The use of RMB in the RCEP region has begun to take shape. Its functions as payment currency, investment and financing currency are gradually deepening, and its functions as valuation currency are enhanced. In the future, the deepening economic and trade cooperation of the RCEP can be used to further cultivate RMB usage habits for domestic and foreign entities, and fully release the potential of RMB use in the region.

In January 2023, the Ministry of Commerce and the People's Bank of China jointly issued the Notice on Further Supporting Foreign Economic and Trade Enterprises to Expand Cross-border Use of RMB and Promote Trade and Investment Facilitation (hereinafter referred to as the Notice). This is after the People's Bank of China, the Ministry of Commerce, the State Administration of Foreign Exchange and other six departments jointly issued a document in 2020 to optimize the policies and measures of cross-border business of RMB, and relevant departments further improve the system of cross-border use of RMB on the basis of summarizing the previous work. The circular states that China will support RMB settlement of trade and investment with neighboring countries (regions) and the RCEP.

By the end of February 2023, the Regional Comprehensive Economic Partnership (RCEP) has been ratified by all 15 member countries. Member states have made high-level commitments to open up in goods, services and investment, and gradually harmonized rules on rules of origin, customs procedures, e-commerce, intellectual property rights and technical standards, so as to build an inclusive, stable and predictable framework of economic and trade rules for the region, which will enhance political mutual trust among member states and enhance intra-regional trade and investment flows. We will promote the free flow of economic factors within the region and promote the deeply integrated development of regional production networks. All these major benefits will bring about profound adjustments in trade settlement, investment and financing currencies that are closely related to economic and trade activities, and create broader space for the cross-border use of the RMB.
The cross-border use of RMB in the RCEP region has great potential

Since the pilot settlement of cross-border trade in RMB in 2009, the cross-border use of RMB has been steadily promoted under the influence of multiple positive factors, such as market demand, improved financial infrastructure and greater financial openness. The cross-border use of RMB has gradually expanded from the current account to the capital account, from trade and investment to financial transactions, and from banks, enterprises and individuals. In 2022, China's cross-border RMB settlement of trade in goods reached 7.92 trillion yuan, up 37.3% year on year; Direct investment in cross-border RMB settlement reached 6.76 trillion yuan, up 16.6 percent year on year. The renminbi is the world's fifth-largest currency for payment and settlement and the third-largest for trade finance, according to SWIFT.

The real market demand for cross-border renminbi business continues to increase. With the formation of the RCEP economic circle, the level of trade and investment among member countries is deepening, and the interdependence of their value chains, supply chains and industrial chains is increasing. Some RCEP members import raw materials and intermediate goods from China and export them to China or other RCEP members without resorting to US dollar pricing and settlement. According to calculations by the Asian Development Bank, Asia's import and export trade with the US accounts for less than 10% of Asia's total. But as much as 89% of Asia's exports and 77% of Asia's imports are denominated in dollars. Therefore, expanding the use of RMB in the RCEP region will help enterprises reduce exchange rates and reduce exchange rate risks.

There is a growing internal demand for market players to use RMB in cross-border trade and investment. From the perspective of macro-economic situation faced by market players, two-way fluctuation and increasing flexibility of RMB exchange rate have been the general trend. Global economic growth has slowed sharply, making it more difficult for the US Federal Reserve, the European Central Bank and other central banks of major developed economies to adjust their monetary policies. As a result, the internal demand of market players to use RMB in cross-border trade and investment to reduce transaction costs and avoid operating risks such as exchange rate and currency mismatch keeps rising.

Overseas entities are more willing to increase the use of RMB. In the context of escalating geopolitical risks and intensifying strategic game between major powers, financial sanctions tend to become the usual means used by developed economies. This has triggered a crisis of confidence in the nature of mainstream international monetary public goods. Many countries have turned to more diversified payment and settlement currencies and international reserve currencies, and overseas entities are more willing to increase the use of RMB. According to the "RMB Internationalization Report 2022" released by the People's Bank of China, more than 78% of Chinese and foreign enterprises surveyed are considering using RMB in cross-border transactions or increasing the proportion of RMB use. However, when the liquidity of international currencies such as US dollar and euro is relatively tight, more than 70% of surveyed overseas enterprises consider RMB as the financing currency.
Cross-border use of RMB in RCEP

At present, the use of RMB in the RCEP region has begun to take shape. Its functions as payment currency, investment and financing currency are gradually deepened, and its functions as valuation currency are further strengthened.

In terms of cross-border RMB settlement, RCEP member states have been an important region using RMB. According to the Report on the Internationalization of RMB in 2022, Singapore, Japan and South Korea are the countries with the most cross-border RMB settlement, accounting for 11.3 percent, 2.5 percent and 1.6 percent of the cross-border RMB receipt and payment in 2021, respectively. Asean countries have good prospects for the cross-border use of RMB. According to the Report on the Use of RMB in ASEAN Countries 2022, the cross-border RMB settlement amount between China and ASEAN in 2021 was 4.8 trillion yuan, a year-on-year increase of 16% and a nearly 20-fold increase in 10 years. Cross-border RMB receipts and payments under direct investment from ASEAN countries totaled 609.42 billion yuan, up 43.5% year on year.

In terms of RMB pricing and settlement of bulk commodities, since 2019, a number of domestic steel companies and their traders have completed a number of RMB pricing and settlement transactions with major iron ore suppliers in the RCEP region, including BHP Billiton and Rio Tinto, and the demonstration effect of RMB pricing and settlement of iron ore trade has initially emerged. In addition, Shanghai Futures Exchange natural rubber futures prices have become the Southeast Asian rubber production enterprises pricing basis.

In terms of the offshore RMB market, the RCEP region covers major offshore RMB financial centers such as Singapore, South Korea, Australia and Japan. According to the data of SWIFT in December 2022, South Korea, Singapore, Japan and Australia are respectively the 4th, 5th, 7th and 8th largest economies in the world in terms of RMB spot foreign exchange transactions, accounting for 14.5%, 12.8%, 7.6% and 7.3% of the global RMB spot foreign exchange transactions.

In the inter-bank foreign exchange market, the range of currencies that can be directly traded between RMB and RCEP countries has gradually expanded. It has conducted direct transactions with the Malaysian ringgit, Japanese yen, Australian dollar, New Zealand dollar, Singapore dollar, Korean won, Thai baht and other currencies, and realized region-listed trading with the Vietnamese dong, Cambodian Riel and Indonesian rupiah.

In terms of foreign exchange reserves, eight RCEP members -- Malaysia, Singapore, Thailand, Indonesia, Cambodia, the Philippines, South Korea and Australia -- have included RMB in their foreign exchange reserves by the end of 2020.

In terms of multilateral and bilateral currency cooperation, by the end of 2021, China had signed bilateral local currency settlement agreements with Vietnam, Indonesia, Cambodia, Laos and other countries. China has signed bilateral currency swap agreements with the Republic of Korea, Malaysia, Indonesia, Singapore, New Zealand, Thailand, Australia and Japan to promote the use of local currencies for bilateral trade and direct investment settlement. In June 2022, the People's Bank of China and the Bank for International Settlements (BIS) signed an agreement to participate in the Renminbi Liquidity Facility (RMBLA), with the participation of the Central Bank of Indonesia, the Central Bank of Malaysia and the Monetary Authority of Singapore. The launch of RMBLA will encourage more trade investors to choose RMB as the currency for trade settlement, investment and financing.

In terms of clearing mechanism, China has set up RMB clearing banks in Singapore, Malaysia, Thailand, the Philippines, Laos, Japan, South Korea and Australia. The RMB cross-border payment System (CIPS) has also achieved full coverage in ASEAN countries. In 2021, the CIPS handled 3.3 trillion yuan of cross-border RMB business between China and ASEAN, a year-on-year increase of over 50%, and gradually promoted the formation of an RMB clearing network within the RCEP region.
Ideas on expanding the use of cross-border RMB in the RCEP region

Although the RMB has already been used in the RCEP region, there is still a long way to go before it becomes an important regional currency. Other RCEP countries have mixed market acceptance and recognition of RMB, and market players still have a strong tendency to use the US dollar. In the future, we can take the opportunity of deepening RCEP economic and trade cooperation to further cultivate RMB usage habits and fully release the regional potential of RMB in the following three aspects:

First, we should make a breakthrough in the major trade categories of bulk commodities in RCEP region to enhance the function of RMB pricing settlement. RCEP member states are important producers and consumers of commodities in the world, and China is one of the most important importers and exporters of commodities in the region. China's imports of agricultural and sideline products, metal minerals, fossil energy products and raw materials from the RCEP region (specific commodity categories are shown in the attached table) account for an important share in the bulk commodity trade of other member states. Although the RCEP's tariff reduction commitments have limited direct impact on bulk commodity trade, the agreement will help significantly reduce the cost of bulk commodity import and export by further harmonizing rules on customs procedures, inspection and quarantine, and technical standards and enhancing trade facilitation. In addition, the investment chapter of the RCEP adopts the "negative list" model and the "ratchet mechanism" with a high level of openness commitment, and the overall openness of all parties in the agriculture, forestry, fishing and mining sectors will help enterprises engaged in commodity trade to optimize their regional layout. In addition, the application of cumulative rules of origin will enhance the competitive advantage of regional manufacturing industry, thus further driving the expansion of upstream bulk commodity trade volume with the increase of demand for downstream products and equipment in the region. From the perspective of monetary function, the expansion of demand and deepening of industrial chain linkage brought about by the effective implementation of RCEP will further enhance the function of RMB in commodity trade valuation.

In view of this, we should expand the cross-border use of RMB in commodity trade within the region, actively promote the wider use of RMB in commodity trading contracts between China and other RCEP member states, establish renminbi-denominated quotation methods, and promote bilateral local currency settlement. We will deepen the reform of the futures market, speed up the introduction of overseas traders, enrich renminbi-denominated futures and other risk derivatives of major commodity transactions in the RCEP region, and provide more financial instruments that maintain and increase the value of RMB. We will accelerate the formation of a trade pricing model based on RMB futures prices for commodities with large import scale and strong influence on regional prices. In addition, we can learn from the "cross-border settlement" model of low sulfur fuel oil futures, study on Chinese commodity operators establishing more overseas delivery warehouses and settlement warehouses of specific varieties in the RCEP storage and transportation trade locations, further facilitate international delivery services of bulk commodities, and encourage more domestic and foreign market players to refer to or use the RMB futures market pricing.

Second, it focuses on cultivating the use habits of small and medium-sized enterprises, and supports cross-border e-commerce and other new forms of foreign trade to use RMB for cross-border settlement. The effective implementation of the RCEP will bring more development opportunities to smes in the region. On the one hand, the RCEP has set up a special chapter on promoting cooperation and development of smes, which will effectively improve the trade and investment environment for smes in the region. On the other hand, the RCEP is a comprehensive and high-level outcome of plurilateral e-commerce rules reached in the Asia-Pacific region, which will help reduce the cost of cross-border e-commerce in various links, mainly for small and medium-sized enterprises. Southeast Asian members of the RCEP region have always been a key location for Chinese smes. Some industry reports show that 15.8% of China's cross-border export enterprises have taken Southeast Asia as their first target market, and about 50% of them have made Southeast Asia account for more than one-third of their total overseas sales. However, most smes have poor resistance to exchange rate risks and are more sensitive to circulation efficiency and capital turnover cycle. Therefore, it is more obvious to guide smes to use RMB across borders.

In view of this, banks and payment institutions should be supported to provide cross-border RMB facilitation services for cross-border e-commerce, market procurement trade, offshore trade and other new forms of foreign trade, further simplify cross-border RMB settlement processes, improve payment and settlement efficiency and fund arrival rate, and encourage domestic and overseas market players to use RMB for trade settlement. In light of the respective characteristics of new forms of foreign trade, we will innovate RMB settlement services with other RCEP member countries in small amounts, high frequency, across time zones and in multiple currencies. We will encourage cross-border e-commerce platforms and independent websites to use more renminbi-denominated transactions. Encourage financial institutions, non-bank payment institutions and credit investigation institutions to strengthen cooperation with foreign comprehensive service enterprises and cross-border e-commerce platforms, and provide smes with one-stop services covering cross-border RMB collection, payment, receipt, financing, credit insurance and other services.

Third, based on innovative financial services, we will enrich the regional recycling scenarios of RMB. The main channels of RMB cross-border settlement in China are general trade, service trade and foreign direct investment, which basically focus on Chinese enterprises' "going out" and domestic trade and investment. However, the unsmooth cross-border outflow, overseas circulation and cross-border return channels of RMB are one of the main sticking points leading to the weak willingness of overseas subjects to hold and use RMB. The key to solving this problem lies in whether more developed financial institutions can provide more diversified, more convenient and lower cost RMB financial products and create a more liquid financial market. The effective implementation of the RCEP will provide a more certain opportunity to facilitate the recycling of RMB within the region. In particular, the agreement on the national treatment of payment and clearing systems, access to new financial services, national treatment of participation in or the right to join self-regulatory organizations, information transfer and information processing and other financial services annex, the conclusion of the agreement will promote a higher level of openness and updated forms of financial cooperation in the Asia-Pacific region, help to encourage regional local currency financial service innovation. So as to further improve the circulation basis, use frequency and recognition of regional currency.

In view of this, Chinese financial institutions and third-party payment institutions should be encouraged to accelerate the regional distribution of RCEP, steadily expand the overseas RMB service network, enrich the types of RMB financial service products in the offshore market, and provide diversified tools for maintaining and increasing the value of offshore RMB assets. We will give full play to the role of pilot free trade zones, free trade ports and other platforms for opening to the outside world, introduce more foreign financial institutions and service institutions, carry out business innovation in offshore RMB transactions, cross-border trade settlement, and two-way financing services, deepen the pilot system of combining local and foreign currency bank accounts, and establish a smoother onshore and offshore RMB circulation mechanism.