There is a deep hunger internationally for Chinese consumers, Chinese exports, Chinese assets and of course, the Chinese currency. While the USD was at one time supported by its gold backing, the RMB today is backed by China’s huge foreign exchange reserves. Confidence in the currency is further enhanced by expectations of conditions in China remaining supportive of a strong currency. The main precondition on which China does not do well is in the stage of development and readiness of its financial system and policy frameworks. These challenges are not insurmountable but they are big enough to make Chinese policymakers adopt a gradual and sequenced approach to RMB internationalisation. They are big enough that premature liberalisation could create significant risks to macroeconomic and financial stability. The challenge for Chinese policymakers is to develop the domestic financial system to a level where integration with the global financial system would not lead to significant vulnerabilities. Therefore, the state of the financial system will be a key determinant of the extent to which policymakers are willing to liberalise and open their system, and consequently, will also be a key determinant of the extent and pace of RMB  2  BIS central bankers’ speeches  internationalisation. The global status of the RMB is closely linked to the global status of the Chinese financial system. Ambitious reforms could expedite RMB internationalisation. On the issue of being a global exporter of capital, China is certainly that.
This include RMB outflows through official aid, international loans by banks in China, foreign issuance of debt in Chinese markets, direct investment abroad, inter-company loans, repatriation of corporate profits, resident spending abroad and so on. Some of these are already happening. Offshore RMB balances in Hong Kong, Chinese Taipei and Singapore for example rose almost 40% between late 2013 and early 2014 to RMB1.4 trillion. These numbers are indeed encouraging, except for one thing. When the RMB is abroad, it gets homesick, terribly homesick. It yearns to return home to the land of its birth. When the legal avenues for it to do so are limited, it desperately seeks other ways to do so. And as the size of overseas RMB pool increases, the pressure of the homeward bound flows will also increase. Will the Qualified Investor Schemes, RMB clearing banks and the eventual introduction of the China International Payment System alleviate this situation of the offshore RMB? Yes, it would, but not entirely. In the current situation, despite the sharp increase in RMB related trade and investment transactions, the data I have seen suggests that the use of RMB remains rather lopsided and favours the flow of RMB into China rather than out of China. A significantly greater proportion of China’s exports were paid for in RMB, then its imports. Similarly, while 63% of the FDI into China was in RMB, only 16% of the direct investment out of China was in RMB.