KATHMANDU : In the wake of its remarkable economic growth since the late 1970s, China has embarked on a mission to promote the internationalization of its national currency, the Renminbi (RMB). This objective, which has been a key focus of Chinese monetary policy for over a decade, aims to enhance the global usage of the RMB in financial transactions, thereby reducing dependence on predominantly US-based financial intermediaries.

China has increasingly conducted high-value transactions with non-Western partners using the RMB, such as paying for energy imports from Russia and Gulf countries. The internationalization of the RMB is seen by China as a crucial component of establishing a more multipolar global order that recognizes China's prominent politico-economic role in the 21st century, on par with Western nations, particularly the United States.

One of the primary driving forces behind China's push for RMB internationalization is the unique role of the United States in the global financial architecture, which has been in place since the end of World War II. The US dollar serves as the de facto global reserve currency, with the Federal Reserve System (Fed) exercising control over its availability worldwide. This has enabled the US to act as a global lender of last resort, including during the 2008 global financial crisis. While the Fed's actions have historically played a vital role in promoting global economic recovery during times of financial turmoil, the US has also utilized its currency's dominance to accumulate budget deficits and shape the monetary policies of other nations. This has resulted in repeated criticism of the so-called "exorbitant privilege" enjoyed by the United States due to the dollar's global monetary market role.

This article explores China's efforts to promote the internationalization of the RMB, assesses the progress made thus far, and highlights the challenges that remain. It begins by examining the global role of the US dollar in financial markets and the advantages it confers upon the American government. It then delves into the policy measures China has undertaken to promote RMB internationalization. Ultimately, this analysis reveals that while China has developed a more advanced financial infrastructure for RMB-denominated assets, the entrenched position of the US dollar, regulatory hurdles within China itself, and concerns regarding government intervention have hindered the global adoption of the RMB.

The United States' "exorbitant privilege" and efforts toward de-dollarization:
Coined by French economist Valéry Giscard d'Estaing in the 1960s, the term "exorbitant privilege" refers to the unique advantages the United States enjoys as a result of the dollar's post-1945 role. The dollar's position as the global reserve currency and the pegging of other national currencies to the dollar have bestowed significant benefits upon the United States, including lower borrowing costs, reduced exchange rate risks, and increased influence over other currencies and financial systems. This reliance on the dollar has motivated other countries, including those generally aligned with the US, to seek alternatives and promote the use of other currencies to challenge the dollar's dominance. These efforts to reduce dependence on the dollar are collectively known as de-dollarization.

The dollar's status as the primary global reserve currency can be traced back to the establishment of the Bretton Woods System after World War II. As part of this international financial architecture, the US dollar was pegged to the value of gold, while other currencies were pegged to the US dollar. This arrangement made the dollar the monetary anchor of the post-war global financial system. The International Monetary Fund (IMF) was also established as part of the Bretton Woods agreements to promote monetary cooperation and stability among member countries. However, the US's significant financial contributions to the IMF have granted it substantial voting power, enabling it China Accelerates Efforts to Promote Internationalization of Renminbi (RMB).

China has been actively pursuing the international usage of its currency, the Renminbi (RMB), as part of a broader strategy to enhance the de-dollarization of the global economy and elevate its own economic status. The push for RMB internationalization gained momentum with the implementation of a pilot program in 2009, allowing Chinese and foreign companies to settle transactions in RMB. Since then, China has been determined to reduce its dependence on the US dollar (USD) and challenge the economic and strategic advantages enjoyed by the United States.

One of the key motivations behind China's push for RMB internationalization is to minimize the significant economic advantages the USD affords the United States. China currently holds the world's largest foreign exchange reserves, with a significant portion of those reserves invested in USD-denominated assets. This exposes China's currency holdings to fluctuations in the value of the USD, making China vulnerable to inflationary pressures. To mitigate this vulnerability, China has historically supported US monetary policies, such as during the global financial crisis in 2008. However, this also makes China's savings susceptible to US policy shifts, which may not align with China's long-term objectives. By reducing its dependence on the USD and diversifying its foreign exchange reserves, China aims to achieve greater stability and resilience in managing its currency holdings while reducing the influence of US policies on its economy.

The internationalization of the RMB also serves to strengthen China's trade and investment relations with other countries, enhancing its soft power outreach. China aims to facilitate trade and investment flows, particularly with major trading partners in Asia, by promoting the use of the RMB in cross-border transactions. Encouraging countries to adopt the RMB in their trade with China and each other would contribute to the RMB's credibility and reliability as an international currency. This, in turn, would elevate China's global economic status and establish the RMB as a viable alternative to the USD.

China has implemented various tools and strategies to promote the internationalization of the RMB. Domestically, it views RMB internationalization as an opportunity to bolster its financial sector reforms and enhance the international competitiveness of its financial institutions. To achieve this, China has undertaken liberalization reforms and encouraged the use of RMB in international transactions. These measures expand the presence of Chinese financial institutions in global markets, providing them with improved access to customers and investment opportunities. The growing demand for RMB also contributes to the sophistication of Chinese financial markets and products.

Furthermore, China has introduced policy measures, such as currency swap agreements, to facilitate the use of the RMB in international transactions. The establishment of the Shanghai Free Trade Zone (FTZ) in 2013 served as a testing ground for financial liberalization and RMB internationalization. The FTZ, along with simplified cross-border trade and investment procedures, relaxed capital controls, and favorable tax treatments, aims to position Shanghai as a long-term alternative to Hong Kong as an offshore financial center. Bilateral currency swap agreements with other countries allow for direct RMB currency swaps, bypassing the need for US intermediaries and providing greater convenience for trade and investment transactions in RMB. China has signed currency swap agreements with over 40 countries, including major economies like the European Union, Japan, South Korea, and Australia. Additionally, the Cross-Border Trade RMB Settlement (CBTRS) program has been expanded to enable companies to settle cross-border trade transactions in RMB.

China has also taken steps to enhance investor access to RMB-denominated assets and securities. Programs such as Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII) allow foreign institutional investors to access China's domestic capital markets and invest

China's Efforts to Internationalize the RMB Face Challenges in Adoption and Acceptance :
China has taken significant steps to promote the internationalization of its currency, the Renminbi (RMB), in recent years. However, despite its efforts, the RMB still faces challenges in gaining wider acceptance and usage in international transactions. Various factors, including political concerns, regulatory complexities, and competition from established currencies, contribute to the obstacles encountered in the RMB's global adoption.

China's reforms and policy measures have established a framework that allows the RMB to play a greater role in international transactions. Currency swap agreements and programs like Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII) have facilitated trade and foreign investment with China. Additionally, the establishment of offshore RMB markets has provided international investors with access to RMB-denominated assets and helped create a global market for RMB securities. Furthermore, China's involvement in multilateral initiatives like the Asian Infrastructure Investment Bank (AIIB) and the Belt-and-Road Initiative (BRI) has facilitated RMB-denominated financing for infrastructure projects and trade-related activities, enhancing the RMB's use in global transactions.

Despite progress, the adoption of the RMB still lags behind other major international currencies. SWIFT data shows that while the percentage of RMB-denominated international payments experienced some fluctuations, it has remained relatively stable at a lower level compared to currencies such as the US dollar, euro, and yen. In trade finance, the use of the RMB has also decreased in recent years. These statistics highlight the challenges faced by the RMB in gaining wider acceptance.

Several factors contribute to the ongoing lack of acceptance of the RMB. China's strict capital controls limit the convertibility and free outflow of the RMB, making cross-border transactions more challenging for investors and companies. The presence of capital controls and fluctuations in the exchange rate raise concerns about transparency, intervention risks, and the overall attractiveness of RMB-denominated assets to international investors. 

Furthermore, the offshore RMB market still lacks the depth and liquidity of major currencies, impacting the ease of buying and selling RMB-denominated assets in large volumes. These factors collectively suppress the demand for RMB in international transactions.

China's regulatory environment is another significant hurdle to RMB internationalization. Complex regulatory structures, diverging pressures on fiscal and monetary policies, and inconsistent regulations create challenges for international investors and businesses.

Geopolitical tensions, trade disputes, and cultural differences also impact the perception and trust of the RMB as an international currency, affecting its adoption by other actors.

Moreover, the dominance of the US dollar and euro in terms of infrastructure, liquidity, and regulatory frameworks poses a challenge for the RMB to compete as a viable alternative. China's economic and political system, along with concerns about government intervention and restrictions on capital flows, contribute to the perception of the RMB as a controlled currency, which may deter its acceptance and usage in international transactions.

To overcome these challenges, China needs to address the issues of capital controls, currency risks, market liquidity, regulatory complexities, geopolitical factors, competition from established currencies, and the perception of the RMB as a controlled currency. Efforts should focus on deepening financial markets, enhancing regulatory transparency, and building trust among international investors and businesses in the reliability of the RMB for cross-border transactions. However, given the current trajectory of political control within China, implementing these regulatory modifications may prove challenging in the near future.

While the internationalization of the RMB has made significant progress, it remains an ongoing endeavor with hurdles to overcome. China's commitment to addressing these challenges will be crucial in promoting the global use of the RMB and expanding its role in international transactions.

Conclusion :
China's continued pursuit of internationalizing its currency, the Renminbi (RMB), is encountering hurdles due to regulatory complexities and the entrenched position of the US dollar. These factors have limited the extent to which other countries adopt the RMB in international transactions, echoing similar de-dollarization initiatives of the past. China's objective in promoting currency internationalization is to strengthen its financial influence and diminish the United States' ability to wield the dollar as a geopolitical tool.

To support its push for internationalization, China has built a sophisticated financial infrastructure that facilitates the use of RMB-denominated assets and financial instruments in international transactions. However, the RMB faces tough competition from the dominant global reserve currencies, the dollar and the euro. Despite China's efforts, the RMB's success in internationalization is more akin to the challenges faced by the yen in the 1990s when it struggled to attain a prominent global role.

The entrenchment of government control within China poses a significant obstacle to implementing the reforms necessary for a successful RMB internationalization. This prioritization of government control makes it increasingly unlikely for China to achieve significant improvements in the RMB's international standing.

China recognizes that reducing reliance on the US dollar is crucial for bolstering its global financial influence. By encouraging the use of the RMB in international transactions, China aims to expand its role in the international financial system. However, regulatory challenges and concerns about Chinese monetary policy have hindered the widespread adoption of the RMB by other countries.

China's efforts to internationalize the RMB mirror previous attempts by other nations to reduce the dominance of the US dollar. By promoting the use of the RMB, China seeks to minimize the leverage the United States holds through its control over the dollar as a geopolitical tool. However, achieving this objective requires overcoming the challenges posed by well-established currencies like the dollar and the euro.

While China's financial infrastructure has made significant strides, the RMB still faces an uphill battle to challenge the dominant position of the dollar and the euro. Currently, the RMB's internationalization progress aligns more closely with the experiences of the yen in the 1990s, when it struggled to gain a substantial international foothold.

In light of the increasing emphasis on government control within China, the prospects for implementing the necessary reforms for enhanced RMB internationalization appear dim. The entwining of government control and currency policies makes it unlikely that China can achieve the desired improvements in the RMB's global acceptance.

China's ongoing efforts to internationalize the RMB face significant regulatory hurdles and the overwhelming dominance of the US dollar. As China strives to strengthen its financial influence, the challenges it encounters underscore the complexities involved in reshaping the global currency landscape.