RMB Internationalization and Financing Belt-Road Initiative: An MMT Perspective

Abstract

The Belt Road Initiative (BRI) is a global development plan that sets out to invest trillions of dollars in infrastructure within the coming decade in over 60 countries. Financing the BRI has come mainly from the Chinese government funded development banks, commercial banks and investment funds. BRI investment has done primarily in the US dollar, which is not a sovereign currency for the Chinese government. As China’s current account surplus narrowed and foreign exchange reserves shrank, the affordability of the BRI becomes questionable. From the Modern Money Theory’s perspective, it is much more desirable, or even necessary, to use the Chinese RMB as the main investment vehicle currency. However, despite the RMB internationalization efforts by the Chinese government in the recent years, especially after the 2008 Global Financial Crisis, RMB internationalization is still quite limited. Financing BRI presents a difficult dilemma for China because on the one hand, continuing with dollar investment requires much capital account and exchange rate management, which hinders RMB internationalization; on the other hand, RMB internationalization, which is desirable for BRI investment, requires more liberalization of the capital account and exchange rate regime. Based on the Modern Money Theory, this paper reveals some of the implications of the connections between RMB internationalization and BRI financing.

Keywords:

• Belt Road Initiative
• development finance
• Modern Money Theory
• RMB internationalization

Notes

1 BRI has expanded geographically and thematically since its inception. It now includes investment in central and south American countries, and in total, over 100 countries are participating in some form. And in addition to infrastructure connectivity, it involves projects that are related to disaster prevention, environmental protection and innovation (OECD 2019).

2 Dim sum bond is a bond denominated in Chinese renminbi and issued in Hong Kong. Dim sum bonds are attractive to foreign investors who desire exposure to renminbi-denominated assets, but are restricted by China’s capital controls from investing in domestic Chinese debt.

3 Just to put these in perspective, the World Bank, which focuses on infrastructure development in developing regions, lends only about $40 billion to $50 billion annually.

4 According to a study, the share of private investment in the BRI fell by 12 percent in the first half of 2018 compared to the first half of 2017. Private companies that were interested in participating have reconsidered their decisions (Joy-Perez & Scissors, 2018).

5 See Yalta and Sivrikaya (2019) for an empirical examination on the long run trend of China’s current account.

6 According to the US Treasury data, out of the $3 trillion plus foreign exchange reserves, over $1 trillion is invested in the US government bonds, US agency debt and US corporate stocks. The remaining reserves are invested in illiquid assets, including initial capital for the China Investment Corporation, the nation’s sovereign wealth fund, the Silk Road Fund that invests in the Belt and Road initiative infrastructure projects and cash-for-commodities loans to countries like Venezuela.

7 For more information on offshore RMB bonds, one is referred to (Fung, Ko, Ling, & Yau, 2016). And for an updated account of China’s bond market development, one is referred to (Fung, Liu, & Zhang 2019).

8 The SDR is an international reserve asset created by the IMF in 1969. It serves as a potential claim on the freely usable currencies of IMF members.

9 Panda bonds are RMB denominated bonds issued in the Chinese onshore market by issuers incorporated outside China.