Challenges of RMB Internationalization: Insights from the NDB and the AIIB
On the back of its growing economic success in the 21st century, China has begun pushing for the growing international usage of the national currency, the Renminbi (RMB), in cross-border transactions, investments, and central bank reserves. This push for currency internationalization is situated in the context of a broader global financial-economic system in which the US dollar continues to occupy a central role that bestows Washington with unique and unparalleled advantages when it comes to domestic lending and financing practices. Further, the de facto role of the dollar as the global reserve currency also provides the United States with significant leverage over other economies, for instance by allowing Washington to shape the access of other entities and countries to global finance and investment markets, providing US-led sanctions regimes with additional influence. Besides the soft power element of providing an alternative to other reserve global reserve currencies such as the dollar, the euro, and the yen, RMB internationalization would also contribute to an insulation of the Chinese economy in the face of potentially intensified US sanctions in the coming years (Liu, 2022). In the increasingly hostile relationship between Beijing and Washington, currency markets and the power generated by a global usage of the dollar and the RMB have emerged as a defining space in which China seeks to assert its global role.
This article examines what role multilateral development banks (MDBs) play in China’s push for currency internationalization, specifically focusing on the New Development Bank (NDB) and the Asian Infrastructure Investment Bank (AIIB). While both the NDB and the AIIB manifest a form of parallel organization that challenge the role of more established global financing institutions, they are differentiated by the constitution of their capital base, the subsequently diverging degree of Chinese influence within both banks, and how immediate the link is to other Chinese foreign policy programs, most notably the Belt-and-Road Initiative (BRI). The article finds that although MDBs have helped to promote the usage of the RMB in cross-border transactions involving China, the use of the RMB in transactions not involving China remains limited. This reflects ongoing issues and concerns regarding RMB internationalization and speaks to broader structural challenges the RMB faces in being used in global transactions.
MDBs in the internationalization of the RMB
Pushing for the growing internationalization of the RMB has become a key economic policy objective for China in the 21st century. As early as 2009, Beijing introduced a program that allowed Chinese and foreign companies to settle their transactions in RMB (Lim & Qing, 2011). These programs have been developed on the back of China’s growing foreign exchange earnings since the early 2000s, when revenues began outpacing national export earnings. For China, currency internationalization includes a soft power element (promoting the usage of the RMB in international transactions and thus bolstering the overall prestige of the currency and the Chinese financial sector) (Kurien & Geoxavier, 2020). As discussed, there is nevertheless also a more immediate strategic element: the US dollar continues to be the most in-demand global currency and functions as the de facto global reserve currency, bestowing the United States with unique monetary policy tools and advantages (including influencing the monetary policy of other countries, leveraging the access to US capital markets, and running up domestic deficits at a rate and to a degree that would be unsustainable for other countries) (Bernanke, 2016). China’s promoted usage of the RMB in MDB-linked transactions is thus part of a broader push by Beijing toward the de-dollarization of the global economy.
MDBs, such as AIIB and NDB, have emerged as significant players in China's push for currency internationalization. These institutions provide financial support for infrastructure projects in developing countries, the investments of which are frequently denominated in RMB. Chinese-led infrastructure projects, for instance as part of the BRI, are subsequently designed in a manner that creates and sustains a demand for RMB-denominated financial instruments and investments. Additionally, both banks promote the use of the RMB by providing RMB-denominated loans to developing countries to facilitate their import and export activities. Furthermore, MDBs are increasingly using the RMB as a currency of settlement in their lending operations, which promotes the use of the RMB in global finance. The following sections review the role the NDB and the AIIB have played in the push for currency internationalization.
The NDB was initially established in 2014 as part of the BRICS grouping, which brings together Brazil, Russia, India, China, and South Africa. For these economies, established financing organizations such as the International Monetary Fund (IMF) and the World Bank Group (WBG) continue to reflect politico-economic ideas and objectives of Western countries, heightening the demand for MDBs in which Western and especially American influence is less pronounced (Panda, 2023). The NDB as well as the AIIB subsequently present a form of “parallel institutions”, meaning institutions that “perform a function similar to those [institutions] that already exist” and “help to create and diffuse new norms” (Paradise, 2016, p. 150). The NDB’s primary policy objective is the financing of infrastructure and sustainable development projects in emerging economies (NDB, 2017). The NDB aims to complement the work of existing MDBs while providing an alternative source of financing for developing countries.
From the start, the NDB has operated on a fundamentally multilateral level. Initially proposed by India, the bank has formalized a shareholding structure in which all founding BRICS members have provided an identical part of the bank’s capital base (10 billion US$ per member) and in which all members hold the same share of exercisable votes (100,000 votes per member) (NDB, n.d.). The NDB has expanded its membership since, with Bangladesh, Egypt, and the United Arab Emirates joining the bank at later stages (with a smaller share of subscribed votes and capital).
RMB internationalization has been a key facet of NDB policy. The NDB was the first MDB to issue bonds denominated in RMB, with the inaugural issuance of bonds worth three billion in July 2016 (Zhou, 2016). Further, the NDB has established an RMB-denominated lending facility that provides financing in RMB to support infrastructure and sustainable development projects in member countries. The establishment of the facility allows borrowing countries to access financing in RMB, reducing their reliance on foreign currencies. In addition, the NDB has signed agreements with Chinese financial institutions to promote the use of the RMB in cross-border transactions. In 2017, the NDB signed a memorandum of understanding (MoU) with the China Development Bank (CDB) to explore opportunities for cooperation in areas such as project financing, investment, and currency swaps (NDB, 2017). The MoU also included provisions for promoting the use of the RMB in cross-border transactions between the NDB and the CDB. The NDB has also signed agreements with the Industrial and Commercial Bank of China (ICBC) and the Bank of China (BOC) to facilitate RMB-denominated transactions between the NDB and respective borrowing countries (NDB, 2017a). Other key NDB policies include the support for China-led internationalization initiatives, for instance by being a member of the Cross-border Interbank Payment System (CIPS), which focuses on facilitating cross-border RMB transactions (Sharma, 2022). Lastly, the NDB has supported the development of local currency bond markets in member countries, which can help to increase the availability of local currency-denominated assets and promote the use of local currencies in international financial markets (Reuters, 2016). Taken together, these measures outline a key role for the NDB in the broader push for RMB internationalization.
However, the NDB’s push toward currency internationalization faces several challenges that have thus far limited the success of policy initiatives. The overarching structural issue remains the limited global usage of the RMB in international transactions. The dollar and the euro are still the dominant currencies in international transfers, foreign exchange holdings, capitalizing on sophisticated and long-standing network effects that have reinforced the global usage of these currencies as reserve currencies. This limits the demand for the RMB. The RMB has also experienced significant volatility in its exchange rates in recent years, making it difficult for the NDB to price and manage its RMB-denominated transactions (Das, 2019). Currency volatility also detrimentally affects investor confidence, making private economic agents more hesitant to borrow in RMB if they perceive the currency to be too volatile. More generally, the NDB's ability to issue RMB-denominated bonds and provide RMB-denominated financing is limited by the availability of RMB-denominated assets in international financial markets. This renders it difficult for the NDB to attract international investors and borrowers who may prefer to transact in more established currencies. The relatively recent entry of the RMB on global monetary markets moreover means that the regulatory environment for RMB internationalization is still evolving, with many restrictions on the use of RMB in international transactions remaining in place within China.
The NDB also faces competition from other multilateral development banks and is subject to broader geopolitical tensions. In practice, the financing provided by the NDB competes with that of other MDBs such as the Asian Development Bank (ADB) and the WBG, which have established currencies, networks, and relationships with borrowers and investors. This can make it challenging for the NDB to establish itself as a key player in international lending markets, especially if loans are provided in RMB. The NDB's efforts to promote RMB internationalization are further affected by geopolitical tensions between China and other countries that can create resistance to the use of RMB in international transactions and limit the NDB's ability to attract borrowers and investors from countries suspicious of China’s broader geostrategic designs.
In sum, the NDB’s efforts to promote RMB internationalization are faced with several challenges. These challenges include the limited global use of the RMB, volatility in RMB exchange rates, limited availability of RMB-denominated assets, regulatory challenges, competition from other MDBs, and geopolitical tensions.
The Asian Infrastructure Investment Bank (AIIB) is another China-linked MDB that aims to provide infrastructure financing to projects in Asia while ostensibly promoting economic development throughout the wider region. While the AIIB remains a multilateral initiative due to its equitable distribution of voting shares between the original BRICS members, China plays a more decisive role within the AIIB. China has made a total capital subscription of more than 29 billion US$ to the AIIB, accounting for 30.71% of the overall capital base and translating into 26.58% of the total votes (AIIB, n.d.). The country with the second-highest voting share, India, holds 7.60% of all votes. In contrast to the NDB, the AIIB subsequently operates according to a structure in which China plays a much more pronounced and influential role. This has led to concerns that China could use the AIIB as a more unilateral, hegemonic foreign policy instrument (Keck, 2014).
A key component of the AIIB’s push for currency internationalization has been the BRI. The AIIB was specifically established to support BRI infrastructure financing (Jordan & Deliwala, 2022) and is part of a broader network of domestic Chinese actors, including policy banks, commercial banks, and sovereign investment funds that provide funding for BRI-linked projects. As part of the financing provided for the BRI, China has sought to use a mixed denomination strategy, with some of the loans being denominated in dollars and some being denominated in RMB, with RMB usage expanding significantly in Central and Southeast Asia since the launch of the BRI (Gjoza, 2018). The AIIB provides a key source of funding for the BRI, with around one-third of all AIIB-held loans going directly to the financing of BRI projects (Jordan & Deliwala, 2022). The BRI thus emerges as a component of China’s broader push for currency internationalization, with the AIIB functioning as the banking actor in this development. This notably differentiates the AIIB from the NDB. In the BRICS grouping, especially India has major strategic concerns regarding the future of Chinese infrastructure investments in South Asia (Taneja, 2017). While the NDB’s equitable vote share allows the NDB to be linked with the BRI, China’s control over the AIIB allows it to more directly link financing practices to BRI and, thus, Chinese objectives.
Outside of the BRI, the RMB-related financial services offered by the AIIB overlap with those provided by the NDB. The AIIB has also issued RMB-denominated bonds to raise funds for its lending activities while providing RMB-denominated loans to borrowers. As is the case with the NDB, the AIIB has inked MoUs with other MDBs and financing bodies on a range of investment objectives, mainly focusing on infrastructure financing and sustainable development. The AIIB has further supported the establishment of RMB clearing centers in countries such as Luxembourg and the United Arab Emirates to facilitate RMB-denominated transactions on a global scale.
As with the NDB, however, the AIIB faces similar challenges when it comes to enhanced currency internationalization. As discussed, these overarching structural challenges include the limited global usage of the RMB, exchange rate risks and subsequently limited investor confidence, competition from more established currencies with deeper liquidity (the euro, the yen, and most notably the dollar), and geopolitical tensions exacerbating currency risks and generally perceived market volatility as a result of political instability and risk.
Limitations of currency internationalization
These challenges have not rendered Chinese efforts of currency internationalization fully void. A growing number of developing economies in Africa, Asia, and South America have started using the RMB in their transactions with China and increasingly deal primarily in RMB (see Figure 1). RMB usage is most pronounced in cross-border transactions in countries that have seen a large influx of Chinese investment as part of the BRI (for instance Kenya and Pakistan). Currency internationalization as part of the BRI has thus been relatively successful in countries receiving a large influx of Chinese foreign direct investment, partially as part of the BRI.
What is notable, however, is that there is little usage of the RMB in cross-border transactions involving China (see Figure 2).
RMB internationalization has been reasonably successful insofar as it has promoted the usage of the RMB in transactions involving China/Chinese businesses and their business partners globally. Extending the perspective, however, highlights that there is little drive to use the RMB in other transactions, where other currencies remain the more dominant choice. This indicates the continued impact of perceived risks vis-à-vis RMB exchange rates, the benefits of other, more established currencies and their networks, and limited market confidence due to geopolitical tensions.
In sum, China’s push for currency internationalization remains limited by a variety of factors. In March 2023, the RMB replaced the dollar for the most used cross-border transaction currency in China for that month, indicating that some progress has been made (Reuters, 2023). Further, the use of the RMB in cross-border transactions involving Chinese businesses practically bestows China with more leverage. Yet, the structural dominance of other currencies, most notably the dollar, the dollar’s network effects in the global economy, and concerns regarding exchange rate risk and political stability will likely limit the degree to which other countries buy into the internationalization of the RMB in the immediate future.
China's push for the internationalization of the RMB has been a key economic policy objective in the 21st century that the NDB and AIIB have played a crucial role in, primarily due to the development of financial instruments and the link between the RMB and the BRI. However, the NDB, which was the first MDB to issue RMB-denominated bonds, still faces several challenges in the push toward currency internationalization, including the limited global usage of the RMB in international transactions, volatility in exchange rates, and geopolitical uncertainties. These issues are mirrored in the AIIB’s efforts, which are differentiated from those of the NDB via the AIIB’s more immediate connection to the BRI and the role the RMB plays in funding BRI-linked infrastructure projects. Both the NDB and the AIIB have been somewhat successful in boosting RMB usage as part of China’s broader cross-border transactions. That said, the limited usage of the RMB as a reserve currency and in cross-border transactions not involving China indicates Beijing’s continued struggle to promote the RMB in international transactions. The structural factors limiting the scope of RMB internationalization will likely continue to be an issue going forward, for now limiting the prospects of a more enhanced global usage of the RMB.
June 2023. © European Foundation for South Asian Studies (EFSAS), Amsterdam