In the third article in “The Rise of the Renminbi” series, TCG explores the role of bilateral swap agreements (BSAs) in China’s RMB internationalization ambitions. Despite Beijing’s hopes that the initiative would foster increased RMB-denominated trade, results have been lackluster thus far. Regardless, BSAs may play an increasingly important role in the sustainable offshore circulation of the redback over the long-term.
Recent weeks have highlighted an increased scrutiny from Washington towards US-listed Chinese companies. In May 2020, the US Senate passed legislation requiring foreign companies listed on the NYSE and Nasdaq to open up their books to American regulators. Faced with the reality of increasingly hostile US oversight, many US-listed Chinese companies are actively weighing the costs and benefits of migrating exchanges – and many are settling on Hong Kong.
Continuing upon the first article in “The Rise of the Renminbi” series, TCG explores China’s strategic approach to the long journey towards RMB internationalization. China has intertwined its global RMB ambitions with the ‘One Belt, One Road’ initiative, a large-scale infrastructure development plan. By providing funding to economically underdeveloped nations, China aims to lead a strong global trade bloc through which new trade and investment can be facilitated in RMB.
In its push for an international RMB, China squares off against the “impossible trinity,” an economic principle stipulating that no open economy can simultaneously manage exchange rates, control monetary policy, and allow for full capital mobility. In recent years, China has attempted to juggle all three at once, but seen limited success. To reap the benefits of a fully internationalized RMB, China must consider the pros and cons of taking a bolder step towards one side of the triangle.
China plans to drive global demand for the RMB by introducing a PBOC-backed digital currency into OBOR and other Chinese-driven global trade initiatives to lubricate cross border trade. While a digital RMB and China’s recent market reforms alone may not be enough to drive demand for the currency to levels that can eventually challenge USD supremacy, the strategy represents the PBOC’s methodical approach to RMB internationalization.
Once the coronavirus outbreak is contained and business returns to ordinary operations, the Chinese market will continue to offer the unique opportunities that originally attracted global investors. With patience and an opportunistic approach, investors will discover a wealth of new opportunities to leverage the Chinese market’s low sensitivity to the global market and build a more diversified investment portfolio.