China’s currency campaign: The challenge of internationalisation and digitalisation of the renminbi

• In China, money, currency and payment transactions are manifestations of state sovereignty and political power. The primary objective of Chinese monetary policy is to maintain domestic stability, expand the scope of its own influence internationally, and reshape the global financial and monetary system to make it more compatible with the structures of the Chinese one-party state.
• China is pursuing the internationalisation of the renminbi on several tracks in small persistent steps and with a long-term perspective, but it has so far shied away from the decisive transition to convertibility.
• For the time being, the renminbi does not play a significant role on the global financial and currency markets. However, it is gaining ground as a trading, credit and reserve currency in Asia and the Global South.
• China is a pioneer in the development and introduction of digital central bank money. It is striving to play a leading role in the digitalisation of international payment transactions. Prospectively, the technology and infrastructure developed in China and the standards set for cross-border payments using blockchain and real-time transactions could replace the current international banking and clearing system in a cost-effective manner.
• The Chinese leadership believes that digital central bank money offers great potential: In terms of domestic policy, it creates further opportunities for surveillance and repression. Internationally, it would become easier for China and third countries to circumvent Western financial sanctions.
• In response to China’s currency campaign, the European Union and the European Central Bank should step up their own efforts to internationalise and digitise the euro. Europe should avoid dependence on China when it comes to the future critical infrastructure of an interoperable system for international payments with digital central bank money.

Issues and Conclusions

China is the world’s largest trading nation and sec­ond-largest economic power. However, the national currency of the People’s Republic, the renminbi (RMB), only plays a minor role on the international stage. The low penetration of the RMB on the inter­national financial markets has a negative impact on the Chinese economy and is a source of political vulnerability. The Chinese leadership is not resigned to this unsatisfactory state of affairs. For some time now, it has been making extensive efforts to spur the internationalisation of its own currency. China is a pioneer in the development and introduction of digi­tal central bank money. The country is striving for a leading role in the digitalisation of international pay­ment transactions.

So far, monetary policy has received comparatively little attention in analyses of China’s foreign policy. Yet, if the RMB were to assume a more important role at the expense of the US dollar and the euro, it would have far-reaching political implications beyond the technical level. If China were to take the lead in a future digitised international payment system, the country’s vulnerability to Western financial sanctions would diminish and the People’s Republic would be in a position to establish effective leverage vis-à-vis third countries.

This research paper takes stock of RMB internation­alisation. What political and economic calculations is China following? What strategies has it chosen, what measures have already been taken, and what obstacles and limitations is it encountering in its endeavours? What are the chances of success, based on this analysis? The paper also takes an analytical look at the development and introduction of digital central bank money in China and its foreseeable polit­ical and economic implications – both nation­ally and internationally.

The paper comes to the following results and con­clusions:

• The aim of Chinese monetary policy is to ensure domestic stability and expand its own room for manoeuvre in the international financial and monetary system – possibly to the detriment of the West – and to reshape the global system in such a way that it becomes more compatible with the structures of the Chinese one-party state. In China, there is a longstanding awareness that money and currency form a decisive basis for political power. Its own currency, the RMB, is a cornerstone of China’s state sovereignty, identity and nationalism.
• Although China does not allow currency convertibility out of concern for its internal stability and maintains capital controls, the country is persistently pursuing the goal of RMB internationalisation with a long-term perspective and on several tracks. Domestically, the objective is to develop efficient financial and capital markets and gradually open them up to foreign investors. The RMB is to be increasingly utilised abroad. Milestones on this long march of RMB internationalisation include the establishment of a convertible offshore RMB, the conclusion of numerous currency swap agreements with foreign governments, the development of an infrastructure for payment transactions that is independent of SWIFT and the gradual flexibilisation of the exchange rate regime.
• For the time being, the RMB does not play a signifi­cant role on the global financial and currency markets. The global dominance of the US dollar remains unchallenged, far ahead of the euro. But even compared to the pound and yen, the RMB is less internationalised. As long as China continues to maintain capital controls and market access barriers to its capital markets, the willingness of investors to hold large volumes of RMB will remain low. However, the RMB is increasingly gaining ground as a trading, credit and reserve currency in Asia and the Global South.
• China will be the first major economy to issue a central bank digital currency (CBDC) nationwide. The Chinese state has an ambition to actively shape the future of blockchain technology, digital money and payment transactions in the interests of the party and the state.
• Officially, China’s central bank is pursuing three goals with the introduction of the digital RMB, namely the provision of cash in digital form, the guarantee of secure infrastructure for payment transactions and its use for cross-border payments. However, the economic and political implications go far beyond the technical level:
  • Firstly, the introduction of the digital RMB cre­ates new options for fiscal and monetary policy.
  • Secondly, state security organisations will be able to use the payment transaction data for surveillance, prosecutions and repression.
  • Thirdly, it should be possible in the future to use a CBDC to process cross-border transfers using blockchain, peer-to-peer networks in real time and at very low cost, thereby bypas­sing the existing banking and clearing system. The technological expertise and practical experience acquired in the process offer China the opportunity to play a leading role in the development of infrastructure and inter­opera­bility standards between domestic and foreign payment systems. China is actively looking for multi-track solutions here.
  • Fourthly, a digital RMB that can be used in international business transactions would enable China and third countries to circumvent Western financial sanctions more easily. With a payment transaction infrastructure centred on China, the People’s Republic would gain access to payment data worldwide.
• China’s persistent pursuit of monetary autonomy and the power to shape and influence the global financial system is a further argument for giving the internationalisation of the euro a higher politi­cal priority and setting the appropriate course at the European level.
• The head start of the People’s Republic with the introduction of a CBDC should also be an incentive to step up efforts to develop a digital euro. With the digital euro, Europe and the European Central Bank (ECB) have the opportunity to issue digital central bank money that – in contrast to the Chinese model – effectively and reliably protects electronic wallets and users’ transaction data against unauthorised access and storage.

About the author:

Dr Hanns Günther Hilpert is a Senior Fellow in the Asia Research Division at SWP and coordinator of the thematic working group “Economic and Technological Transformations”