▲

RenminbiUsageinCross-BorderPayments:

RegionalPatternsandthe

RoleofSwapLinesand

OffshoreClearingBanks

HectorPerez-SaizandLongmeiZhang

WP/23/77

IMFWorkingPapersdescriberesearchin

progressbytheauthor(s)andarepublishedto

elicitcommentsandtoencouragedebate.

TheviewsexpressedinIMFWorkingPapersare

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Ar

N

2023

MAR

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*TheauthorswouldliketothankRoshanIyerforoutstandingresearchassistance,andHelgeBerge,Martin?ihák,DongHe,AstridThorsen,andFabiánValenciaforveryhelpfulcomments.

**DatarelatingtoSwiftmessagingflowsispublishedwithpermissionofS.W.I.F.T.SCRLSWIFT?2023undera‘BIPartnership’framework.Becausefinancialinstitutionshavemultiplemeanstoexchangeinformationabouttheirfinancialtransactions,Swiftstatisticsdonotrepresentcompletemarketorindustrystatistics.Swiftdisclaimsallliabilityforanydecisionbased,infullorinpart,onSwiftstatistics,andfortheirconsequences.

?2023InternationalMonetaryFund

WP/23/77

IMFWorkingPaper

Strategy,Policy,andReviewDepartment

RenminbiUsageinCross-BorderPayments:RegionalPatternsandtheRoleofSwapsLinesand

OffshoreClearingBanks

PreparedbyHectorPerez-SaizandLongmeiZhang*

AuthorizedfordistributionbyMartin?ihák

March2023

IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicit

commentsandtoencouragedebate.TheviewsexpressedinIMFWorkingPapersarethoseofthe

author(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement.

ABSTRACT:ThepaperexaminestheusageoftheRenminbi(RMB)asaninternationalpaymentcurrency.

Globally,theuseofRMBremainssmall,accountingfor2percentoftotalcross-bordertransactions.Using

country-leveltransactiondatafromSwift**for2010–21,wefindsignificantregionalvariationsintheuseofRMBforcross-borderpayments.WhileRMBislittleusedinsomeregions,ithasgainedtractioninothers,andthesecross-countrydifferenceshavewidenedovertheyears.Suchdifferencescanbepartlyexplainedbyan

economy’sgeographicdistance,politicaldistance,andtradelinkageswithChina.However,italsoreflectstheimpactofpolicymeasuresbythePeople’sBankofChina,includingestablishingbilateralswaplinesand

offshoreclearingbanks.BothpolicymeasureshelpedtoaddressoffshoreRMBliquidityshortagesgivenChina’soverallcapitalaccountrestrictions,withtheoffshoreclearingbankshavingaquantitativelylargerimpact.OuranalysiscontributestoabetterunderstandingofthegrowingimportanceofRMBwithintheinternationalmonetarysystem.

RECOMMENDEDCITATION:Perez-SaizandZhang(2023)

JELClassificationNumbers:

E42;F33

Keywords:

RMBinternationalization;Swift;Swaplines;OffshoreClearingBanks

Authors’E-MailAddresses:

HPerez-Saiz@;

LZhang2@

WORKINGPAPERS

RenminbiUsageinCross-BorderPayments:RegionalPatternsandtheRoleofSwapLinesand

OffshoreClearingBanks

PreparedbyHectorPerez-SaizandLongmeiZhang

1

1Theauthor(s)wouldliketothankRoshanIyerforoutstandingresearchassistance,andHelgeBerge,Martin?ihák,DongHe,AstridThorsen,andFabiánValenciaforveryhelpfulcomments.

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Contents

Introduction

3

RegionalPatternsofRMBCross-BorderPayments

7

RegionalPoliciesthatFacilitateRMBInternationalization

9

BilateralSwapLines

9

OffshoreClearingBanks

11

EmpiricalStudy

13

Conclusion

16

AnnexI.DataSources

17

AnnexII.ListofSwapLines

18

References

19

FIGURES

1.China’sRapidIntegrationvs.LimitedFinancialIntegration

3

2.CapitalAccountOpennessbyIncomeLevel

4

3.EvolutionofRMBCross-BorderPayments

7

4.GeographicalDistributionofRMBPayments(2021)

8

6.OutstandingBilateralSwapLines(2021)

10

7.ExampleofFunctioningofCentralBankBilateralSwapLine

11

8.RMBOffshoreClearingBanks

12

TABLES

1.RolesofanInternationalCurrency

5

2.RegressionsResultsforTransfers(MessagesMT103andMT202)

15

3.RegressionsResultsforTrade-relatedPayments(MessagesMT400andMT700)

16

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Introduction

Overthepastfourdecades,rapideconomicgrowthhastransformedChinafromoneofthepoorestcountriesintheworldtothesecondlargesteconomythataccountsforone-thirdofglobalgrowth(IMF,2018).TheWTO

entryin2001hasspurredChina’srapidtradeintegrationandreshapedglobalsupplychains.However,despiteitseconomicsuccessandclosetradetieswiththerestoftheworld,China’sfinancialintegrationismuchmorelimited.Itsinternationalassetsandliabilitiesconstituteonlyfourpercentoftheworldexternalassetsand

liabilities,comparedto13percentinglobaltrade

1

.Inthiscontext,theinternationaluseofChina’scurrency

RMBisalsominimal,accountingfortwopercentofallglobalcross-borderpayments

2

and3percentofcentralbankreserveassets

3

(Figure1).

Figure1.China’sRapidIntegrationvs.LimitedFinancialIntegration

China'sslowfinancialintegrationislargelytheresultoftheChinesegovernment'sdecisiontomaintainaclosedcapitalaccount.SincethefalloftheBrettonWoodssystemin1973,manycountrieshaveswitchedtoward

flexibleexchangeratesandopencapitalaccounts,resultinginanincreaseinthesizeandvolatilityofcross-borderfinancialflows.Today,mostadvancedeconomieshavefullyliberalizedtheircapitalaccounts,whileemergingmarketsandlow-incomecountrieshaveretainedcertainrestrictionsnotwithstandingpartial

liberalization.Incomparison,Chinahasmaintainedstrongcapitalaccountlimitsfordecades,withamuch

tightercontroloncapitalmobilitythanitspeers(Figure2).Zhang(2023)showsthatanopencapitalaccountcouldleadtoasignificantexpansionofChina’sglobalfinancialfootprintsbasedoncross-countryexperiences.

1BasedonIMFWorldEconomicOutlook.

2BasedonSwiftdata.

3BasedonIMFCOFFERdataset(

/regular.aspx?key=41175

).

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Figure2.CapitalAccountOpennessbyIncomeLevel

Notwithstandingthecapitalaccountrestrictions,thePeople’sBankofChina(PBC)beganpromotingRMB

internationalization,afterthe2008GlobalFinancialCrisis.ThenGovernorZhouXiaochuanhascalledfor

reformoftheglobalfinancialarchitecture(Zhou,2009),whichwasechoedinasubsequentGroupof20

meeting(G20,2009).In2009,thePBCbeganpermittingcross-bordersettlementsinRMB,initiallyviapilotsinselectedprovinces,andnationwidesince2011.Reflectingthetightcontroloncross-bordercapitalflows,RMBliquidityoutsideChinaislimited.Toaddressthisissue,thePBChasintroducedbilateralswaplines(annexII)andoffshoreclearingbankstofacilitatethecross-borderuseofRMB.In2015,theRMBjoinedthebasketof

SpecialDrawingRights,amilestoneofRMBinternationalization.Since2017,China’sfinancialliberalization

hasalsoaccelerated,openingupdomesticcapitalmarketsandthebroaderfinancialsectortoforeigninvestors,andRMBbondshavebeenincludedinmajorglobalindices(Schipkeandothersp(2019)).Ifthesetrends

continue,theywillhelpdeepenChina’sfinancialintegrationwiththerestoftheworldandreducebarrierstotheglobaluseofRMB.

TheriseofRMBasaninternationalizationcurrencyhasfar-reachingimplicationsfortheinternationalmonetarysystem(IMS).Historically,theIMShasundergoneprofoundchanges,fromthesterlingdominanceunderthe

goldstandardinthepre-warperiod,tothecoequalstatusofthesterlingandtheU.S.dollarintheinter-war

years,tothedominanceoftheU.S.dollar,whichwasinstitutionalizedundertheBrettonWoodssystemand

remaineddeeplyentrenchedaftertheBrettonWoodsbrokedownin1973.Sinceitsbirthin1999,eurohasalsobecomeanimportantinternationalcurrency,thoughitisusedmorewidelyinEuropethanglobally.With

China’sincreasingfootprintintheglobaleconomy,somehaveexpressedtheirviewthattheroleofRMBasakeyinternationalcurrencywillgrow.Subramanian(2011)evenpredictedthattheRMBcouldpotentially

becomethedominantreservecurrencyinthefollowingdecade.PrasadandYe(2012)expectedtherenminbitobecomeareservecurrencywithinadecade,erodingbutnotdisplacingthedollar’sdominance.Others

expressedmorecaution.Forexample,Frankel(2012)arguedthattheinternationalizationofRMBwilltakelongerreflectingthelackoffinancialdevelopmentandmobilityofcapitalflows.

Incontrasttothetraditionalview(Krugman,1980)thattheIMSwillalwaysbedominatedbyasinglecurrencyreflectingincreasingnetworkreturns,Eichengreen(2011,2012)envisagedthenewviewofamulti-polar

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monetarysysteminwhichtheRMB,theeuro,andUSdollarplaytheroleofinternationalcurrencies.Farhi,

Gourinchas,andRey(2011)highlightsstructuralflawsintheexisting(largely)U.S.dollar-basedsystem,whichfacesthe“NewTriffin’sDilemma”,astheU.S.willeventuallyrunoutoffiscalcapacitytoprovideglobalsafe

assetsgivenitsfallingshareintheworldeconomy.Diversifyingreservecurrencies,suchasincludingRMBassets,couldhelpaddresstheshortageofsafeassetprovision.

ThereisalsoalargeliteratureonhowtheU.S.dollarhegemonhasimplicationsforglobaltrade,financial,andcapitalflowcycles,andchallengesformacropolicymanagement.(Bozetal.,(2018),Gourinchas(2021),

Gopinathetal.(2010),Gopinathetal.(2020),amongothers).ReflectingthedominantroleofUSdollaringlobaltradeinvoicing,thedollarexchangeratehasasignificantimpactonnon-U.S.relatedtrade,withaonepercentappreciationleadingtoa0.6percentdeclineinglobaltradevolumeoutsideoftheU.S.ThehighertheshareofU.Sdollarinvoicing,themoresensitiveacountry’stradeistotheU.S.dollarvaluation(Gopinathetal(2020)).Asthevehiclecurrencyinglobalbanking,U.S.monetarypolicyalsodominatestheglobalfinancialcycleandcapitalflowmovement(AgrippinoandRey(2020)).TheincreasinguseofRMBinacountry’stransactionwithChinaislikelytoreducethesensitivityofitstradevolumetotheU.S.dollarexchangerate.AwideadoptionofRMBmayalsoimplystrongerspillovereffectofChina’smonetarypolicy.

Inbroadterms,aninternationalcurrencyservesthreedistinctfunctions:aunitofaccount,amediumof

exchange,andastoreofvalue.Morespecifically,itsusebyboththepublicandtheprivatesectorscanbesummarizedbyTable1,whichwasintroducedbyCohen(1971)andKenen(1983).Themultiplefunctionsofaninternationalcurrencyareoftencloselyinterrelated.AsshownbyGopinathandStein(2021),acurrency’sroleasaunitofaccountforinvoicingdecisionsiscomplementarytoitsroleasasafestoreofvalue,andthiscomplementaritycanleadtotheemergenceofasingledominantcurrencyintradeinvoicingandglobal

banking,asillustratedbytheroleofU.S.dollartoday.

Table1.RolesofanInternationalCurrency

FunctionofMoney

Publicsector

Privatesector

Unitofaccount

Exchangeratepegs/Anchorcurrency

Tradeinvoicing/Financialsecuritiespricing

Mediumofexchange

FXintervention/Lenderoflastresort

Cross-borderpaymentsfortradeandfinancialtransactions

Storeofvalue

Internationalreserves

Financialsecuritiesdenomination/cash

Source:AdaptedfromCohen(1971)andKenen(1983).

ThereisalargeliteratureonRMBinternationalization.MoststudiesfocusedontheuseofRMBasastoreof

valuefortheofficialsector,basedonFXreservedata.Keydeterminantsofthereservecurrencyshare

identifiedintheliteratureincludethesizeoftheeconomy,sizeoftrade,capitalaccountopenness,andfinancialmarketdepth(Subramanian,2011;Frankel,2012).Arslanalp,Eichengreen,andSimpson-Bell(2022)reviewchangesinreservecurrencysharesandfindthatthedollardominancehasbeenerodedbytheriseofRMB

andcurrenciesofothersmallercountries.Eurocontinuestobethesecondlargestreservecurrency,thoughitssharehasalsodeclinedaftertheglobalfinancialcrisis.AnotherbodyofliteratureexaminestheroleofRMBasanexchangerateanchor,andfindsthatRMBhasbecomeananchorcurrency,especiallyinEastAsiaand

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otheremergingmarkets(SubramanianandKessler2013;MoraandNor,2018).Yu(2012)andCheun(2019)providesanoverviewoftheRMBinternationalization.

IncomparisontoextensiveliteratureonRMBasareservecurrency,thereisscantresearchonRMBasa

paymentandpricingcurrency.Duetodatalimitations,researchonRMBpaymentandinvoicinghasonly

emergedinrecentyears.BahajandReis(2020)developedasmalleconomymodeltoillustratetheimpactoffinancialpoliciesoncurrencyusageandfoundthatempiricallythePBCswaplineshavebeeneffectivein

jumpstartingtheuseofRMBincross-borderpaymentbasedonSwiftdata.LaiandYan(2020)studiedthe

determinantsofcurrencysharesinglobalpaymentsusingSwiftdataandfoundthatChina’slackoffinancial

marketdevelopmentandcapitalaccountrestrictionsarethemainimpedimentstoRMBcross-borderpayments.

SongandXia(2020)analyzedtheimpactofPBCswaplinesoncross-borderRMBpaymentsusingSWIFT

dataupto2015.CheyandHsu(2020)alsofoundapositiveimpactofPBCswaplinesontheRMBsharein

globalFXtradingbasedonBIStri-annualsurvey.Georgiadisetal.(2021)studiedRMBtradeinvoicingin

selectedcountriesandfindthatChina’stradeintegrationhasstrengthenedU.S.dollarinvoicingattheexpenseofeuro,andPBCswaplineshadapositiveimpactonRMBinvoicing.Perez-Saiz,Zhang,andIyer(2023)studycurrencyusageincross-borderpayments,findingthatcurrencyadoptionhasahighdegreeofinertia,andthelegaltenderstatus,geographicandpoliticaldistanceplayanimportantroleinexplainingcross-country

variationsincurrencyusage,especiallyforemergingcurrencies,suchastheRMB.

Thepapercontributestotheliteraturebyexaminingtheregionalpatternsofcross-borderRMBpayments.WepresentstylizedfactsaboutthegeographicheterogeneityinRMBusage,andexplorethefactorsbehindthevariation,suchastradelinkages,geographicdistance,andimportantlypolicyinitiatives,includingthebilateralswaplinesestablishedbetweenPBCandothercentralbanks,aswellastheintroductionofoffshoreRMB

clearingbanks.ComparedtoBahajandReis(2020),wefocusontheintensivemarginofRMBusage(thedegreeofusage)insteadoftheextensivemargin(fromzerotosomeusage).Ourempiricalanalysisalsoprovidesthemostup-to-dateanalysisofRMBpayments,asmuchhavechangedintheChineseeconomysince2015,suchasfluctuationincapitalaccountrestrictions,andtheintroductionofanewexchangerateregime,amongothers.Toourknowledge,thisisalsothefirstpapertostudytheimpactofoffshoreclearingbanksonRMBcross-borderpayment.

Theremainderofthepaperisorganizedasfollows.Section2describestheregionalpatternsofRMBusein

cross-borderpaymentsandtheirevolutionovertime.Section3discussesthetwokeypolicyinitiativesin

facilitatingRMBinternationalization:bilateralcentralbankswaplinesandRMBoffshoreclearingbanks.Section4studiesempiricallythecontributionofeconomicfundamentalandpolicyinitiativesindrivingtheRMBusageincross-borderpayments.Section5concludes.

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RegionalPatternsofRMBCross-BorderPayments

WhileglobaladoptionofRMBusageremainsatitsinfancy,ithasestablisheditselfasanimportancereferencecurrencyforsomeemergingeconomiesandisincreasinglyusedforcross-borderpaymentsinsomeregions.ThissectionwillexploregeographicaldisparitiesinRMBusagebasedoncountrylevelSwifttransactiondata.

Since2009,thePBChaspermittedcross-bordersettlementinRMB,initiallyinselectedprovinces,andthen

expandednationwide.Despiteaslowstart,RMBusagehasexpandedsignificantlyinrecentyears.Figure3

illustratestheevolutionofRMBincross-borderpayments,measuredastheRMB’sshareinaneconomy’stotalpaymentswithChina.Thisisoftenthefirstphaseofcurrencyinternationalization,whenthecurrencyisusedintransactionswheretheissuingcountryisinvolved.ThepaymentdataisbasedonSwiftmessagingsystemthatprocessesthevastmajorityglobalbankingtransactions.TheSwiftdatasetspansmostcountriesandregionsandcoverscross-bordertransactionsdatingbackto2010intermsofcurrenciesusage.Overall,themedian

RMBusageinasampleof125economieshasincreasedfromaround0in2014to20percentin2021,

suggestinghalfoftheeconomiesinthesamplesettleatleast20percentoftheirtransactionswithChinain

RMB.The75thpercentilehasdemonstratedsignificantincreasefrom0into70percentin2021,indicatingthataquarterofthesampleeconomiestransactswithChinaprimarilyinRMB.Incontrast,the25thpercentileRMBusagehasremainedclosetozero,demonstratingthatanotherquarterofthesampleeconomiesbarelyusesRMBintheirtransactionswithChina.

Figure3.EvolutionofRMBCross-BorderPayments

(RMBshareincross-bordersettlementwithChina)

Sources:SWIFTWatch,IMFcalculations

Note:Thedistributionisbasedonasampleof125economies.

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Figure4.1and4.2belowvisualizesthesignificantgeographicdisparityinRMBusageasof2021.Overthe

pastdecade,theRMBhasgainedtractioninAsiancountries,suchasMongolia,Laos,aswellasother

emergingmarketanddevelopingcountries,suchasChile,Turkey,andArgentina.CountriesthatweresubjecttoU.S.dollarsanctions,suchasIran,alsoincreasinglyusedRMBfortransactionswithChina.

Figure4.GeographicalDistributionofRMBPayments(2021)

Figure4.1.RMBShareinTotalSwiftPayments

Figure4.2.RMBshareinSwiftPaymentswithChina

Sources:Swiftandauthors’calculations

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RegionalPoliciesthatFacilitateRMBInternationalization

Despiterecentliberalizations,China’scapitalaccountremainsunderverytightcontrol,limitingtheRMB’savailabilityforglobalusage.Againstsuchbackdrop,thePBChaslaunchedinitiativesinsomeregionsintheworldtofacilitatethecross-borderuseofRMB,includingtheestablishmentofbilateralswaplineswithothercentralbanksandthedesignationofoffshoreRMBclearingbanks.

BilateralSwapLines

BilateralswaplinesarePBC'ssignaturepoliciesforpromotingRMBinternationalization(Zhuandothers,

2021).SwaplineswereinitiallyintroducedtofacilitateRMBsettlementininternationaltrade,reflectingthelimitedRMBliquidityoverseas.ThegeographiccoveragebeganwithneighboringAsiancountriesandlaterexpandedtoincludeotheremergingmarkets.Later,afewadvancedeconomies,includingCanada,the

EuropeanCentralBank,andtheUnitedKingdom,havesignedswaplineswiththePBC,primarilytoaddress

potentialfinancialstabilityrisks(PBC2021)(Figure5).Asof2022,thereare38bilateralswaplinesoutstanding,amountingtoaround4trillionRMB(Figure6).

Figure5.EvolutionofPBCSwapLines

(IntrillionsofRMB)

Sources:PBCandauthors’compilation

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Figure6.OutstandingBilateralSwapLines(2021)

Sources:PBCandauthors’compilation

Theswaplinesareusuallysignedforatermofthreeyearsandoftenreneweduponmaturity.Insomeregions,thesizeoftheswaplineshasbeenscaledupovertimeinlinewithincreasingeconomictieswithChina,

notablyinHongKongSAR,Singapore,andSouthKorea.TheFigure7belowillustratesthefunctionofswaplinesfromanEgyptianimporter’sperspective.WhentheneedforRMBliquidityarisesforeithertradeand

financialtransactions,theforeigncentralbankcanactivatetheswaplineandrequestthePBCtodepositRMBtoitsaccount,whichcanthenbeonlendtoforeignfinancialinstitutionstoprovideRMBrelatedpayment.TheforeigncentralbankwillalsodeposittheequivalentamountoflocalcurrencytothePBCaccountascollateral.Attheendoftheswap,theforeigncentralbankwillpaybacktheRMBatapre-determinedinterestrate.

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Figure7.ExampleofFunctioningofCentralBankBilateralSwapLine

Source:CentralBankofEgypt(2017)

Note:CBEstandsforCentralBankofEgypt.

TheactivationoftheRMBswaplineshasbeenlimitedsofar.WhilethePBCdoesnotregularlydisclosetheusageoftheswaplines,a2015reportindicatesthatabout100billionofthe3trillionRMBoutstandingswapswereusedinthatyear,orlessthan1percentofthetotal.ThisstandsincontrasttotheFederalReserveswaplines,whichhavebeenheavilyusedduringcrisisperiods.McDowell(2019)alsoconcludesthatthebilateralswaplineshavebeenusedinfrequently,basedonasurveyoftherecipientcentralbanks.ThismightreflectthattheswaplinesaremeanttobeusedtoaddressRMBliquidityshortageonlyinapotentialcrisisscenario.

AsBahajandReis(2020)demonstratesintheirmodelthatswaplinescanreducetheperceivedrisk

distributionofcreditinarisingcurrencyandjumpstartitsusage.Therefore,theimpactofswaplinesextendsbeyondtheiractualusagetoabroaderprovisionofsafetynet.

OffshoreClearingBanks

Inadditiontobilateralswaplines,thePBChasestablishedoffshoreclearingbanksin25economiestofacilitateRMBpayments.In2003,thefirstoffshoreRMBclearingbankwasestablishedinHongKongSAR.Afterthe

globalfinancialcrisis,thenumberofoffshoreclearingbankshaveincreaseddramatically.Atfirst,designatedclearingbanksarefrequentlyforeignbranchesofChinesebanks.Since2018,thePBChasstartedtograntRMBclearinglicensetoforeignbanks,suchasJPMorganintheU.S.andMUFGBankinJapan.Asof2020,Chinahasestablished27offshoreclearingbanksin25economies,coveringtheworld’smajortimezones

(Figure8).

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Figure8.GeographicDistributionofRMBOffshoreClearingBanks

Sources:PBCandauthors’compilation

Theestablishmentofclearingbanksisanimportantsteptowardbolsteringthefinancialinfrastructureforcross-borderRMBpayments.Asaresultofcapitalaccountrestrictions,foreignbanksarerequiredtoclearandsettleRMBtransactionsthroughChina'slocalcorrespondentbank,whichisfrequentlytimeconsumingandcostly,

andcomplicatesChina’santi-moneylaunderingefforts.Withtheestablishmentofoffshoreclearingbanks,

overseasfinancialinstitutionscannowsettleRMBdirectlywiththelocalclearingbank,operatinginthesametimezone,oftenusingthesamelanguageandlegalframework,greatlysimplifyingthetransaction.

Furthermore,clearingbanksalsofacilitatesthedevelopmentoftheoffshoreRMBmarketbyenablingfortheaccumulationofRMBliquidity.

CIPS(Cross-BorderInterbankPaymentSystem),China'snewcross-borderpaymentmechanism,hasthe

potentialtoreducetheroleofoffshoreclearingbanksinthefut