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Research Report


Douglas W. Arner
Andre Soares
Copyright Date: Oct. 1, 2016
Published by: Atlantic Council
Pages: 20
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Table of Contents

  1. (pp. IV-IV)
    Jason Marczak and María Fernanda Pérez Argüello

    For the past several months, China has been making headlines across the world. And not for the usual reasons.

    In September 2016, China hosted the G20 for the first time. Argentine President Mauricio Macri, Brazilian President Michel Temer, and Mexican President Enrique Peña Nieto joined world leaders in Hangzhou for this historic gathering. Peruvian President Pedro Pablo Kuczynski followed up with a trip to Beijing as his first official foreign destination. China seeks to celebrate its economic muscle again in October 2016. The renminbi (RMB) becomes the fifth global currency—joining the US, European Union, Japanese, and United Kingdom banknotes—...

  2. (pp. 1-1)

    In the past four decades, beginning with Deng Xiaoping’s gradual economic opening in 1978, China has reemerged as one of the world’s most important economies. Its economic, geopolitical, and financial rise is underscored by key milestones: joining the World Trade Organization (WTO) in 2001; surpassing the United States, Germany, and Japan to become the world’s most significant exporting nation;¹ and becoming one of the world’s top three global sources of outward foreign direct investment (FDI).² In 2015, China became a net foreign investor, sending more FDI out than it took in.³ China is well on its way to overtaking the...

  3. (pp. 2-5)

    From an economic standpoint, China’s process of RMB internationalization is intended to support the diversification of its trade and investment relationships, and encourage continued domestic economic restructuring. Enhanced competitiveness and a more innovation-friendly financial ecosystem are major objectives in China’s economic reform strategy. Top international goals under this framework include trade with and investment in emerging markets worldwide, as well as achieving greater economic and financial balance between its developed and emerging market relationships.

    The process of restructuring addresses both changing demographics in China as well as concerns about the middle-income trap. Both of these are important changes from China’s...

  4. (pp. 6-8)

    An internationalized RMB can be a new opportunity for Latin American countries to diversify their sources of finance—perhaps in the same way that trading relationships have expanded with the rise of China. For example, countries and companies can issue RMB-denominated debt, which—depending on prevailing interest rates—may lower their financing costs. This is particularly true for countries with constrained access to the G3 (dollar, euro, yen) markets, with Venezuela serving as the leading current example.

    A central aspect of China’s RMB internationalization strategy is increasing RMB use for trade and trade finance. Trade in a local currency offers...

  5. (pp. 9-10)

    RMB internationalization is clearly a central Chinese policy objective. However, before the RMB becomes widely used for trade, investment, finance, or reserves management in Latin America, it must win the confidence of financial market participants and policymakers. By taking the following three steps, the Chinese government could encourage greater RMB use in the region.

    Advance capital account reforms. If the Chinese government does this, particularly with capital outflow controls, foreign investors would have more freedom to access both bond and stock markets in China. In addition, China could simplify the process of bond issuance to make it easier for foreign...

  6. (pp. 11-11)

    Given the current level of bilateral trade flows and the increasing focus on using RMB both for denomination of transactions as well as for trade finance, it is highly likely that RMB use will continue to increase in China–Latin America deals, especially with the currency’s inclusion in the Fund’s SDR. In addition, more of China’s increasing external investment in the region is likely to be denominated in RMB, although at a gradual pace.

    The combination of payments, trade finance, and investment in RMB means China’s currency will occupy a more significant percentage of flows with Latin America. Still, the...