Establishment of RMB clearing arrangements boosts high-quality foreign trade, promotes RMB internationalization

China and Brazil signed a memorandum of cooperation earlier this year to establish renminbi (RMB) clearing arrangements in Brazil. It is expected that the arrangements will help enterprises and financial institutions in both countries conduct cross-border transactions using the RMB and further facilitate bilateral trade and investment.

The remarks were made by Chinese Foreign Ministry spokesperson Mao Ning during a regular news briefing on March 30, when responding to a relevant query.

Experts believe that the establishment of such arrangements should be beneficial in terms of hedging exchange rate risk and boosting stable and high-quality trade, as well as promoting further internationalization of the RMB.

-- Quality of trade improved with reducing forex risk

It is expected that the RMB clearing arrangements will reduce costs, promote bilateral trade, and facilitate investment between China and Brazil, according to a declaration by the Brazilian Trade and Investment Promotion Agency.

Brazil is China's largest source of imports for soybeans, chicken and other products, said Shu Jueting, a spokesperson for the Ministry of Commerce at a recent press conference, noting that Brazil's export of important agricultural products such as corn to China is also seeing rapid growth.

At the same time, China is an important source of direct investment for Brazil. Steady progress in bilateral cooperation is reflected in various sectors including manufacturing, energy and agricultural infrastructure, among others, according to Shu.

No longer using the U.S. dollar as an intermediary means that Brazil and China could trade in their own currencies, which will help reduce the foreign exchange losses for both countries' foreign trade enterprises, hedging exchange rate risks, said Chang Ran, a senior researcher at the Zhixin Investment Research Institute.

This is of greater significance for small and medium-sized foreign trade enterprises, given the high costs of using foreign exchange derivatives, Chang noted, adding that this settlement method can stabilize the companies' operating expectations, helping them expand business scope in overseas markets.

The fact that China and Brazil can trade in their own currencies will also help expand China's trade circle of friends and further promote stable and high-quality foreign trade, said Chang.

China is Brazil's largest trading partner, accounting for more than one-fifth of the South American country's total imports and more than one-third of its total exports. In 2022, the bilateral trade volume between China and Brazil reached 171.49 billion U.S. dollars, up 4.9 percent year on year.  In the future, trading in their own currencies will significantly reduce the costs for both sides, further facilitating bilateral trade, Chang noted.

In addition, the establishment of such arrangements with a major trading partner like Brazil may be a positive signal, generating positive spillover effects. Driven by the hedging of exchange rate risks and facilitation of trade settlement, more trading partners are likely to prefer conducting transactions in their own currencies, thus expanding the scope of trade, according to Chang.

-- Promoting RMB internationalization in small, quick steps

The RMB has gained wider acceptance in the global market in recent years.

According to a recent report released by China's central bank on the overall operation of payment system, the business volume and transaction value of cross-border payments made in the RMB maintained steady growth in 2022.

During the period, the RMB cross-border payment system handled over 4.4 million transactions with a total value of 96.7 trillion yuan (about 14.04 trillion U.S. dollars), up 31.68 and 21.48 percent year on year, respectively. Some 17,700 transactions were processed on daily average, with a value of about 388.34 billion yuan, said the report.

In May 2022, the share of Chinese yuan in the International Monetary Fund's Special Drawing Rights (SDR) basket had risen from 10.92 percent to 12.28 percent.

Earlier in March this year, China completed its first purchase of about 65,000 tons of liquefied natural gas using cross-border yuan settlement.

Internationalization of the RMB is enjoying favorable environments with great opportunities, said Pan Gongsheng, deputy governor of the People's Bank of China and head of the State Administration of Foreign Exchange during a press conference held on March 3.

Through over ten years of development, the RMB is showing initial network effect for international use, supported by establishment of RMB clearing banks and local currency swap networks, development of offshore RMB markets, opening-up of domestic financial markets and continuous improvement of the overseas layout of Chinese financial institutions, according to Pan.

The RMB's continuously expanding role in pricing, reserves, payments and financing will help the steady progress of its internationalization in the future, said Chang, adding that the currency's exchange rate stability and hedging attributes will become more and more prominent as China's comprehensive national strength continues to grow.

Internationalization of the RMB is taking small and quick steps to break new grounds, which may have a demonstration effect, enhancing stable development of economic and trade relations between China and other countries and promoting continuous growth of foreign trade, according to a chief analyst at a Shanghai-based securities firm.