[MUSIC] In recent years, the Chinese government has articulated a goal of internationalizing the Renminbi. Now, what does internationalization of any currency really mean? Well, basically it means that the currency is being used for different types of economic transactions. Some of the international transactions that are most prominent include trade settlement and invoicing, where invoicing means that the bill is in Renminbi. You have to pay so many Renminbi to purchase this product or after I deliver this service to you. Settlement means that when I pay my bill, I actually use Renminbi to pay you. So, even if the bill is in dollars, I can use the equivalent amount of Renminbi at the exchange rate at the moment to pay you back. In addition, we can also think about investment transactions also being settled in Renminbi, and we can think of many other types of financial contracts. For instance, bonds or loans, are these available in Renminbi, even if you're in another country, but you're trying to diversify your portfolio. Or make sure you have a portfolio or a stock of Renminbi assets that you can then use for future Renminbi transaction needs. If we think more generally about the different roles that money can play, we can think of three important roles. The first is as a medium of exchange in order to facilitate transactions. This is related to the settlement function in trade transactions. The second is as a unit of account, to keep track of how much different goods or services are worth and need to be paid for. And this is equivalent to the invoicing of using Renminbi, and finally, store of value. This is the idea that people will want to hold currencies that they think will be useful to them in the future to purchase goods or services or to engage in other types of economic transactions. Now, what does the data say about how much the Renminbi is currently being used in economic transactions? There's data on the percentage of international trade that is settled in Renminbi, and this has increased quite steadily in recent years and reached about 25% to 30%, which is a very significant amount. And there's, of course, still much more room for growth. Much of this trade may be with Hong Kong. If we look at settlement of foreign investment, whether it be inward foreign investment or outward foreign investment, we also see very steady increases in recent years, up to 30% for inward FDI and up to 15% for outward FDI. Now, China has also established bilateral currency swap agreements with a number of countries to try to promote use of the Renminbi. These are arrangements where the Chinese Central Bank will make sure that there is a sufficient supply of Renminbi in those other countries. So provided to the central banks of those other countries, so that transactions being settled in those countries can be done using Renminbi. Or other types of financial instruments can be developed in Renminbi if there's a demand for it. And similarly, the foreign country or the partner country will make its currency available to the central bank in China. If we look at data on the amount of deposits being held in Renminbi in places outside of mainland China, again, this reflects the use of the Renminbi as a store of value. We can see that Hong Kong is the dominant player here, where about two-thirds of the offshore Renminbi are in Hong Kong accounts. Other Asian financial centers, like Singapore and Taiwan, also have a fair amount of Renminbi deposits now, much more modest in other countries. If we think about how much the Renminbi is used in general foreign exchange transactions, which will encompass both trade and investment types of transactions, we can compare the ratio of global foreign exchange turnover that is done in Renminbi. And compare that to China’s share of global GDP as a rough indicator about whether the use of the currency is proportionate to the economic importance of the country. And here, you can see that China, which is this red line at the bottom of the figure, has progressed very well in the last five to ten years, going from almost nothing to 10%. Again, this is the ratio of the shares of foreign exchange turnover compared to the share of global GDP. But this is well below that of the major global currencies. For the US dollar, it's over 150% because many countries prefer to use the dollar for international economic transactions and to hold assets in dollars. And similarly, for the Euro, the British pound, and the Japanese yen, which are the other top four currencies in the world, they're all at or above their share of GDP, 100%. So China has a long way to go, despite making some recent progress. Many questions remain, I think, about trying to understand the motivations and consequences of China's internationalization of the Renminbi. For instance, what are really the economic benefits of internationalizing the Renminbi for the Chinese economy? How successful has China been in internationalizing the Renminbi? We've seen some evidence in the data presented just now. And finally, what can be done to promote more rapid internationalization of the Renminbi? What reforms of the financial system of the capital account restrictions will make the most difference in encouraging holders or economic players all over the world to want to use the Renminbi as its main form of currency?
