PRC not ready to run trade deficits to spur RMB internationalisation

Wang Yongli 王永利 China International Futures Co. analyses the international monetary system and the implications for RMB internationalisation 

• the primary determinant of a currency's internationalisation is the issuing country's national strength and international influence
  • only the strongest country can sustain the leading international currency
    • with lower reliance on FX reserves and greater influence through global currency circulation
• the PRC still lags the US in GDP, comprehensive national strength and international influence
  • much of the PRC’s external trade remains denominated and settled in US dollars
  • the PRC holds the world's largest foreign exchange reserves 
    • but records negative net overseas income
    • reflecting the RMB’s weaker international position relative to the US dollar
  • shaping a strong PRC currency should be a central part of the PRC’s national priorities
• international payments are now conducted almost entirely through bank account transfers rather than physical cash
  • this involves transfers of ownership and adjustments of creditor-debtor relationships
    • electronic and blockchain tech reduce cash handling costs
• under account-based settlement, dollars do not physically leave the US
  • FX settlement, imports, investment and currency conversion transfer ownership of dollar assets without reducing US dollar liquidity
    • this structure enables the US to sustain large trade deficits without triggering domestic currency shortages
    • rising US net foreign liabilities do not signal economic weakness or excessive external borrowing
      • the greater concern is the sustainability of rising US government debt
  • by contrast, the PRC’s export earnings are largely held as low-yield dollar deposits or US treasury securities
    • contributing to negative net overseas income despite rising net external assets
• FX reserves under account-based settlement cannot be physically ‘brought back’
  • they can only be utilised through imports, investment, aid and other cross-border transactions
  • the PRC’s FX reserve management should therefore prioritise asset security and liquidity
• countries whose currencies are not the leading international currency cannot easily sustain large trade deficits financed in their own currency
  • before sustaining persistent trade deficits, the US attracted large inflows of labour, capital and production capacity through its geographic, resource and institutional advantages
    • the US can export dollars through persistent trade deficits only because the dollar is the leading international currency, traded through global account-based settlement and is already decoupled from gold
  • the PRC cannot bypass historical development path by jumping to use trade deficits to internationalise the RMB
    • a country can only increasingly settle its trade in its own currency with sufficient international competitiveness
      • this way, it may expand overseas currency circulation while maintaining a trade surplus
• policy recommendations
  • preserve the PRC’s comprehensive industrial system and integrated innovation capability
  • continue opening-up and strengthen financial stability
  • maintain strong trade surpluses
  • expand RMB international circulation through central bank currency swaps, outbound investment, foreign aid and cross-border lending