[MUSIC] So, to help us to better understand the internationalization of the Renminbi, I'm very happy to welcome Professor Edwin Lai to talk to us about his insights into this issue. Edwin is a professor of economics at HKUST and is an expert in international economics, and has been doing research recently on the internationalization of the Renminbi and publishing commentaries on this issue. So, we're very lucky to have him. So Edwin, thank you for coming. >> Thank you. >> I wanted to start by asking you what does China really have to gain from internationalization of the Renminbi? Why is the government pushing this idea so hard? >> I think the internationalization of Renminbi is really a long term goal of China's development strategy. It's basically to create stable international environment for China's long-term economic development. So, it's goal is to make or encourage both Chinese and non-Chinese in the world to use RNB, inside and outside China for international trade or international investment for trade settlement, for denomination of financial assets that involve China. So basically that is what we mean by internationalization of RNB. >> Why does it matter if the Chinese producers or consumers, whether the transactions are done in Renminbi versus US dollars, let's say? And what's really the benefit? >> Right, you mentioned US dollars, a very good point because right now in the international monetary environment, the US dollar is the dominant currency for trade settlement, for invoicing trade, and for denominating financial assets. But China wants to be independent from the US dollar in the long run, because China is a large country, it's a large trading economy. It's probably going to be the largest economy in the world in the not too distant future. For example, when Chinese firms trade with foreigners, if they use RNB, then they can avoid the exchange rate risk. And also more importantly, Chinese firms and banks and government can borrow and lend in their own currency, in RNB. Which has a lot of benefits because again, because of the exchange rate risk, right? If you borrow in a foreign currency, and if your currency is subject to speculative attack, and the currency depreciates tremendously, then you owe foreigners a lot of money, and your firm may go bankrupt. So, if a lot of these firms go bankrupt, it will create a crisis for the economy. So, that is one of the most important reasons. >> So how successful has China been thus far, do you think, in reaching this goal of internationalizing the Renminbi? >> It's hard to say whether it is successful or not successful. China started from a very low base, very, very, low base. RNB was not used outside of China even before the year 2000, I would say, very rarely used outside of China. So China started from a very low base, and ever since China began to internationalize its currency, for example, trade settlement or bond issuance. They grow very fast, have very high percentage growth rate. However, in affluent terms, currently the RMB use in the world is still substantially lower than the established currencies like the Euro or US dollar, or even Great Britain Pound or even Japanese Yen. So, I would say the growth rate has been fast in the last five years or so. So that's one thing, but the absolute value, absolute level is still low. >> Yeah, so it sounds like China is going to have to be patient >> China has to be patient, definitely have to be patient. In fact, the growth slowed down in the last year or two, have in fact slowed down the pace of internationalization of RNB, as well. >> Right. What can China do to accelerate the pace? Are there things related to its institutions or its policies that are kind of preventing more people from using the Renminbi? >> Yes, I think one of the key issue is about China's capital control, or some people call it capital accountabilization. China still is still carrying out capital control. In other words, foreigners, with the whole offshore RNB, they cannot freely use the offshore RNB to buy things inside China, to buy assets or even other things. That would prevent people, that would discourage people from holding offshore RMB. But another factor, other than the capital accountabilization, would be China needs to reform its financial sector. So that its financial sector, including the banking sector, would be very well regulated. Become more competitive, more market oriented, more stable, and give people more confidence about China's financial system so that people are more willing to hold the RNB knowing that it's a stable currency. It is a trustworthy currency. They have confidence in that currency to be stable and not easily devalued. Or the political environment has to be very stable and give people the confidence about the stability of the country as a whole. >> So it sounds like, in terms of the use of different international currencies, the capital side is very important. A lot of the demand and supply for Dollars or Pounds or Renminbi is on kind of the investment side. And that really requires more developed and more open financial system. >> Yes, because eventually when, so it's about, if the cross-border use of the RNB outside of China would mean that RNB is used not just for trade settlement or invoicing, but as a store of value. And that means that people holding offdhore RNB will hold RNB denominated bonds, or RNB deposits, or become lender of RNB. So that is a big thing, right? So that is the capital side that you just mentioned. And therefore if they are holding this offshore RNB, they need to know that they can use this offshore RNB on shore. Because China is a huge economy, okay? To give you an example, if people are holding offshore US dollar. If they know that they can use this offshore US dollar and go to the US and buy US asset, buy US land, US property, they are a lot more comfortable holding US dollar. >> I see, great. Okay, thank you very much. That's been very helpful. >> Thank you. >> So, in summary, I think we've learned today that China is making rapid progress and its goal to internationalize the Renminbi, but it has really very a long way to go. And in particular there's some key institutional factors related to the financial system and the capital controls that are still preventing more rapid internationalization of the Renminbi. But I think looking forward we can be optimistic that is China goes forward with reforms in these areas and if the Chinese economy, it keeps its dominant role in the global economy, that we will see in increase in internationalization of the Renminbi going forward.