The Belt and Road Initiative was written into the Constitution of the Communist Party of China (CPC) at the 19th CPC National Congress, signaling China's resolution and confidence in carrying out international cooperation under this initiative.

From a long-term, global perspective, China and the countries along the routes have obtained a slew of benefits in infrastructure construction and production capacity cooperation, laying a concrete foundation for further cooperation. However, financial risks remain a hindrance to transnational synergy. To facilitate the use of China's RMB in countries involved in the Belt and Road Initiative will help Chinese investors get around bottlenecks in exchange rates, financing, and debts, and furthermore promote the currency's status in the international monetary system.

Financial Risks

The Belt and Road Initiative, a key measure for Chinese companies' "going global" strategy, serves as an important platform for the RMB's internationalization. In their operations overseas, Chinese companies need to handle a large amount of financial business such as exchange, guarantee, debit and credit, and insurance. In less developed countries along the routes, however, one of the perplexing issues for these companies is financial risks brought about by fluctuations in policies.

The first and utmost risk comes from inconvertibility. A few countries along the Belt and Road regulate foreign exchange differently in light of the international balance of payments. Foreign businesses and investors are prohibited or confined in the transfer of their legitimate incomes, including capital and profits, to foreign countries. So companies that make large profits from contracting projects, sales and services have no way to exchange them to foreign currencies and transfer them.

In countries exercising tighter control on exchange, the U.S. dollar's price keeps buoyant in the black market. Some countries have adopted a floating exchange rate, but the bar, to a certain degree, was still there, especially for the import of non-strategic goods.

The second risk is rate fluctuation. Chinese companies' overseas projects are generally settled in local currencies, and the construction takes a long period of time, they are therefore exposed to higher risks of rate fluctuations. For less developed countries with a simple economic structure, in particular, exports are vulnerable against the international market, resulting in a deficit in international balance of payments and abrupt fluctuations in exchange rates.

The adjustment to a nation's exchange rate mechanism or policies moreover increases risks in this regard. For example, on November 3, 2016, the Egyptian government announced to free float its currency, and the Egyptian pound against the U.S. dollar was revised downwards from 8.8 to 13 overnight.

The third issue is overseas asset guarantee. As their business expands, Chinese companies have an accumulated amount of assets overseas. Currently their international financing relies on seller's credit, buyer's credit, concessional loans, syndicated loans, offshore loans against onshore guarantees, but their overseas assets are unable to serve as a guarantee. To some extent, Chinese companies' capacity for overseas financing was hindered.

Long Way Ahead

The RMB internationalization in countries involved in the Belt and Road Initiative will eliminate bottlenecks hitting Chinese companies in exchange rates, financing, and debts, and mark up the RMB's status in the international monetary system. If settled in RMB, Chinese companies operating abroad are able to avoid exchange risks in trade, contracting, and services; and Chinese exporters don't need hedging receivables, thus slashing costs. On the other hand, banks providing loans in RMB will increase Chinese companies' financing capacity, and extend Chinese financial institutes' presence overseas.

Bank of China held a forum on RMB internationalization in Jakarta in September 2016.

At present, there is a long way to go for the RMB's internationalization, in particular, the RMB's recent depreciation lowered expectations in the market. Latest statistics by Swift show that in June 2017 RMB was the sixth most-used currency, and 1.98 percent of international payments were settled in the Chinese currency, while a year earlier RMB ranked the fifth most used and accounted for 2.09 percent of settlements. However, the major reason for the dip is external policies on restricting capital outflows, other than shrinking international trade. Therefore, it is expected that the RMB will hike up to a level even higher.

Four How-to's

International cooperation under the framework of the Belt and Road Initiative created a benign environment for RMB internationalization. On the one hand, the cooperation has yielded plentiful results. During the two-day Belt and Road Forum on International Cooperation last May, for example, a list of deliverables was produced, including 76 items comprising more than 270 concrete results in five key areas, namely, policy, infrastructure, trade, financial, and people-to-people connectivity. Cooperation has extended to a wide spectrum ranging from mining, construction, and manufacturing, to finance, sci-tech, and hi-tech services.

On the other hand, there is not a dominant local currency in less developed countries along the Belt and Road routes, which means it is easier for them to accept and adapt to a new currency. With regards to RMB, the stable currency has been included in the IMF's Special Drawing Rights (SDR) basket, playing a rising role in international payments, investment and financing, foreign exchange transactions and reserves. At present, more than a few developing countries are considering to subscribe RMB bonds to diversify their reserves, in response to the spillovers of the U.S. monetary policy and the related risks in foreign exchange.

Meanwhile, China is becoming a major creditor on the platform of the Belt and Road. Many projects undertaken by Chinese companies are supported by Chinese financial institutions. In other words, China is the largest lender of many projects in countries along the Belt and Road routes. Therefore, though RMB internationalization is still limited in scope and depth on a global scale, it is a historic opportunity for China to promote its currency's global status and knock down hindrance in financing for its businesses. Measures should be carried out in the following aspects.

First, quicken the building of RMB's cross-border payment system, so as to facilitate RMB settlement in such fields as capacity cooperation and bulk commodity trade of energy, minerals and agricultural raw materials. Chinese financial institutions should take advantage of their funds to iron out kinks in RMB financing and settlement. Furthermore, the usage of RMB will be tied up with project operations. Chinese financial institutions should tilt towards RMB financial products in international aid, investment and loans, and explore ways of RMB settlement in seller's credit, buyer's credit, concessional loans, syndicated loans, industrial investment funds, and public-private partnerships.

Second, strengthen currency exchange between China and other countries along the Belt and Road, and extend the RMB swap from forex reserve to local credit system, so as to increase capital resources for developing real economy. Since 2009, China has signed agreements on currency swap with 31 countries and regions. In December 2016, the Egyptian central bank and the People's Bank of China signed a currency swap agreement involving RMB 18 billion, which provided Egypt the same amount of liquidity to help ease the pressure from forex reserves. The currency swap will definitely tap capital resources for infrastructure and real economy, and should be well implemented on the market level.

Third, expedite the trial of RMB business in key industrial parks overseas where Chinese companies have congregated and have a strong demand for financing, investment and payment. By setting up offices in these industrial parks, Chinese financial institutions are able to provide RMB-dominant financial support systems and form the RMB transaction network in these areas. For Chinese companies, they could build platforms for international capital management within the industrial parks, so as to prevent and control financial risks and reduce costs.

Fourth, encourage Chinese financial institutions to provide supporting financial services to industrial capacity cooperation, and increase the RMB-dominant financial products such as RMB loans. Large-scale Chinese financial institutions have a leading role to play in RMB internationalization. Only when their RMB services are expanded to all aspects including cross-border liquidation, settlement, corporate investment and financing, will the RMB overseas market take shape.

To this end, China's policy banks and large commercial banks should further improve their global networks, and provide their overseas offices with sufficient authorization. Due to the limited number of these banks' branch offices in countries along the Belt and Road routes, the usage of RMB is still confined in these regions. With regards to project financing, the government should encourage Chinese financial institutions to issue RMB loans with preferential interest rates.  

Xu Yanzhuo is an associate researcher at International Strategy Department, Institute of World Economics and Policies of the Chinese Academy of Social Sciences.

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