On 18th June, Bank of China Chairman Mr Tian Guoli was invited to attend the UK-China Financial Forum in London and represented Chinese financial sector to deliver a speech titled 'RMB Internationalization: An Important Choice in Global Financial Stability'. The full speech is as following:
RMB Internationalization: An Important Choice in Global Financial Stability
Tian Guoli, Chairman of Bank of China
18 June 2014
Distinguished guests and dear friends,
It is my great honor to be invited to the "UK-CHINA Financial Forum". London, as the birthplace of Euro-dollar, is the world's largest offshore USD market now. Today, experts and scholars of the global financial community gather here to discuss the status quo and future of RMB internationalization, which will provide important reference to this process.
RMB internationalization is a choice of history. The collapse of the Bretton Woods System after the World War II indicates that the gold exchange standard system cannot ensure global financial stability, and subsequently the single currency-dominated international currency system can hardly avoid the "Triffin dilemma". Currency diversification has become a realistic choice. In 2013, China's GDP and foreign trade accounts for 12.5% and 11.4% of the world total, respectively. Historical experience suggests that the basic conditions are ripe for RMB to become an international currency.
RMB has become a crucial force in safeguarding the global financial stability in the past over ten years, mainly in the following two areas:
Firstly, RMB is the "stabilizer" in financial crises. In 1997, Southeast Asian countries rushed to devalue their currencies to absorb the shock from the Asian financial crisis. China pledged to the world that it would not devaluate RMB, shoring up the confidence in facing down the crisis. In the global financial crisis that broke out in 2008, RMB value was on the rise other than decline, delivering a significant contribution to the stability of world economy.
China's stable social and political environment, rapid economic growth, balanced international payment, low foreign debts and huge foreign exchange reserve become an important footstone for avoiding drastic fluctuations of exchange rate and underpinning the confidence in RMB.
Second, RMB is the "safe haven" for foreign exchange risk. Along with the increasingly closer economic and trade ties between China and other nations in the world, there emerges a broad international demand for RMB-denominated settlement to avoid foreign exchange risk.
I would like to share with you one of our cases. BOC has an important client in the Southeast Asia, who is very active in trading with China. We established a USD170 million trade finance facility for the company in 2013. The client got from BOC RMB1,350 million of financing through export bill purchase under L/C in the year, and another RMB970 million in the first quarter of this year. This service helps the client save exchange costs and slash the cost of derivative trading intended to avoid foreign exchange risk.
RMB is broadly sought after in international markets, with the market penetration on the rise. According to the BOC's observations and studies on the offshore RMB market, the BOC Offshore RMB Index rose to 1.07 in the first quarter of this year from 0.91 at the end of last year, representing a sharp increase of 81% over a year ago. Drivers of the offshore RMB index include the following: In the first quarter of this year, RMB340 billion of net RMB outflows from China further increased the offshore RMB liquidity; the balance of offshore RMB deposits reached RMB2.4 trillion, or 1.51% as a percentage of global offshore RMB deposit; RMB71.8 billion of offshore RMB bonds were issued, up 160% over a year ago; the foreign exchange trading volume of offshore RMB doubled when compared with the fourth quarter of last year, rising from 2.3% to 3.0% as a percentage of the world total of foreign exchange trade. The size and scope of the offshore RMB market is expanding continuously. In London, the world's biggest foreign exchange trading center, the RMB trading volume has taken up two thirds of the global market exclusive of the mainland China and Hong Kong.
Also, as BOC's global client survey shows, over 50% of clients believe that cross-border RMB settlement will account for 20%-30% in the five years ahead; 61% of overseas respondents intend to use RMB in cross-border trade or increase the proportion of RMB settlement, up 7 parentage points from 2012. The choice of clients represents the voice of markets, signaling a great boom of RMB in the future.
Of course, we also need see that RMB internationalization is still in its infancy now. In April 2014, in spite of its position as the world's seventh largest payment currency, RMB took up only 1.4% of global payments and settlements, far behind USD; in spite of its position as the world's ninth largest trading currency, RMB contributes merely 2.2% to the world's daily average of global foreign exchange trade; though it gradually becomes a new choice of some countries in reserve diversification, RMB still takes up a very small portion of the global foreign exchange reserve. Therefore, there is a huge potential for RMB internalization. The journey is just beginning.
Doubtlessly, commercial banks are an important driver of RMB internalization. Based on my many years' experience in the financial sector and my observation of international banking developments, I would like to share with you my views on what role commercial banks should play in promoting RMB internalization:
Firstly, the use of RMB in the cross-border trade and foreign investment activities should be further enhanced. It is agreed that international trade and direct investment serve as the important engine driving world economic growth. As the largest trader in the world, China's import and export of goods reached USD4.16 trillion in 2013, and its foreign investment amounted to USD90.1 billion. In the next five years, USD10 trillion goods are expected to be imported, and foreign investment is estimated to soar to USD500 billion. In the past four months, the proportion of RMB settlement in China's import and export of goods stood at 17.5%, and that in the foreign investment was reported at 27.5%. If Chinese and foreign commercial banks can provide appropriate products and services according to client's needs, we will confidently estimate that the aforesaid proportions will rise to 30% and 40% respectively in the next five years. In addition, China is the major consumer of commodities in the world. To facilitate RMB internationalization, commercials banks can strengthen the cooperation with exporters, importers and major exchanges all over the world, and actively promote commodity trading denominated and settled in RMB. If so, the exchange rate risk confronted by some enterprises would be mitigated to a great extent, and cross-border use of RMB would attain a new height.
Secondly, the construction of cross-border RMB market infrastructures should be propelled positively, to further improve global RMB clearing network. BOC Hong Kong was designated as the RMB clearing bank in 2003, becoming a main component of the RTGS clearing system in Hong Kong and directly connecting to domestic RMB payment system - CNAPS. So far, BOC has opened more than 1100 RMB accounts for financial peers in over 90 countries and regions, hence a global cross-border clearing network with Hong Kong and Shanghai as the hub has taken shape. We would like to cooperate with major clearing agencies and financial institutions in different countries, jointly build and enhance a global RMB clearing channel, and provide clients with fast, efficient and safe fund transfer service.
Thirdly, offshore RMB treasury products should be innovated continuously, and the markets of foreign exchange trading, bond issue and investment, and RMB derivative transactions should be cultivated, to push forward the deepening of financial market, make RMB become an active trading currency in various offshore financial markets, and develop offshore market into a main carrier for cross-border use of RMB. By reliance on market forces, the integration of onshore and offshore RMB markets can be gradually accelerated.
Fourthly, more reasonable RMB pricing mechanism and system should be fostered, to provide clients with effective solutions for liquidity management and market risk management, and expand the sources of profits for commercial banks. More importantly, market participants will be able to manage their risk exposures in a more efficient manner and achieve sound operation.
My dear friends, as a large global commercial bank, BOC always takes a leading position in the RMB internationalization business and devotes itself to the expansion of such business. It is not only a historical responsibility that BOC ought to shoulder, but also an inevitable choice for us to adhere to international business model and grasp strategic opportunities.
With 85 years of operating history in the UK financial market, BOC can be considered as a direct participant and witness in terms of the sustained and healthy development of Sino-British economic and trade relations. Currently, all sectors of the UK participate in the process of RMB internationalization in a very positive attitude. History will eventually prove that it will be another strategic opportunity for London Financial Centre to maintain prosperity. We are willing to propel RMB internationalization together with various government agencies, enterprises and financial institutions in different countries, for the purpose of making contribution to global economic prosperity and stability.