How To Measure RMB Internationalization?--Huachuang Macro·Zhang Yu Team
Core Point Of View
The degree of internationalization is measured by the internationalization index calculated by the International Monetary Institute (IMI) of RENMIN UNIVERSITY of CHINA by comprehensively considering the proportion of each currency in international trade valuation, financial valuation and foreign reserves. There is still a large gap between the RMB and the US dollar and the euro, and there is still a long way to go for internationalization. IMI initially estimated that the 22Q1 RMB Internationalization Index (RII) was 4.66, while the 21Q4 USD, Euro, GBP, and JPY Internationalization Indexes were 51.8, 23.13, 4.06, and 4.2, respectively. According to our estimation, assuming that China’s bilateral trade with France, Russia, Iran, and Pakistan is all settled in RMB, the maximum RII can be increased by 0.17 to 4.83; assuming that all of China’s foreign trade is switched to RMB settlement, the maximum RII can be increased by 1.62 to 6.28.
REPORT SUMMARY
1. What is the RMB Internationalization Index (RII)?
Recently, the wave of global "de-dollarization" has resumed. From last year's Sino-Russian gas transmission agreement, which decided to use local currency for settlement, to the recent completion of the first LNG cross-border RMB settlement transaction between China and France, and Brazil's announcement of currency settlement arrangements with China, RMB's the function of international invoicing and payment has become more and more prominent, which has aroused people's attention to the internationalization of RMB. So, how much has the recent shift from US dollars to RMB in trade settlement between many countries and China contributed to the internationalization of the RMB? We try to quantify this impact with reference to the compilation principles and methods of the RMB Internationalization Index (RII) of the International Monetary Institute (IMI) of RENMIN UNIVERSITY of CHINA.
The International Monetary Institute (IMI) of RENMIN UNIVERSITY of CHINA selected two categories of indicators that can reflect the RMB's international currency function to construct the RII indicator system. The first category of indicators reflects the international valuation, clearing and settlement functions of the RMB, specifically including the indicators of the use of RMB in international trade and the use of RMB in financial transactions. The second category of indicators reflects the RMB's international reserve function. In terms of RII calculation method, it reflects the RMB's share in global trade valuation, international finance and official foreign exchange reserves.
2. Looking at the status quo of RMB internationalization from the perspective of RII
Overall perspective: In recent years, the internationalization of the renminbi has been steadily advancing, which is reflected in the rapid increase in the RII, which rose from close to zero in early 2010 to 4.66 (IMI preliminary calculation data), but the current RII and major currencies, especially the US dollar and the euro There is still a large gap in the globalization index. The latter two together exceed 70, which means that they together account for more than 70% of the global international currency market, of which the US dollar itself accounts for 51%. As the ruling and leading force of international currency, it is still relatively strong. RMB internationalization has a long way to go.
Sub-item perspective: From the perspective of sub-items in the RII indicator system, the rapid improvement of RII in recent years mainly depends on the improvement of the RMB’s international financial valuation function (direct investment, international bond and note issuance), which also reflects the financial function of investment and financing. The importance of playing the role of international currency. The proportion of RMB direct investment and the proportion of RMB international bonds and notes issued have all increased significantly. The former has risen from about 5% before 2017 to about 20% now, and the latter will increase significantly in 2022, rising from about 1% at the beginning of the year to about 2.1% in 2022Q4.
3. Estimation of the impact of the recent increase in RMB trade settlement on RII
Referring to the compilation principles and methods of the RII, quantitatively estimate how much the recent transfer of some or all trade between China and Russia, Iraq, France, and Brazil to RMB settlement has improved the RMB's internationalization function. Essentially, the question to be answered is: when other conditions remain unchanged, how much will the shift to RMB settlement for these trades increase the "RMB settlement ratio in the total world trade", and how much will the RII increase?
In order to simplify the calculation, we assume that: 1) the six indicators that constitute RII are equally weighted, that is, the weight of RMB’s share in international trade settlement is 1/6; RMB settlement. Based on this, it is estimated that the full conversion of bilateral trade between my country and related countries to RMB settlement will bring about the upper limit of the impact on RII.
The calculation results show that: 1) Assuming that all bilateral trade between China and France, Iran, Russia, and Pakistan is settled in RMB, the RMB Internationalization Index (RII) can increase by up to 0.17 to 4.83, an increase of about 3.6%. 2) Assuming that my country's LNG imports are all settled in RMB, the RMB Internationalization Index (RII) can increase by up to 0.02 to 4.68, an increase of about 0.4%. 3) If all of my country's foreign trade can be settled in RMB, the RII can be increased by a maximum of about 1.62 to 6.28, an increase of about 35%.
In fact, in most commodity trades, the importer has a relative advantage in determining the terms of trade such as the currency for pricing and settlement, and can often dominate the choice of currency for settlement. Therefore, if an enterprise wants to use RMB for settlement in export trade, it must persuade foreign importers to accept RMB, which often takes longer. It is relatively more difficult to change the trade settlement habits of enterprises. Moreover, the improvement of the RMB internationalization index in recent years is mainly due to the rapid growth of the share of international financial denominated payments. Therefore, the internationalization of RMB still needs to promote the international financial transaction function of RMB, which may involve the opening of my country's financial market and the control of capital accounts.
