China aims to create a renminbi zone to balance the US dollar zone that has dominated the world’s financial system since the end of World War II. This involves encouraging the use of renminbi as a reserve currency, a unit of settlement for trade and a store of value for investors in securities. These efforts are necessary but not sufficient. More importantly, China needs to create a renminbi-centric financial system. China’s emerging strategy is to shift from a piggybacking approach to a lawfare one by setting up global or regional institutions to mirror the current multilateral framework that governs the global financial market. China, together with other BRICS emerging powers, has set up a New Development Bank and a contingent reserve arrangement, alternatives to the World Bank and International Monetary Fund. It also set up the Asian Infrastructure Investment Bank, with a backing of 21 countries, a rival to the Asian Development Bank. China is moving ahead with a scheme to create the Development Bank of the Shanghai Co-operation Organisation, a six-country Eurasian political, economic and military grouping. More recently, China announced its “One Belt and One Road” Initiatives including over 130 countries and most of them are developing nations. These four institutions will add to the considerable financial fire power of China. This article tries to understand China’s strategy in the field of international monetary and financial market as well as its implications. China aims to create a renminbi zone to balance the US dollar zone that has dominated the world’s financial system since the end of the Second World War. This involves encouraging the use of renminbi as a reserve currency, a unit of settlement for trade and a store of value for investors in securities. Progress on all fronts has been marked. The outstanding volume of offshore renminbi bonds (excluding certificates of deposit) has seen an increase in the recent years. By the end of the first quarter of 2023, the balance of offshore renminbi bonds reached RMB 1.04 trillion (approximately USD 151.1 billion), marking an increase of RMB 86.7 billion (USD 12.6 billion) from the end of 2022. During the first quarter, offshore renminbi bond issuance (excluding CDs) totaled RMB 196.6 billion (USD 28.6 billion), up RMB 72.8 billion (USD 10.6 billion) from the fourth quarter of 2022 Bank of China [3]. Using an aggregate measure of international currency usage, renminbi was the fifth-used currency by the end of August 2024, with 2.5% of transfers, up from 0.6% in January 2013 Von Beschwitz [38]. These achievements may be due to the US and its allies’ financial sanctions on Russia after the outbreak of Russia-Ukraine military conflict, and these financial sanctions really concern a large number of developing countries which are afraid of similar sanctions imposed by the US government in the future. Consequently, more countries are in a plan to have an alternative currency scheme so that they would be safer in some extreme scenarios. Nevertheless, these are not enough for renminbi to overtake the US dollar in international importance as it still ranks behind the euro, the British pound, and the Japanese yen. While the renminbi is unlikely to challenge the US dollar’s dominance as a global reserve currency in the immediate future, the international monetary system is becoming “multipolar,” with the renminbi gaining prominence as a reserve and transaction currency. Under the IMF rules, the renminbi cannot be officially included in central banks’ reported totals of reserves because it is not freely usable and convertible. The fact that some central banks have started reporting their offshore and onshore renminbi investment as official reserves means a further unraveling of IMF influence. The IMF would act as a significant propellant for renminbi internationalisation if the IMF were to include the renminbi as a special drawing rights reserve asset. The bigger opportunity for the renminbi is potential changes in portfolio investment flows. The recovery of the US demand could lead to a sharp increase in the relative attractiveness in renminbi assets. What is needed in an immediate term is a renminbi-centric financial system or a financial system that is friendly to renminbi. This is the soft or discourse power the renminbi needs to have in order to gain more significance in the globe. Without an institutional build-up, renminbi is likely to be tainted by the debtbook diplomacy or other similar accusations made by Western states. China has been industrious in recent years in laying the foundations for a China-centric financial system. China’s plan is to set up institutions to mirror the multilateral organisations that govern the global organisations and the global development agenda. China has set up a New Development Bank and a contingent reserve arrangement, alternatives to the World Bank and International Monetary Fund. It also set up the Asia Infrastructure Investment Bank, with a backing of over 103 approved members, a key rival to the Asian Development Bank. China is moving ahead with a scheme to create the Development Bank of the Shanghai Co-operation Organisation, a six-country Eurasian political, economic, and military grouping. The thrust of these institutions is clear even though the realisation of China’s grand design remains uncertain and far off. Multilateral organisations will have to change their spots to compete more effectively in an increasingly China-centric world. This article looks into China’s institution build-up efforts in this regard.
