1 Chapter 1Renminbi Internationalization Index 1.1 RMB internationalization index and its principles 1.1.1 Internationalization of RMB The internationalization of the RMB can be defined as the process of the RMB performing the functions of ainternational currency, becoming a major pricing and settlement currency in trade, and becoming a financial transaction currency and an international reserve currency. In the current extremely complicated and turbulent international economic environment, for China to implement the new urbanization, maintain a steady economic growth and maintain its core interests, RMB internationalization is undoubtedly a very important system guarantee. Currency internationalization requires some basic conditions. For example, the real economy should maintain steady development, and play an important role in international trade and economy; there should be a higher level of domestic financial liberalization and international openness; and the basis of a market system and a macroeconomy which is helpful for currency internationalization should be established. Although the currency has preliminary with the internationalization of some conditions, but to achieve the final goal, China will also face a long and arduous process. According to the development law of currency internationalization, the RMB internationalization must undergo peripheral - regionalization – global, the three stages of development, which costs at least 20 to 30 years. There is no doubt that internationalization of the RMB is a process of combination between natural market formation and government policy guidance. The process is full of repeated gaming among various international forces, which requires China to make down-to-earth efforts in the aspects of politics, economy, military and culture and to raise China’s comprehensive powers, in order to calmly cope with the risks and challenges of the RMB internationalization. 1.1.2 Definition of the RMB internationalization index The international community generally measures the currency internationalization level by the proportion of one currency in official foreign exchange reserves. National governments submit the currencies which are among the top most in their official foreign exchange reserves, in accordance with the
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1
Chapter 1Renminbi Internationalization Index
1.1 RMB internationalization index and its principles
1.1.1 Internationalization of RMB
The internationalization of the RMB can be defined as the process of the RMB
performing the functions of ainternational currency, becoming a major pricing and
settlement currency in trade, and becoming a financial transaction currency and an
international reserve currency. In the current extremely complicated and turbulent
international economic environment, for China to implement the new urbanization,
maintain a steady economic growth and maintain its core interests, RMB
internationalization is undoubtedly a very important system guarantee.
Currency internationalization requires some basic conditions. For example, the
real economy should maintain steady development, and play an important role in
international trade and economy; there should be a higher level of domestic financial
liberalization and international openness; and the basis of a market system and a
macroeconomy which is helpful for currency internationalization should be
established. Although the currency has preliminary with the internationalization of
some conditions, but to achieve the final goal, China will also face a long and arduous
process. According to the development law of currency internationalization, the RMB
internationalization must undergo peripheral - regionalization – global, the three
stages of development, which costs at least 20 to 30 years.
There is no doubt that internationalization of the RMB is a process of
combination between natural market formation and government policy guidance. The
process is full of repeated gaming among various international forces, which requires
China to make down-to-earth efforts in the aspects of politics, economy, military and
culture and to raise China’s comprehensive powers, in order to calmly cope with the
risks and challenges of the RMB internationalization.
1.1.2 Definition of the RMB internationalization index
The international community generally measures the currency
internationalization level by the proportion of one currency in official foreign
exchange reserves. National governments submit the currencies which are among the
top most in their official foreign exchange reserves, in accordance with the
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International Monetary Fund (International Monetary Fund, the IMF) statistical
requirements, and then the index will be published by the IMF. Since the IMF only
separately censuses and publishes the currencies which are more than 1% of the
world's official reserves, according to which there only list the dollar, euro, yen,
pound, Swiss franc, Canadian dollar and Australian dollar, that is to say, we can't use
the internationally applied indicator, the currency proportion in official foreign
exchange reserves to measure of the renminbi internationalization level.
International Monetary Institute of RUC, proceeding from the basic functions of
the international monetary, consider that in the case of RMB capital account’s orderly
opening, the international monetary function of RMB should be mainly reflected in
the field of the real economy and focus on the function of RMB as a currency for
trade settlement, direct investment and international bond trading; in the guidance of
which, we selected the appropriate variables and indicators and compiled a
comprehensive multivariable synthesis index - the renminbi internationalization index
(RII), to measure and reflect the actual level of RMB internationalization. By
observing the value and the structure change of the RII, not only can we
straightforward judge the degree of RMB internationalization and its main influence
factors, but also can grasp the influence direction and magnitude of different factors
on the RMB internationalization, and we can conduct a dynamic comparison with the
global usage of major currencies. This offers an efficient operational and management
way for government decision-making sectors to accurately grasp this dynamic process,
helping them to propitiously seize new opportunities and challenges from home and
abroad during this process of internationalization, and decisively adjust or formulate
macroeconomic policies.
1.1.3 The compilation principles of the RMB internationalization index
First, the compilation of RII should be based on the international monetary
function, and the index should be able to not only reflect the actual international
application of the renminbi, but also can reflect the guidance direction of the renminbi
internationalization and highlight the function of the renminbi as the means of the real
economy’s exchange and circulations. The compilation of RII’s core purpose is to
reflect objectively the present situation of the countries around the world’s using the
renminbi, in order to provide objective, fair and reliable basis to the government
departments’ formulating relevant decisions and private department using RMB
financial products and formulating the corresponding financial strategy. The global
financial crisis makes people realize the danger of the overdevelopment of virtual
economy; once the money was divorced from the real economy and inflated
endogenously, the stable operation of the financial system would be enormously
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damaged. As a result, the renminbi internationalization index must not pay too much
attention to the virtual economy or derivative financial transactions function, but
should emphasis on the circulation function of the real economy.
Second, consider the comparability and operability comprehensively. One of the
purposes of the compilation of RII is to provide the countries around the world with
the choice basis of international trade and reserve currency, which requires
considering the transverse comparison and dynamic comparison between different
currencies of the evaluation results in the design. Through comparison and analysis of
the internationalization index of the renminbi and other major currencies, we know
structurally the main factors that promote or hinder the renminbi internationalization,
understand the gap between the internationalisation of the renminbi and other major
currency and discover the main contradictions and problems, thus providing a
convenient evaluation tool to the government’s speculating the renminbi
internationalization implementation and the effectiveness of promotion measures, so
that the Chinese government timely seize the opportunity of the internationalisation of
the renminbi, formulate appropriate and targeted countermeasures, and effectively
promote the internationalization of the renminbi. At the same time, the index system
design should also fully consider the availability of data and the operability. For some
special important indicators whose data can’t directly be collected, we should estimate
them basing on as much information as possible. And the content of the chosen index
should be easy to understand, there should be no ambiguity, to ensure that the
compilation of RII can accurately and easily be calculated and applied.
Third, consideration must be given to both the stability and the flexibility. The
index which compiling the RII bases on and the weight of each index is not suitable to
change frequently, to ensure that the interpretation of the assessment result has a
certain continuity and dynamic comparability. However, we shouldn’t rigidify the
index and the weight of each index, but maintain certain flexibility. Because at
different stages the internationalization of the renminbi have different strategic target,
and the periodic strategic targets need to be adjusted appropriately according to the
change of international political and economic situation. In order to accurately and
objectively reflect the process of RMB internationalization, the compilation of RII
indexes and the weight of each index, should be adapted to the RMB
internationalization practices and China's strategic goal, to appropriately adjust itself
in different phases.
Fourth, index compilation should be transparent and simple. The index selection
principle and weight determination principle of the RII compilation should be carried
out under the guidance of the scientific nature and operability. At the same time,
adopt simple and intuitive calculation method to avoid the method of
over-complicated and difficult to understand. In addition, the method of index is open,
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so that the government and related research department’s personnel can study
collaboratively on the problems of the renminbi internationalization, to lay a solid
foundation for the scientific development of RII.
1.1.4 RMB internationalization index indicator system
Theoretically, a currency has three primary functions: as a unit of account, as a
medium of exchange, and as a store of value. In international trade, the pricing
currency is usually the settlement currency, and one of the purposes of compiling the
RMB internationalization index is to focus on reflecting the actual use of the RMB in
international economic activities. Therefore, this report will merge the first two
functions together.The First-class indicators of RII include the international pricing
and payment function and the international reserve function, and the international
prcing and payment function is reflected in two aspects of trade and finance.
Therefore, in RMB internationalization index indicator system, the functions of trade
prcing, finance pricing and official foreign exchange reserces are parallelized and
their weight is 1/3.
According to one of the principles used in compiling the RMB
internationalization index, i.e. emphasizing the circulation and transaction functions
of the RMB in the real economy, the functions of the RMB in international trade
should be the most important component in evaluating its internationalization.
Therefore, the proportion of RMB settlement in world trade has been selected as the
specific indicator.
According to the balance of payments, capital and financial accounts comprise
all transactions between residents and non-residents, which include direct investment,
international security, and international credit. The RMB internationalization indicator
system covers indicators from these three aspects. Corresponding indicators have
been designed, based on the functions of the RMB in these three categories of
transactions. The following are some additional notes about indicators of securities.
International securities include bonds and stocks. Because of the great risk of
information asymmetry in international finance, the scale of the international bond
market with fixed income is far larger than that of international stock, which has
always been in a dominant position in the international securities market. What is
more, the scales of the major national stock markets are often quoted in local currency,
and there is a lack of statistics concerning non-residents’ stock investment. Therefore,
by taking financial theories and data availability into consideration, this report will
use the international bonds and bills indicator of the Bank for International
Settlements (BIS) to reflect international securities transactions. According to the BIS
classification international bonds and bills include: first, all bonds denominated in
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foreign currencies issued by domestic institutions and non-domestic institutions;
second, the bonds denominated in domestic currency and issued by foreign
institutions in the domestic market; third, the bonds denominated in domestic
currency and issued by domestic institutions in the domestic market, which are also
seen as international bonds and bills if they are targeted to non-domestic investors.
Thus, the international bonds and bills indicator can reflect the degree of
internationalization of a country’s currency in international securities markets very
well.In order to reflect the transactions of the RMB international bonds more
comprehensively and accurately, this report further divides the indicator into two
indicators. One is the stock indicator, namely, the remaining sum of outstanding
bonds and bills. The other is the flow indicator, namely, the issuance amount of bonds
and bills. The reason for doing this is that the stock indicator can objectively reflect
the status quo of the RMB in international bonds and bills transactions, and the flow
indicator can better capture dynamic changes of the RMB international bonds and
bills. Certainly, accumulation of the flow results in the stock. And the relationship
between these two indicators determines that the stock indicator itself usesinformation
from the flow indicator, thus giving greater weight to the stock indicator of the RMB
international bonds and bills transactions.
The international reserve function is the most typical and centralized among all
international monetary functions. Generally, the proportion of a currency held in
foreign exchange reserves is the most immediate and intelligible indicator for
measuring its degree of internationalization, which is published by IMF.In their own
interests, a majority of governments in the world do not normally publish the specific
currency structure of their official foreign exchange reserves, which leads to great
difficulties in collecting data that reflects the international reserve function of the
RMB.Despite RMB hasnot be reported separately, with gradual improvement of our
statistic system and deepening international cooperation, the availability of data for
the RMB as an official reserve is expected to increase.
Table 1-1 RMB internationalization index indicators
general indicators main
indicators Subordinate indicatiors
Function of pricing and
settlement
trade proportion of settlement of RMB in world trade
finance
proportion of RMB overseas credit in international credit
Proportion of RMB security in announced issues of
international bonds and notes
Proportion of RMB security in amounts outstanding of
international bonds and notes
Proportion of RMB direct investment in international
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Data for RII mainly comes from People's Bank of China, International Monetary
Fund, Bank for International Settlements, The World Bank, United Nations Trade and
Development Organization. With the level of RMB internationalization improved,
indicator and statistics of the international organizations mentioned above may be
upgraded, getting access to the specific statistics of RMB usage in both overseas trade
and international finance. This means modifications of indicators of RII, with more
indicators included and a few changes in the different weight of existing indicators.
1.1.5Calculation of RMB internationalization index method and its economic
implication
In the RII index system, every index itself is a proportion, no difference of order
of magnitudes, so there is no need for dimensionless processing, but we can directly
conduct the weighted average and compile the RII.
𝑅𝐼𝐼𝑡 = 𝑋𝑗𝑡𝑤𝑗5𝑗=1
𝑤𝑗5𝑗=1
× 100
Where RIIt represents the RMB internationalization index at time t ,
Xjt represents the value of Xjat time t,wjrepresents the weight of variable Xj.
direct investment
Function of international
reserve
Government
reserve
Proportion of foreign exchange reserves of RMB in
world reserve
introduction:
proportion of settlement of RMB in world trade = amount of cross-border trade in RMB / amount
of cross-border trade in the world;
proportion of RMB overseas credit in international credit = RMB overseas credit / international
overseas credit ;
Proportion of RMB security in announced issues of international bonds and notes =
Amount of RMB security in announced issues of international bonds and notes / Amount of
security in announced issues of international bonds and notes ;
Proportion of RMB security in amounts outstanding of international bonds and notes =
Amount of RMB security in amounts outstanding of international bonds and notes / amount of
security in amounts outstanding of international bonds and notes;
Proportion of RMB direct investment in international direct investment = RMB direct investment /
international direct investment ;
Proportion of foreign exchange reserves of RMB in world reserve = foreign exchange reserves of
RMB / foreign exchange reserves。
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The economic implication of the RII should be interpreted like this: if the
renminbi was the only international currency, the numerical value of the RII index
system should equals 100%, then RII equals 100. Conversely, if the renminbi wasn’t
be used in any international economic trade, the numerical value of each index should
be 0 and RII 0. If the value of RII increases continuously, this means that the renminbi
played more international currency function in the international economics, and that
the internationalization level would be higher and higher. For example, when RII
equals 10, this implies that one tenth of the international trade, capital flow and
official reserve assets trade among the countries around the world was operated with
the renminbi.
1.2 Analysis of the variation of the RMB internationalization index
1.2.1 Status Quo of Renminbi internationalization index
The RMB internationalization index has shown a steady rise in 2013, specifically,
the RMB was more accepted in international trades, international financial
transactions and official exchange reserves, promoting the RII represents a sustained
increase. As is shown in figure 1-1, by the fourth quarter of 2013, the RII has climbed
to a new high level (1.69), with an increase of 83.80%.From the first quarter of 2012
to the fourth quarter of 2013, the average growth rate of RII was 15.66%, significantly
higher than the growth rate of China's GDP and trade in the same period.
Figure 1-1 the RMB internationalization index
Note: Due to adjusted raw statistics, RII of four quarters in 2012 were changed from 0.55,0.70,
0.77 and 0.87 (" RMB internationalization Report 2013 " ) to 0.56,0.70,0.79and 0.92.
RII ofQ4 2013 respectively reaches 0.95, 1.14, 1.14 and 1.69. Since related
policies has implemented in order to simplify the cross-border process in 2013,the