Is RMB A (Truly) International
Currency?
——An Evaluation Based on Offshore FX Trading Patterns
Beijing · RMB and FX Forum
2017-09-13
RMB Internationalization: A Change of Trend
The share of RMB in global payments (%)
0
0.5
1
1.5
2
2.5
3
20
11
.10
20
11
.12
20
12
.02
20
12
.04
20
12
.06
20
12
.08
20
12
.10
20
12
.12
20
13
.02
20
13
.04
20
13
.06
20
13
.08
20
13
.10
20
13
.12
20
14
.02
20
14
.04
20
14
.06
20
14
.08
20
14
.10
20
14
.12
20
15
.02
20
15
.04
20
15
.06
20
15
.08
20
15
.10
20
15
.12
20
16
.02
20
16
.04
20
16
.06
20
16
.08
20
16
.10
20
16
.12
20
17
.02
20
17
.04
20
17
.06
Data source: SWIFT
RMB Internationalization: A Change of Trend
Total Outstanding of RMB Deposits in Hong Kong (RMB mn)
Data source: CEIC
0.000
200,000.000
400,000.000
600,000.000
800,000.000
1,000,000.000
1,200,000.000
RMB Internationalization: A Change of Trend
So, is RMB internationalization a successful story?
How to Measure the Level of RMB Internationalization?
Private Use Official Use
Medium of Exchange
vehicle currency: invoicing trade
and financial transactions, settlement
currency
vehicle currency: intervention currency in the
foreign exchange market
Unit of Accountquote currency (denominating trade
and financial transactions)anchor of the other currency’s exchange rate
Store of Valueinvestment currency (portfolio
allocation) or currency substitution
(private dollarization)
reserve currency (international reserves)
Basic Functions of International Currencies
Data source: Hartmann (1998)
How to Measure the Level of RMB Internationalization?
Indicator System of RMB Internationalization Index by IMI, Renmin University of China
Data source: International Monetary Institute: RMB Internationalization Report 2015
First-class indicators Second-class indicators Third-class indicators
International Pricing and Payment Function
Trade Proportion of RMB settlement in
world trade
Capital and Finance
Proportion of RMB credit in global foreign credit
Proportion of RMB security in global issuance of international bonds and bills
Proportion of RMB security in global remaining sum of international bonds and bills
Proportion of RMB direct investment in global foreign direct investment
International Reserve Function Official Foreign Exchange Reserves
Proportion of RMB foreign exchange reserves in global foreign exchange reserves
How to Measure the Level of RMB Internationalization?
Formula of Renminbi Globalisation Index (RGI) by Standard Chartered
Data source: Standard Chartered
1 1 1 1 1D T F DC
RGI t Depo t TSIP t FX t DSCD tW W W W
RGI t Depo t TSIP t FX t DSCD t
A New Approach: Trading Pattern in Offshore FX Market
• Assumption:
– Currencies at the similar level of internationalization have similar trading patterns
– Trading pattern is more stable and relevant than trading volume
• A (politically incorrect) analogy: How to judge a person’s social class?
– Income or wealth
– Social behavior
A New Approach: Trading Pattern in Offshore FX Market
• What’s the meaning of trading pattern?
– Statistical characteristics of trading data on specific currency or currency-pair
– Topological characteristics of the complex network comprising of the institutions
participating the trading of specific currencies and the transactions between them
𝑄1 𝑄2 𝑄3 … 𝑄𝑖 … 𝑄𝑁𝑄1 𝑤11 𝑤12 𝑤13 … 𝑤1𝑖 … 𝑤1𝑁𝑄2 𝑤21 𝑤22 𝑤23 … 𝑤2𝑖 … 𝑤2𝑁𝑄3 𝑤31 𝑤32 𝑤33 … 𝑤3𝑖 … 𝑤3𝑁… … … … … … … …𝑄𝑖 𝑤𝑖1 𝑤𝑖2 𝑤𝑖3 … 𝑤𝑖𝑖 … 𝑤𝑖𝑁
… … … … … … … …𝑄𝑁 𝑤𝑁1 𝑤𝑁2 𝑤𝑁3 … 𝑤𝑁𝑖 … 𝑤𝑁𝑁
A New Approach: Trading Pattern in Offshore FX Market
• Variables
Regular statistical characteristics
– Proportion of different trading institutions categories;
– Proportion of different regions where trading took place;
– Proportion of transnational transactions;
– Proportion of cross-regional transactions;
– Market concentration.
Network characteristics
– Distribution function of trading institutions with various number of trading partners;
– Trading intensity between highly active trading institutions;
– Trading intensity between high volume trading institutions;
– Local intensity of trading relationship;
– Local intensity of trading volume;
– Proportion of reading between high volume trading institutions.
A New Approach: Trading Pattern in Offshore FX Market
• Clustering of CLS currency-pairs in Q2 2015
A New Approach: Trading Pattern in Offshore FX Market
• Clustering of CLS currency-pairs in Q2 2015
A New Approach: Trading Pattern in Offshore FX Market
How different is KRW trading?
A New Approach: Trading Pattern in Offshore FX Market
• Ranking of CLS currencies in Q2 2015
Data source: SWIFT RMB Tracker
Rank Currency Name Currency Code
1 United States Dollar USD
2 Euro EUR
3 British Pound GBP
4 Japanese Yen JPY
5 Canadian Dollar CAD
6 Swiss Franc CHF
7 Australia Dollar AUD
8 New Zealand Dollar NZD
9 Swedish Krona SEK
10 Norwegian Krone NOK
11 Singapore Dollar SGD
12 Hong Kong Dollar HKD
13 Danish Krone DKK
14 South African Rand ZAR
15 Mexican Peso MXN
16 Israeli New Shekel ILS
17 South Korean Won KRW
A New Approach: Trading Pattern in Offshore FX Market
• Clustering of RMB and CLS currency-pairs in Q2 2015
A New Approach: Trading Pattern in Offshore FX Market
• Clustering of RMB and CLS currency-pairs in Q2 2015
A New Approach: Trading Pattern in Offshore FX Market
• Clustering of RMB and CLS currencies in Q2 2015
A New Approach: Trading Pattern in Offshore FX Market
• Ranking of RMB and CLS currencies in Q2 2015
Data source: SWIFT RMB Tracker
Rank Currency Name Currency Code
1 United States Dollar USD
2 Euro EUR
3 British Pound GBP
4 Chinese Offshore RMB CNH
5 Canadian Dollar CAD
6 Swedish Krona SEK
7 Swiss Franc CHF
8 Norwegian Krone NOK
9 Danish Krone DKK
10 Australia Dollar AUD
11 Mexican Peso MXN
12 Japanese Yen JPY
13 Hong Kong Dollar HKD
14 New Zealand Dollar NZD
15 South African Rand ZAR
16 Singapore Dollar SGD
17 South Korean Won KRW
18 Israeli New Shekel ILS
19 Hungarian Forint HUF
A New Approach: Trading Pattern in Offshore FX Market
• Conclusion
RMB looks very like a member of international currency club,
even though he sometimes behaves a bit weird…
A New Approach: Trading Pattern in Offshore FX Market
How weird is CNH trading?
A New Approach: Trading Pattern in Offshore FX Market
Why is CNH trading so weird?
– RMB is not a CLS currency
– Sparseness of RMB trading data
A New Approach: Trading Pattern in Offshore FX Market
Why does RMB still rank high as an international currency?
➢ High diversification in trading patterns
Currency
code
Average distance between
currency-pairs
Number of currency pairs
USD 12.96 7
AUD 7.0519 7
CAD 7.995 6
CHF 8.8394 5
EUR 15.64 10
GBP 8.6277 7
JPY 6.5875 6
SEK 8.2447 4
CNH 12.7939 9
Conclusion and Policy Recommendation
• The fact that RMB doesn’t join an international multilateral PvP
settlement mechanism like CLS not only limits its trading
efficiency, but also twists its trading pattern to some extent.
• The benefits of international cooperation on payment system
are not only from the improvement of RMB trading
efficiency in FX markets, but also from the opportunity to
employ accurate and systematic trading data to more precise
assessment of RMB’s position in global monetary system.
THANK YOU FOR YOUR ATTENTION!