Before launching its reform and economic opening program，China maintained a highly centralized foreign exchange management system. In principle，the renminbi could not be taken out of China and could not be used for the settlement of foreign trade and investment. The renminbi was defined as a domestic currency in the complete sense. Since the nation's policies of economic reform and opening-up began four decades ago，restrictions on the use of the renminbi outside the country have gradually been relaxed. The addition of the renminbi to the International Monetary Fund's Special Drawing Rights (SDR) currency basket at the end of November 2015 suggested that the renminbi had truly become an international currency. The following reviews the lengthy path of renminbi  internationalization.

For many years renminbi cash could not be carried out of China. However，China issued policy documents that permitted small amounts to be taken beyond the nation's borders – in 1957 that was set at 5 yuan and in 1987 that was raised to 200 yuan.

The deepening of the reform and opening-up program promoted China's interchanges with the rest of the world，and that required further relaxation of restrictions on the use of the currency by individuals. As of February 1993，Chinese citizens and foreigners were permitted to carry 6,000 yuan across the border when they entered or exited China. Trade in small amounts was also allowed in borders areas. In January 2005，the quota for renminbi carried in and out of China was raised to 20,000 yuan.

As cash renminbi was permitted outside of China，the need for currency exchange and deposit-taking services arose. Without official channels of financial services，underground transactions thrived. Smuggling and money laundering were of particular concern.

The Renminbi and Border Trade Settlement

Border trade，which includes small-scale border trade and foreign engineering contracting，has expanded rapidly since economic reforms got under way.

The renminbi，which has long been accepted by neighboring countries for payment and settlements，has been seen as a hard currency in some regions. Since border trade has been dominated by small-scale business exchanges，it is often inconvenient to use high-value currencies such as the US dollar to settle accounts. Many neighboring countries still lack US dollars or restrict the use of the currency for this kind of trade. At the same time，compared with the domestic currencies of neighboring countries，the renminbi has held relatively stable. That in turn has spurred market demand for the renminbi in these kinds of transactions.

In view of these market developments，in March 2003，the State Administration of Foreign Exchange (SAFE) issued a policy document stating that domestic institutions could use the renminbi for pricing purposes in import and export contracts. However，actual settlements would be in equivalent foreign exchange. In September 2003，SAFE issued further documents allowing the use of renminbi-denominated settlements for import and export verification in border trade，permitting foreign trade institutions to open special accounts for renminbi border trade settlement at banks within China's border areas，and to handle funds under border trade settlement accounts. Meanwhile，banks in the border areas were encouraged to establish correspondent banking relations with commercial banks in the border areas of neighboring countries in order to open direct bank settlement channels and to increase the renminbi's value against the currencies of neighboring countries.

The above policies have played a positive role in promoting the use of local currency in denomination for settlement. However，due to the lack of legal trade channels and higher transaction costs，the border areas are still dominated by the "street banks" or unofficial means of conversions.

Hong Kong's Pilot Individual Renminbi Business

The use of renminbi in Hong Kong has had a long history. Since there was no channel for remittances initially，renminbi in Hong Kong and Macao was mainly for cash transactions. However，the lack of a supervisory role for the banking system，facilitated money laundering and smuggling. In late 2001， Hong Kong authorities raised the issue of renminbi business in the Special Administrative Region of China. In 2003，the Chinese mainland and Hong Kong signed the Closer Economic Partnership Arrangement，laying a solid foundation for cooperation in the use of the renminbi. In November 2003，the People's Bank of China announced that it would provide clearing arrangements for banks in Hong Kong handling renminbi deposits，exchange，bank cards and remittances for individuals. The launch of bank card business has helped drive Union Pay's effort to "go global" and it has quickly leapt to the top position in global card issuance.

China has strictly followed the principle of "one country，two systems" and that guarantees broad freedoms for Hong Kong's financial system，including the right to maintain a separate currency. Under this framework，the selection of clearing banks for renminbi business clearing banks and the signing of a clearing agreement，the management requirements for handling individual renminbi business were  transmitted to Hong Kong in a market-oriented manner. This helped renminbi business for individuals get off to a smooth start. Since then，the quota for this business has been gradually relaxed. In August 2004，following the path for Hong Kong，the People's Bank of China officially provided clearing arrangements for the launch of bank renminbi business for individuals in Macao.

Cross-border Trade Unveiled

The internationalization of the renminbi got its start after the outbreak of the international financial crisis in 2008. In July 2009，renminbi settlement for cross-border trade got under way in Shanghai，Guangzhou，Shenzhen，Zhuhai and Dongguan. By 2014，the cross-border use of renminbi under the current account had basically achieved full coverage in terms of geographical scope，items of trade and market participants. At the same time，the use of the currency for investment began to make headway. Cross-border use of renminbi on the capital account included direct investment and securities investment.

In July 2010，the monetary authorities in mainland China and Hong Kong signed a supplementary memorandum of cooperation，making clear that offshore renminbi business could be conducted in Hong Kong. In June 2011，the Hong Kong Treasury Markets Association launched the offshore renminbi spot exchange rate，which was the average of prices quoted by 15 banks. This made the offshore renminbi market pricing more transparent and provided a basis for the pricing of derivative products. It also reduced the settlement risks of renminbi foreign exchange products in Hong Kong and ushered in rapid development of the offshore renminbi market in the Special Administrative Region.

Renminbi Joins the SDR

The International Monetary Fund's Special Drawing Rights are a basket of important international currencies. In 2010，an initial assessment of the renminbi's participation in the SDR basket was made，though the renminbi was deemed to be short of requirements for admission. However，the continuous improvement of the cross-border renminbi business under pilot programs helped the Chinese currency move closer to the required standard. At the end of 2014，the Central Economic Work Conference stated that it would "steadily promote the internationalization of the renminbi." This was the first time an official document was issued stating that the internationalization of the renminbi was national strategy. Previously，it had used lower key policy references such as encouraging "cross-border circulation of the renminbi" or "cross-border renminbi business."

Despite the challenges brought by the stock and foreign exchange markets in 2015，the IMF announced at the end of November that the renminbi met its standard for "free usability" and would be added to the SDR basket. On October 1，2016，the renminbi officially joined the SDR，gaining  international recognition of its global importance. It became the fifth currency in the elite club，with a weighting of 10.92% – the third largest.

There are more than 60 foreign central banks in the world holding renminbi foreign exchange reserve assets. According to IMF statistics，the scale of renminbi foreign exchange reserves held globally as of the end of September 2018 amounted to the equivalent of US$192.5 billion，accounting for 1.80% of the global total. That was 0.73 percentage point higher than in 2016，as the sixth largest international reserve currency.

Controversies and Setbacks

The exchange rate reform of August 11，2015 surprised the market and effectively devalued the renminbi by 2% against the dollar. China suffered a reversal of capital flows and a decline in foreign exchange reserves. This prompted a further decline in the value of the currency. China adopted some temporary macro-prudential or quantitative control measures to regulate cross-border capital flows. The market thus believed that the internationalization of the renminbi had been halted，triggering a heated debate about whether the pace of internationalization in the past had been too fast.

Zhou Xiaochuan，the former governor of the People's Bank of China，said that counter-cyclical market interventions，even though employed temporarily，would ultimately have some negative impact on cross-border use of the renminbi. This was particularly true when the market was rife with speculation. Since 2015，the internationalization of the renminbi has taken a somewhat lower profile.

But overall，the opening-up of the financial market has been deepened. Since 2015，the Qualified Foreign Institutional Investor and the Renminbi Qualified Foreign Institutional Investor quotas have been expanded with the launch of the "Stock Connect" and "Bond Connect" programs. Renminbi-denominated settlement futures products were created to support domestic institutions as they  entered the domestic foreign exchange market. This also attracted overseas investment in domestic renminbi financial assets – a key advance since investment facilitation is an important part of currency internationalization. In recent years，promoting renminbi convertibility on the capital account has contributed to the internationalization of the renminbi.

Additionally，the nation's financial infrastructure has been improved. In order to integrate renminbi cross-border clearing channels and improve the efficiency of renminbi cross-border payment settlement，the People's Bank of China created the Cross-border Interbank Payment System (CIPS). In October 2015，the first phase of CIPS was successfully put into operation，and a trial run of the second phase was begun in March 2018. In addition，there has been a steady build-out of the network of offshore renminbi clearing centers and clearing banks，and more local currency swap agreements have been reached between the People's Bank of China and foreign central banks.

There also has been an improvement in the management of cross-border renminbi capital flows. The renminbi's role in international investment and financing has made headway as part of national strategy. The macro-prudential regulatory framework was put in place for cross-border renminbi business，thereby strengthening cross-border capital flow management. In addition，coordination of policies for cross-border flows of local and foreign currencies was strengthened with improved regulatory efficiency. In early 2018，the stabilization of the foreign exchange situation helped improve  the cross-border renminbi business policy was further improved to facilitate trade and investment.

More recently，we have seen a return to a neutral regulatory policy. After September 2017，authorities announced the suspension or cancellation of macro-prudential or quantitative management measures for cross-border capital flows. This so-called regulatory policy neutrality，as a micro-regulation，maintains cross-cycle stability，consistency and predictability in terms of regulatory policies and enforcement standards. This supports legally compliant capital inflows and outflows. Although the renminbi exchange rate encountered fresh challenges in the second half of 2018，only macro-prudential measures were adopted，such as foreign exchange risk preparation and counter-cyclical adjustment factors.

In the above context，the internationalization of the renminbi has gained new opportunities for development. As of the end of 2018，the total of domestic renminbi financial assets held abroad was 4.8 trillion yuan，an increase of 1.8 trillion yuan from the end of 2016. The value of renminbi denominated stocks rose 502.6 billion yuan，while bonds increased 859 billion yuan，loans climbed 308.2 billion yuan and deposits were up 143.7 billion yuan. In addition，the People's Bank of China had signed currency swap agreements with 38 foreign central banks for a total value of 3.47 trillion yuan，an increase of 309.5 billion yuan from the end of August 2015.

In terms of global payments，the renminbi's share was 2.07%，up 0.61 percentage point from the recent low and giving the currency a ranking of fifth globally. In 2018，there was a net inflow of 201.8 billion yuan under the Hong Kong and mainland "Stock Connect" programs.

Experience on the Road to Renminbi Internationalization

The internationalization of the renminbi is in line with development trends. In 2008，the subprime mortgage crisis that began in the United States evolved into a global financial tsunami，shattering the world's confidence in the dollar-based standard international monetary system. Many countries began to look for alternative international currencies. The current round of the internationalization of renminbi results from the initiative that the central bank of Republic of Korea invited the People's Bank of China to sign a currency swap agreement in local currencies at the end of 2008. The internationalization of the renminbi would not have developed to its current status had it not been for the international financial crisis.

Renminbi internationalization must also keep clearly defined boundaries between policies and markets. Only when the market and policy agree can renminbi internationalization move forward in an orderly manner.

The internationalization of the renminbi also requires internal strength，and a strong economy is the foundation of a strong currency. The experience of internationalization of the Japanese yen in the 1980s and 1990s has been instructive for Chinese authorities. In terms of policy，it is necessary to pursue a stronger domestic economy and a better financial system by improving the effectiveness of financial supervision，instead of chasing after short-term objectives for the renminbi. In addition，market-based interest rates and exchange rates are a necessity.

The internationalization of the renminbi requires greater policy coordination in regard to local and foreign currencies. As a global currency，the renminbi behaves like a foreign currency rather than a local currency. Cross-border renminbi business will affect the currency's exchange rate and foreign exchange reserves. The different regulatory policies for local and foreign currencies can encourage regulatory competition and could lead to regulatory arbitrage.

The internationalization of the renminbi is an important part of opening up the financial system but it must be carried out in a secure manner. Progress will help to build consensus but setbacks will  increase differences and policy reversals. The internationalization of the renminbi therefore requires great vision but careful implementation.

It also calls for effective capital flow management. Unlike other major international currencies，the renminbi is still not fully convertible. However，through the selection of clearing banks，the signing of clearing agreements and other market-oriented methods，regulatory requirements have been effectively transferred from the China mainland to the free market of Hong Kong. In future，both courage and wisdom，combined with technology and risk control，are necessary for the promotion of the internationalization of the renminbi.

The author is a senior researcher at China Finance 40 Forum