets to each other，and create an "express pass" for urgently needed personnel exchanges while consolidating our achievements in epidemic prevention. In addition，we should sign the Asian Regional Comprehensive Economic Partnership as soon as possible.

It is worth mentioning that in recent years the main driving force of renminbi internationalization has been trade settlements and currency swaps，but this year it should be capital account input，that is，