Currency promoter

Since the beginning of 2020, the worldwide spread of the novel coronavirus has severely affected the world economy and global finance. The abrupt demand shocks and suspension of supply have dampened the enthusiasm and weakened the outbound direct investment (ODI) ability of multinationals.

Although China has been affected by the pandemic, its investment in countries along the Belt and Road routes has maintained steady growth. According to data from the Ministry of Commerce, Chinese enterprises made $4.2 billion of non-financial investment in 52 Belt and Road countries in the first quarter of this year, an increase of 11.7 percent year-on-year. It accounted for 17.3 percent of China's total ODI in the same period, an increase of 2.4 percentage points from the previous year.

Improving financial integration is the key to driving the development of the Belt and Road Initiative. Greater use of the renminbi in investment and financing projects would help reduce the currency exchange costs of the Belt and Road Initiative countries, effectively alleviate currency mismatches, fend off risks caused by exchange rate changes, and promote further capacity cooperation between China and the countries concerned, which in turn would drive complementary cooperation, resources and risk sharing, as well as trade and investment.

Therefore, the internationalization of the renminbi needs to be further promoted and integrated with the development of the Belt and Road Initiative for complementary development. Policy options can be adopted to facilitate the use of the Chinese currency.

First, China needs to expand renminbi cross-border investment. It can increase the proportions of renminbi loans or investment for projects involving the purchase of Chinese products and services, while prolonging the repayment period for projects which take a long time to produce returns to balance the liquidity capabilities of both sides in trade and investment. The renminbi can also be used more in the cross-border receipt and payment of goods trade, investment and financing. China's central bank has signed bilateral currency exchange agreements with the central banks of 22 countries along the Belt and Road routes, while the actual use has not yet met expectations. It needs to further expand bilateral currency exchanges to more countries and improve the amount of renminbi actually used by foreign monetary authorities.

It can promote bulk commodities to be denominated in the renminbi. Many of the Belt and Road countries are key exporters and importers of bulk commodities including crude oil, natural gas and mineral resources while lacking the power to set prices, this needs to be steadily changed. To further develop the domestic commodity futures market, China needs to introduce more international institutions and upstream and downstream enterprises to the industrial chain, increase the variety of products in transactions and facilitate renminbi-denominated transactions. It also needs to adopt tools for addressing risks caused by exchange rate changes as well as trade and financial products on the supply chain, reduce the operation risks and costs for investors, boost transaction vitality and improve the renminbi foreign exchange market. As foreign investors see increasing exposure to the renminbi, great demand for hedging foreign exchange risks will emerge and the foreign exchange market will be indispensable.

China needs to build an internationalized panda bond market. The issuance of bonds by foreign governments, financial institutions and enterprises in China is a key financing approach which can drive the implementation of the initiative and renminbi internationalization. It allows domestic investors to enjoy benefits created by overseas issuers and provides more investment options for foreign investors, which can boost domestic financial market and expand sources of funds for the Belt and Road projects.

In addition, China needs to enrich offshore renminbi financial products. In recent years, offshore renminbi markets such as those in Hong Kong and London have developed rapidly and the renminbi cash pool has expanded. While consolidating and developing financial services such as deposits, loans and credit guarantees, China can further expand green renminbi bonds, renminbi-denominated asset-backed security products and renminbi reinsurance to provide multi-functional services to support the Belt and Road Initiative.

It also needs to improve the foreign exchange management system. Amid the ever-changing international landscape, China is supposed to fully weigh the impacts of macro and regulatory policies on the investment and financing activities of the initiative, improve its management on offshore loans under onshore guarantee, cope with loopholes, and introduce targeted measures supporting the implementation of the initiative. It can simplify the approval procedures for offshore loans under onshore guarantee, allow qualified enterprises to provide guarantee for overseas loans of which the value is below stipulated caps, provide preferential and flexible policies for enterprises engaged in the investment and financing of Belt and Road projects, and support enterprises with identified business backgrounds, practical demands and existing contracts to conduct foreign exchange purchasing. It needs to improve the system of overseas bond issuance of enterprises, allow those in need of overseas financing for the Belt and Road Initiative to submit the year-round bond issuance quota and carry out flexible management by allowing the issuance to be launched ahead of registration.

China needs to improve cooperation with export credit agencies in countries participating in the Belt and Road Initiative. Related Chinese institutions can take the lead in organizing counterparts in the countries to build platforms and mechanisms for cooperation, improve policy coordination and business cooperation, and attract more market players and funds into the Belt and Road Initiative through joint credit, co-insurance and reinsurance. It should develop agreements for guaranteeing cross-border investment and financing between the countries, enhance cooperation on the registration, search, disposal, and court judgments and enforcement relating to collateral and create favorable investment and financing environment.

The author is a member of the National Committee of the Chinese People's Political Consultative Conference and a senior researcher with the China Finance 40 Forum (CF40). The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.