RENMINBI INTERNATIONALIZATION: PULL AND PUSH FACTORS IN AN ERA OF GEOPOLITICAL RIVALRY

By Paolo BALMAS, January 2025 | PDF
Dispatch 2025.1

China lacks the political and economic conditions necessary to fully internationalize its currency, the renminbi (RMB). Several studies outline the prerequisites for currency internationalization, emphasizing domestic factors such as monetary policy, full currency convertibility, the depth and liquidity of the financial system, liberalized outward investments, robust welfare provision, and the capacity to manage balance of payments deficits (e.g., Bergsten 1997; Cohen 2018; Germain 2022; Germain and Schwartz 2017; Prasad 2016). Despite these structural limitations and its inability to challenge the dominance of the US dollar (Benney and Cohen 2022), the RMB’s usage in international markets continues to expand. According to SWIFT—the interbank payment messaging system responsible for approximately 95% of the RMB’s use outside China—the RMB alternates between being the fourth and fifth most-used currency globally. Although the US dollar and euro remain far ahead in terms of international usage, the RMB is closing the gap with the Japanese yen and the British pound.

Building on Cohen’s (2015) proposal to disaggregate the mechanisms of currency internationalization by function, a recent study by Balmas and Howarth (2024) analysed the “push and pull” factors influencing RMB internationalization. Using data primarily sourced from Chinese financial institutions, including the People’s Bank of China (PBC, China’s central bank), the China Securities Regulatory Commission (CSRC), and the State Administration of Foreign Exchange (SAFE), the authors identified foreign investment in Chinese capital markets as the primary driver of RMB internationalization. In other words, the increasing presence of the RMB in international markets largely reflects its growing role in investment portfolios, particularly among European and American investors (“push” factors).

This trend does not result from a deliberate Chinese strategy to displace the US dollar. Instead, it stems from a coordinated effort involving states and financial agents from various origins—not solely Chinese actors—who have developed “channels” to facilitate international investments into China (“pull” factors). These findings align with Zucker-Marques’ (2021) research, which emphasizes the importance of considering external factors—such as economic sanctions and global financial instability—when analysing the internationalization of the RMB beyond the concept of currency statecraft.

European and US index providers and rating agencies play a pivotal role in the RMB internationalization process, contributing to the “pull” factors while enabling “push” agents. This coordinated market dynamic has resulted in an atypical trajectory for RMB internationalization, bypassing the conventional progression from trade to investment and reserve currency status.

This deviation is particularly significant given the intensifying economic confrontation between the US and China. As the US seeks to maintain market and technological advantages through sanctions and tariffs, these trends may change in the coming months and years. Such shifts could increase the susceptibility of financial capital markets to uncertainty, while simultaneously creating opportunities for institutional investors and key financial institutions. These gatekeepers of the international RMB market include a select group of European and American investment banks, including J.P. Morgan (US), HSBC (UK), and BNP Paribas (France).

China’s monetary policymakers does not appear overly concerned by the increasing interest of external investors in domestic capital markets and the role of Western large banks for several reasons. First, the domestic RMB markets that attract foreign investors are shielded from international speculative activity by the dual-currency system—a structural anomaly of the RMB system. The onshore currency (CNY, as used in foreign exchange markets) is managed separately from the offshore currency (CNH), which operates under the monetary authority of Hong Kong and is traded under unrestricted conditions (Subacchi 2016). To minimize the gap between these two values and deter speculative activity by external investors, the People’s Bank of China (PBC) makes daily adjustments to the onshore currency.

Furthermore, Chinese financial sector reforms and monetary policies continue to deepen the liquidity of domestic capital markets. Despite protections against aggressive external speculation, the RMB market is likely to face mounting tensions. On one side is the increased appeal of RMB-denominated assets for both domestic and foreign investors; on the other are Western governments’ efforts to restrict financial capital flows into China. The resolution of these tensions will play a critical role in shaping the future trajectory of RMB internationalization.

Figure 1. Annual cross-border RMB settlement 2010-2022. Source: PBC 2023. Capital Account includes investments and reserves. Current Account refers to trade in goods and services.

Although statistically less significant, trade remains a key area where the international use of the RMB is growing. Following sanctions on Iran and, more recently, Russia, the demand for alternatives to the US dollar has increased. It is anticipated that international trade will increasingly be settled in local currencies, without necessarily undermining the US dollar’s dominance (Tyson 2023).

A critical factor in assessing the potential trajectories of the RMB in the current economic conflict is the alleged manipulation of the currency by the Chinese government to devalue it. This devaluation is reportedly intended to boost exports and attract foreign direct investment. However, over 40% of exports by volume and approximately 51% by value are attributed to non-Chinese companies (Ma et al. 2015). This raises important questions about who truly benefits from such devaluation and how it aligns with China’s evolving policies for RMB internationalization.

Within this context, the RMB is seen by some as a potential dominant currency in the Asian region, particularly given China’s status as the region’s largest trading partner. Hasegawa (2018) links the regional success of the RMB to geopolitical stability and the maintenance of a peaceful balance in the Indo-Pacific. However, escalating tensions over Taiwan now threaten to undermine this potential.

Despite similarities due to geopolitical confrontation, China’s monetary system also highlights the differences between the first and second Cold Wars. The Soviet ruble, along with the monetary policies and structures of the Soviet Union (see Pravilova, 2023), differed fundamentally from those of China. A defining characteristic of the Second Cold War is the absence of a rigid division between economic and monetary systems into two distinct politico-economic blocs. Instead, the European, Chinese, and American monetary systems are partially interconnected, built on similar banking and foreign reserve frameworks, and shaped by four decades of globalization.

This progressive yet limited integration began during China’s “going out” strategy, which has recently slowed amid intensified geopolitical rivalry. This shift has increasingly exposed contradictions between the RMB and both domestic and international financial systems, revealing fault lines within China’s hybrid monetary system—defined by elements of both planned and liberal market economies (Huang et al., 2020). China’s hybrid monetary policies are closely linked to the need to regulate and limit the outflow and inflow of financial capital.

Perhaps the most compelling aspect of this evolving integration lies in the contrast between the limited internationalization capacity suggested by China’s macroeconomic conditions and the government’s ability to construct a vast financial infrastructure. This infrastructure, supported by bilateral swap agreements and the establishment of RMB clearing centres, is poised to facilitate the currency’s use across many regions of the world.

These developments suggest that a new phase of RMB internationalization may be on the horizon. Two essential factors characterise this new phase: on the one hand, the tension between international investors attracted to China’s domestic capital markets and the growing tendency of Western governments to discourage these investors from increasing their exposure to China; on the other hand, the increasing use of an extensive financial network developed by China in recent years, which is capable of addressing the rising need—and desire—to diversify payments away from the US dollar. In other words, while the pull forces will be partially undermined by Western policies aimed at curbing the growing demand for Chinese financial assets among international investors, China’s push forces may gradually accelerate, supported by the financial infrastructures established in recent years.

—
The opinions expressed herein are those of the authors; they do not necessarily reflect the views of the SCWO.

REFERENCES

Balmas, P., & Howarth, D. (2024). Chinese currency exceptionalism: The curious internationalisation of the renminbi. The World Economy, 00, 1–27. https://doi.org/10.1111/twec.13632

Benney, T. M., & Cohen, B. J. (2022). The international currency system revisited. Review of Keynesian Economics, 10(4), 443–461. https://doi.org/10.4337/roke.2022.04.01

Bergsten, C. F. (1997). The dollar and the euro. Foreign Affairs, 76(4), 83–95.

Cohen, B. (2018). Currency statecraft: Monetary rivalry and geopolitical ambition. University of Chicago Press.

Cohen, B. (2015). Currency power. Understanding monetary rivalry. Princeton University Press.

Germain, R. (2022). Welfare and world money: The domestic foundations of currency internationalisation. Journal of International Relations and Development, 24, 574–598. https://doi.org/10.1057/s41268-020-00203-x

Germain, R., & Schwartz, R. (2017). The political economy of currency internationalization: The case of the RMB. Review of International Studies, 43(4), 765–787. https://doi.org/10.1017/S0260210517000109

Hasegawa, M. (2018). The geography and geopolitics of the renminbi: a regional key currency in Asia, International Affairs, 94(3), 535–552, https://doi.org/10.1093/ia/iiy020

Huang, Y., Ge, T., and Wang, C. (2020). Monetary policy framework and transmission mechanisms, in M. Amstad, G. Sun, and W. Xiong (eds.), The handbook of China’s financial system. Princeton University Press. 38-62.

Ma, H., Wang, Z., and Zhu, K. (2015). Domestic content in China’s exports and its distribution by firm ownership, Journal of Comparative Economics, 43(1), 3-18. https://doi.org/10.1016/j.jce.2014.11.006

PBC. (2023). 2023 RMB Internationalization Report. http://www.pbc.gov.cn/en/3688241/3688636/3828468/4756463/index.html

Prasad, E. S. (2016). Gaining currency: The rise of the renminbi. Oxford University Press.

Pravilova, K. (2023). The Ruble. A political history. Oxford University Press.

Subacchi, P. (2016). The people’s money: How China is building a global currency. Columbia University Press.

SWIFT. (2024). RMB Tracker. https://www.swift.com/products/rmb-tracker#resources

Tyson, K. (2023). Multicurrency mercantilism: The new international monetary order. [Independently published].

Zucker-Marques, M. (2021). Financial statecraft and transaction costs: The case of renminbi internationalization. Discussion paper 2021/9. School of Business & Economics. Freie Universität Berlin. https://doi.org/10.17169/refubium-30256