The use of the renminbi for trade and non-trade denomination * and settlement The State Administration of Foreign Exchange (SAFE) Taskforce Published by China Economist magazine ? Abstract: The use of the renminbi for invoicing and settlement intermediaries in foreign-oriented activities is the first step and footstone of internationalization of the Chinese currency. With the appreciation of the renminbi in recent years, there has been a growth of renminbi invoicing and settlement in China?s border trades, although the overall amount is small and the development momentum is imbalanced among different regions. The main obstacles come from such factors as VAT rebate policy restrictions and foreign exchange control, insufficient financial services, and under-cultivated willingness among enterprises. Looking from the strategic perspective of strengthening macro-adjustment and enhancing the open economy, it is pressing and would be beneficial to China to promote the renminbi?s invoicing and settlement function. Therefore, following the momentum, we should accelerate the construction of a cross-border renminbi clearing system, create non-discriminative treatment in terms of VAT rebate and exchange control policies, and gradually expand the usage of the renminbi from border trades to general trades and outward investment. Keywords: Renminbi, Invoicing, Settlement, Border trade I. Introduction Since it launched the reform and opening-up policy, China has continued to lift foreign exchange controls, increasing renminbi convertibility and realigning foreign exchange controls with market forces. Meanwhile, China has increasingly merged into the process of economic globalization with a rising status in terms of comprehensive national strength, economic clout and ramification. The renminbi has gained strength amid an economic upswing. Under this background, the renminbi has become increasingly attractive in neighboring countries and regions and emerged as a medium of payment and a foreign exchange reserve currency in some regions. The renminbi has been accepted by neighboring countries and regionalized in a spontaneous way. Jumpstarting the renminbi as a currency of denomination and settlement with a conscientious rather than spontaneous effort and then pushing it to take up more functions as an international currency in international transactions have become key strategies to deepen the opening-up drive and promote sound and rapid economic development. Renminbi denomination and settlement in international transactions involve refining monetary policy control and foreign exchange control as * Team leader: Li Dongrong. Team members: Wang Yungui, Han Hongmei, Wen Jiandong, Xieduo and Liu Bin. 1 well as realizing the free convertibility and internationalization of the renminbi. This is a new topic to be addressed at the new stage of economic development and opening-up in China. Many scholars have conducted in-depth research and exploration in this area. Some scholars have analyzed the current status of renminbi circulation overseas. Jiang Boke (1994) estimated the amount of renminbi outflows during the 10 years from 1993 to 2003 and found that the cumulative amount should have reached RMB 200 billion yuan as of 2003. Wang Yafan, Guantao and Wen Jiandong (2002) made a detailed analysis of the current status and causes of the use and circulation of the renminbi in neighboring countries and regions. Li Huamin (2002) found that the renminbi has been generally accepted as a currency of payment and settlement in Vietnam, Thailand, Myanmar, the Democratic People?s Republic of Korea, Mongolia, Russia, Pakistan and Nepal; and renminbi deposits and other businesses have been accepted by countries and regions such as Bangladesh, Malaysia, Indonesia, the Philippines, Singapore and South Korea. The renminbi has also become a freely convertible currency in some developed countries where the trading prices of the renminbi against the local currencies are published daily. The accurate amount of renminbi in circulation overseas remains unknown due to statistical difficulties and a significant discrepancy existing between the statistical results estimated by different researchers. In light of China?s rising economic power, some scholars have suggested that the Chinese government should take positive measures to push the renminbi to become the world?s reserve currency in the future. Wu Nianlu (2000) proposed a timetable for the free convertibility of the renminbi under the capital account and the internationalization of the renminbi. Zhao Haikuan (2001) suggested that China should adopt a positive attitude and push the renminbi to gradually become one of the world?s reserve currencies. Li Huamin (2002) took currency internationalization as a regional extension of seigniorage and advocated boosting the international competitiveness of the renminbi and penetrating it as a strong currency into neighboring countries and regions. Zhong Wei (2002) recommended integrating the free convertibility of the renminbi under the capital account and the internationalization of the renminbi. Foreign scholars are also keenly interested in the internationalization of the renminbi. Rudiger Dornbusch, a famous economist, published an article in Germany's Mirror Weekly in 1999, predicting that the renminbi was likely to secure a dominant position in Asia in the future. In 2001, former German Chancellor Helmut Schmidt predicted that 30 years from then the world would probably have three major currencies ? the U.S. dollar, the Euro and the renminbi. Most monetary scholars and specialists adopt an optimistic attitude towards renminbi internationalization. But some scholars remain cautious and prudent on this issue. Hu Dinghe and Cheng Haiyong (1996) studied the conditions for renminbi 2 internationalization. Qiu Xiang (1999) argued that it will take time for the renminbi to become an international currency. Jing Xuecheng (2000) characterized the current circulation of the renminbi in some neighboring countries and regions as a non-institutional behavior rather than the beginning of renminbi internationalization. The issue of renminbi internationalization will be put on the agenda a long time after the renminbi has realized full convertibility. Some scholars believe that renminbi internationalization will be significantly postponed due to the lack of a complete financial market and adequate regulatory capability as well as a global financial center in China. Chen Bingcai (2001) pointed out the asymmetry of renminbi convertibility and argued that renminbi internationalization should be realized via the American approach by boosting the reputation and convertibility of the renminbi. These economists held different viewpoints on the issue of the renminbi serving as a currency of denomination and settlement in international transactions and gradually realizing regionalization and internationalization. Renminbi internationalization is defined differently under different starting points of research; different policy recommendations are made to meet different policy objectives. This is a testament to the complexity of renminbi internationalization at the present time. Renminbi internationalization is a manifestation of the structural change in China?s overall economic system. Renminbi internationalization involves redesigning China?s overall opening-up strategy and it has a direct bearing on China?s national interests. China must remain calm amid praise and applause for its economic accomplishments; conduct a meticulous and pragmatic analysis of the issue of renminbi internationalization; and come up with an overall strategy and policy recommendation that conform to its national interests. II. It is time to urgently push the renminbi as a currency of denomination and settlement Renminbi denomination and settlement are conducive to enhancing the strategy of regional cooperation and integration. China is now at the epicenter of the economic systems of its neighboring countries and regions. It provides an enormous amount of industrial manufactured goods for neighboring areas, which hold resource products required for China?s economic development. Renminbi denomination and settlement in international transactions can reduce settlement costs, overcome the capital bottlenecks facing adjacent countries and expand the scale of trade between China and its neighboring countries under a win-win solution. Renminbi denomination and settlement help mitigate the imbalance of international payments. When the renminbi is used as the currency of denomination and settlement, some of China?s trade surplus and foreign capital inflow will be denominated in renminbi, thereby helping decouple foreign exchange reserve from foreign economic and trade activity. Renminbi denomination and settlement help simplify import payment and capital outflow procedures and promote import and FDI 3 growth. The balance of international payments can be realized by encouraging capital outflows without hurting exports. Renminbi denomination and settlement help boost the status of the renminbi in the international monetary system, expand the currency?s circulation and use overseas and play a positive role in boosting the credibility of the renminbi and expanding its international influence. China is not the sole beneficiary of elevating the international status of the renminbi. The rising status of renminbi has a positive effect on improving the international monetary system and promoting global economic development. Renminbi denomination and settlement is conducive to accelerating the pace of capital market construction. Demand for renminbi will rise amid the expanding use of renminbi as a currency of denomination and settlement in international transactions. Foreign holders of renminbi will also demand value preservation and appreciation. Gradually allowing qualified overseas institutions to issue renminbi-denominated bonds and stocks in China and buy renminbi currency market instruments and capital market instruments can push forward domestic capital market openness and development. Renminbi denomination and settlement are of special significance to macroeconomic development at the present time. Under the macro-background of excess liquidity, China has taken a series of policy measures such as conducting the central bank offset operation, forming China Investment Corporation as a sovereign wealth fund, instituting the QDII system and rescinding the cap on the foreign exchange accounts of domestic institutions for current account transactions. These measures have some effects but they are limited in nature. The tone of monetary austerity was set at China?s annual Central Economic Work Conference held in December 2007. However, the current account surplus is still the major source of excess liquidity. Promoting the balance of international payments has become a focal point of tight monetary policy. Seizing the opportune moment to push for renminbi denomination and settlement is therefore conducive to changing the paradigm in which China relies on the U.S. dollar in foreign trade settlement; and mitigating the tremendous pressure from the excessive buildup of foreign exchange reserves. Renminbi denomination and settlement will become an important entry point of addressing the macroeconomic issues. Conditions are ripe for launching the renminbi as a currency of denomination and settlement. Now China has favorable internal conditions and external environment. The favorable internal conditions are that China has sustained rapid economic growth, boosted comprehensive strength, increased openness, realized full convertibility of renminbi under the current account, opened up the capital account in an orderly way and raised renminbi exchange rates. These factors have laid a solid foundation for launching the renminbi as a currency of denomination and settlement. The favorable external environment includes the fact that China?s international status has substantially risen; the renminbi has become popular in the neighboring countries and regions, in spontaneous circulation where people have subjective expectations for the renminbi to become a currency of denomination and settlement. 4 III. The current status of renminbi denomination and settlement in international transactions The renminbi has been in circulation across the borderline since the mid- to late-1990s along with the rising comprehensive strength of China and the further expansion of its foreign economic and trade activity. The renminbi has since been used as the currency of denomination and settlement in China?s border trade with neighboring countries and regions. In 2003, the State Administration of Foreign Exchange (SAFE) issued a circular allowing domestic firms to use the renminbi as the currency of denomination when they enter into import/export contracts. In 2005, the SAFE further allowed for the settlement of border trade in renminbi and the cancellation of import/export after verification. The People?s Bank of China has entered into a bilateral agreement on border trade settlement in home currency with eight neighboring countries such as Mongolia, Vietnam and Russia. Such policies have provided institutional arrangements for the renminbi to fulfill its functions as an international currency in neighboring countries and regions. The functions include denomination, settlement, circulation and store of value. The scale of renminbi denomination and settlement in international transactions has expanded steadily since 2000. (I) The renminbi is mainly used for settlement in border trade and has been in wide circulation in some border trade partner countries Our survey found that by the end of 2007, seven of the 14 countries sharing borders with China had set up renminbi and U.S. dollar settlement accounts with banks in China?s border trade areas. They are Russia, Mongolia, the Democratic People?s Republic of Korea, Kazakstan, Vietnam, Myanmar and Nepal. The amount of border trade bank settlement reached US $22.35 billion, up 53.5% from a year earlier. The amount of settlement in U.S. dollar rose 52.1% to reach US $18.38 billion, accounting for 82%; the amount of settlement in renminbi rose 52% to reach US $3.2 billion, accounting for 14%. Renminbi outflows from and inflows into neighboring countries and regions continued to rise as the scale of renminbi settlement continues to expand over time. For example, the renminbi has become one of the currencies in circulation in Mongolia and it is called the ?second U.S. dollar? by Mongolians. In 2007, Mongolian banks received RMB 3.55 billion yuan in revenue and expended RMB 4.07 billion yuan through accounts with Chinese banks, resulting in a net expenditure of RMB 520 million yuan. The annual cumulative cash transfer of renminbi totaled RMB 1.4 billion yuan. In 2007, Vietnam held approximately 1.8 billion yuan of renminbi in cash. 5 (II) Renminbi denomination and settlement are still at an initial stage characterized by development imbalance The amount of renminbi settlement is currently very small under the mechanism of spontaneous selection by market forces and in the absence of strong support by bilateral government. Regarding the spontaneous circulation of renminbi across borderlines, China and its neighboring countries do not enact any incentive policy and in most cases policy arrangements are provided after the amount of transaction has reached a substantial level on the market. Against this background, the use of the renminbi for international settlement has gained strong growth momentum but the scope of use has been very limited to border trade transactions between China?s border provinces with Vietnam, Myanmar and Mongolia. The renminbi is sometimes used in transactions with Hong Kong, Macau and Taiwan when Mainlanders travel and visit their relatives. However, the renminbi is rarely used in settlement for economic and trade transactions with Japan, South Korea and Euro-American countries. Meanwhile, the amount of transaction is far below that of any of the international hard currencies such as the U.S. dollar. The use of renminbi for international settlement is still at an initial stage characterized by development imbalance. 1. The imbalanced development of the renminbi as a settlement instrument based on cash and bank card. In the small-sum border trade, the barter trade between border residents and the general trade, renminbi settlement is mostly confined to cash payment or bank transfer. The bank card business which has emerged in recent years has enhanced the depth of the renminbi settlement business. In addition to the above instruments, domestic banks issue a limited number of renminbi-denominated letters of credit and customs bonds (or surety bonds) with China Customs designated as the beneficiary. In cross-border transactions, the renminbi has not been developed into any settlement instrument (such as collection) or trade financing tool (such as notes financing) that are closely related to modern international trade development. 2. The imbalanced use of renminbi in cross-border transactions as it is used more for trade settlement than for non-trade settlement. The renminbi is used more for settlement for trade in goods than trade in services. The use of renminbi for settlement in trade in services outgrows that for settlement in investment. In the trade in goods, the small-sum border trade is growing faster than general trade. Against the background of strong expectations for renminbi appreciation, Chinese firms have an increasing demand for using renminbi for international settlement but in practice they have rarely used renminbi for settlement due to their weak price bargaining power and state policy restriction. In general trade, the use of renminbi for denomination and settlement lags far behind that for border trade. In the order of precedence, renminbi is then used for settlement for trade in services such as travel and transportation. The use of renminbi for settlement for travel is an important part of the use of renminbi for settlement for trade in services. Hong Kong and Macau have significantly stimulated 6 renminbi spending overseas under the ?Individual Visit Scheme?; in some border and port areas travelers pay or settle accounts in renminbi but the amount of settlement is very limited. Renminbi-denominated outward foreign investment still lags behind. For example, Guangxi-based firms make direct investment in Vietnam primarily by making contributions in kind ,such as machinery and equipment, but rarely by making cash contribution. The Ministry of Commerce statistics show that by the end of 2006 there were only five registered firms investing an aggregate amount of RMB 23.17 million yuan in Vietnam. In addition, over 95% of the outward direct investment of Heilongjiang province in Russia has been made mainly by converting renminbi into a foreign currency and there are only a few ports in which such investment has been denominated in renminbi. To our knowledge, there were 26 Chinese firms that made investments in Mongolia in 2006 without the approval of the Chinese government. The contractual amount of investment totaled US $64.85 million, most of which was made in cash and in kind. Our investigation finds that the concealed foreign direct investment in renminbi is dispersed across geography and small in amount. 3. The imbalanced development of renminbi settlement in neighboring countries and regions with southern border areas outpacing northern ones. The use of renminbi for denomination and settlement is currently growing rapidly in the neighboring countries and regions, with the northern border areas lagging behind the southern areas. Our survey found that the proportion of settlement in renminbi as of 2006 reached 96%, 90%, 79% and 71% for China?s border trade with Vietnam, Myanmar, North Korea and Mongolia respectively. However, renminbi settlement accounted for only 5.43% of Sino-Nepal border trade and for virtually zero in China border trade with Russia and Kazakhstan. (III) The complex channels of cross-border renminbi circulation and the increasing backflow and settlement demand As China expands business contacts with its neighboring countries and regions, the amount of renminbi in circulation across the borderline has been on an upswing. Now the renminbi has been used through multiple channels other than border trade settlement, for example, when Mainlanders visit their relatives, make donations, carry it with themselves, travel and spend, and make investment overseas. Meanwhile, an increase in the overseas stock of renminbi has imposed urgent requirements for backflow and settlement. 1. The bank settlement channel has been put in place but the cash transaction method has greater competitive advantages. At present, the vast majority of border provinces have established the regular financial channel for renminbi settlement with neighboring countries and regions in an attempt to provide standard bank settlement services for business and individual customers. However, the financial services provided by banks have high fixed costs. The fast-growing border trade and travel and shopping business are characterized by small-sum and 7 flexible transactions. Therefore, the low-cost and convenient cash transaction method boasts greater competitive advantages. 2. Private financial channels grow rapidly and compete with regular banks for market share The large amount of renminbi in circulation across the borderline facilitates the development of private remittance and clearance channels. By leveraging their advantages such as tremendous capital strength, low commission, simple formality and real-time remittance, private financial institutions such as ?bazaar banks? handle collection directly for border traders and have become very popular among individuals and merchants in border areas. Moreover, private financial institutions have controlled the renminbi exchange rates, remittance and bank position clearance in border areas. Private channels have occupied a large market share in cross-border renminbi circulation and settlement and added tremendous pressure on regular banks for business development. IV. Major difficulties facing renminbi denomination and settlement The use of renminbi for denomination and settlement has many advantages in international transactions. Under the expectation for renminbi appreciation, some export firms have an increasing demand for the use of renminbi for denomination and settlement but in practice they have rarely used renminbi for denomination and settlement. Our survey finds that there are many factors affecting the use of renminbi for denomination and settlement. The key factors are that i) renminbi denomination and settlement do not support a tax export rebate; ii) the cross-border renminbi clearance channel is not smooth; iii) the renminbi is not fully convertible; iv) import/export firms have a weak product price bargaining power; and v) a small number of neighboring countries have a negative attitude toward the renminbi. (I) Lack of synergy in encouraging renminbi settlement amid excessive policy constraints Some taxation, customs and immigration inspection policies are still policies enacted in the era of foreign exchange shortage to encourage export and foreign exchange collection. Such policies are no longer able to meet the requirements for the changing foreign exchange supply and demand situation in China at the present time. Owing to their weak price bargaining power, the export firms face some difficulty in selecting renminbi as the currency of denomination in export. 1. The export tax rebate policy does not treat renminbi settlement and foreign exchange settlement equally. The export tax rebate is an important item to which Chinese export firms pay special attention in cost accounting and it has even become an important source of revenue that dictates whether a razor-thin profit margin firm can operate as a going concern. However, the current export tax rebate policy only applies to the international settlement currencies such as U.S. dollar and renminbi denomination and settlement do not qualify for an export tax rebate except 8 in Yunnan province. The export firms using renminbi for settlement are thus subject to tax discrimination. 2. That renminbi is not freely convertible affects the foreign holdings and backflow of renminbi. Research finds that the free convertibility of a currency is an indispensable condition for realizing the currency?s internationalization. Moderately opening the capital account to non-residents has become an important step in stimulating foreign demand for the home currency. That the renminbi is not freely convertible at the present time causes it to lack overseas liquidity and makes it theoretically impossible to guarantee its yield and security. This has directly restricted the use of renminbi for denomination and settlement in international transactions. On the one hand, foreign commercial banks cannot operate renminbi business on a massive scale and the renminbi cannot become a medium of international payment. On the other hand, foreign holders of renminbi-denominated assets cannot realize value preservation and appreciation before the renminbi capital account is fully open to non-residents. 3. The cross-border financial cooperation and exchange mechanism is incomplete. In border areas for which China has entered into bilateral agreements on settlement in home currency, the Chinese government authorities have not established a long-term cooperation and exchange mechanism in the international financial arena with the government agencies of neighboring countries. The Chinese authorities have obtained little information from border trade firms and individuals, let alone valuable and timely information. The lack of financial exchange and communication channels makes it impossible for both countries of border trade and cooperation to exchange and communicate on a timely basis with each other on the status and problem of border trade settlement in home currency. This has reduced the regulatory efficiency of both countries. 4. The foreign exchange control policy awaits further improvement. The Administrative Regulations on Foreign Exchange Control over Border Trade, issued by the State Administration of Foreign Exchange in 2003, provided policy support for renminbi denomination and settlement in border trade. However, the scope of renminbi settlement was limited solely to border trade without extending to the general trade and capital account. (II) Foreign trade firms lack a sense of renminbi denomination and settlement and their pricing power is very limited A substantial number of foreign trade firms lack a sense of renminbi denomination. The State Administration of Foreign Exchange (Guangdong) Office undertook a survey of foreign trade firms on the causes of not using renminbi for trade denomination. The survey found that 12.68% and 20.42% of import and export firms respectively were not aware of the policy that allowed them to use renminbi for trade denomination and this exerted an adverse effect on the use of renminbi for denomination and settlement. Owing to China?s low value added export product 9 structure, export firms have long been put at a disadvantageous position in foreign trade negotiation and unable to gain an upper hand in negotiation to press for renminbi denomination. In Sino-Russian border trade in goods, for instance, Russian resource products pertain to the seller?s market in which the Russians have the discretionary power in selecting the currency of settlement between the ruble and U.S. dollar. In general trade, only the manufacturers of high-tech products and electromechanical products with strong international competitiveness possess a stronger price bargaining power and a stronger demand for renminbi denomination and settlement. (III) China has yet to improve its financial services 1. Lack of a unified cross-border renminbi clearance channel. A smooth and fast clearance system is the precondition and basis for a currency to become an international settlement currency. The U.S. dollar has a repercussion felt worldwide due to its strong and efficient clearance system. A perfect clearance system can directly reduce the transaction costs of the renminbi as a medium of international payment and settlement, especially when renminbi settlement has reached a substantial level at which an imperfect clearance platform will hinder the internationalization of the renminbi. In border areas, the banks of both countries establish a one-to-one agent account relationship and use agent accounts to help customers settle payments. This method is time consuming and inefficient and as a result cannot help both parties fully offset currency positions. In some border areas, banks use other irregular financial methods to offset forex positions. To settle border trade between Guangxi and Yunnan with Vietnam, for instance, the banks have no alternative but to offset the currency position of Vietnam through the ?bazaar banks,? thereby putting regular banking business at the mercy of irregular financial institutions. 2. Regular banks are not as flexible as private financial institutions in operating cross-border renminbi settlement business. Regular banks are put at a disadvantage in competing with private financial institutions because the head office of each commercial bank prohibits its border area branches from keeping the foreign exchange position balance overnight to control exchange rate risk exposure. This practice has restricted commercial banks from expanding their home currency settlement business scale. In addition, financial institutions are heavily dependent on the U.S. dollar settlement path and not very interested in renminbi settlement business. Commercial banks have established a stable operation model in handling U.S. dollar settlement for foreign trade firms in respect to remittance and cash settlement. In the absence of a strong demand for renminbi settlement at the present stage, commercial banks are unable to garner the benefits of scale and uninterested in opening the renminbi settlement path. Furthermore, each border area bank is responsible for transporting its own cash across the borderline but its bank settlement income fails to make up for cash transport costs, making banks hesitant to operate cash business and causing a large amount of renminbi cash to escape from the regular bank system. The 10 amount of renminbi cash stored overseas can flow back only through private channels. V. Speeding up the formation of policy synergy and actively pushing for renminbi denomination and settlement The regionalization and internationalization of the renminbi has become an irreversible trend amid the increasing demand for domestic firms to use renminbi for denomination and settlement and for overseas institutions and individuals to hold renminbi. Chinese government agencies should work together to build synergy in renminbi denomination and settlement policy, thereby laying a solid foundation for the cross-border circulation and use of renminbi. (I) Establishing a cross-border renminbi payment and clearance mechanism The commercial banks of China and its neighboring countries should continue to be allowed to open home currency accounts with each other and provide bilateral settlement arrangements. Regarding the clearance mechanism, we may consider realizing cross-border payment and clearance by allowing Chinese commercial banks to serve as the agents of overseas banks under market principles. The demand of overseas banks for renminbi clearance can be carried out through their domestic agent banks in the People?s Bank of China (PBOC) payment system. Meanwhile, it is also advisable to extend the PBOC payment system to some foreign countries and regions and provide payment clearance services. In this regard, we may refer to the renminbi business clearance methods in Hong Kong and Macau. By providing cross-border renminbi payment and clearance services, the PBOC payment system enables overseas businesses and individuals to replace cash payment with wire transfer and provide an efficient clearance platform for renminbi denomination and settlement for foreign economic and trade activity in border areas. (II) Creating a policy environment for border trade firms to use renminbi for trade denomination and settlement The competent departments of the State Council should adjust their relevant policies and eliminate discrimination against renminbi denomination and settlement in respect to the border trade export tax rebate. Meanwhile, the government agencies should simplify the procedures for border trade firms to use renminbi for denomination and settlement. (III) Encouraging renminbi denomination and settlement for foreign trade and investment in border provinces We should expand the scope of renminbi denomination and settlement beyond border areas to gradually cover the general trade, service trade and foreign direct investment across border provinces; adjust export tax rebate, commodity inspection and forex collection and cancellation policies; and adopt uniform policy for renminbi denominated and settled trade and investment and foreign currency denominated and 11 settled trade and investment. (IV) Adjust the currency standard used in foreign economic and trade statistics With reference to the practices of other countries, we should use the renminbi and U.S. dollar as the dual denomination currencies in foreign trade statistics. When conditions are ripe, we should use the renminbi as the sole denomination currency in foreign trade statistics. (V) Establishing home currency trading markets in border areas China should conduct a feasibility study of establishing border trade home currency trading markets on a trial basis in border provinces to trade renminbi and the currencies of adjacent countries and facilitate the domestic and foreign commercial banks with home currency accounts opened with each other to swap currency positions and determine the benchmark exchange rates of the renminbi against the currencies of adjacent countries. (VI) Actively expanding the scope for neighboring countries to use renminbi in their economic and trade transactions with China China should establish a renminbi development fund, and increase foreign aid in renminbi so countries and regions can use it to buy goods and services from China; provide renminbi loans for the infrastructure projects of neighboring countries, and increase the economic dependence of neighboring countries on China; enact preferential policies for the importation of raw materials denominated and settled in renminbi; simplify the relevant policy procedures and encourage firms to use renminbi for foreign direct investment; allow foreign central banks or financial institutions to issue renminbi bonds through private placement and use the renminbi proceeds in making payment and clearance for their economic and trade transactions with China. References: [1]???.???????.????????1994. [2]???.????????????.??????.? 7??2000. [3]???????.????????????.??????.? 6??2000. [4]??.???????????????.??????.? 11??2001. [5]???.???????????.????.2002? 11? 4?. [6]???.????????????????????2002? 6? 21?. [7]??????. ??????????????.?????.? 5??2002. 12 [8]???.?????????????????.???.? 6??2002. [9]???.?????????????????.??????.? 3?? 2002. [10]??????.????????????.????.? 7??2002. [11]???.??????????????.??????.? 4??2002. [12]??.???????????.????.? 3??2002. [13]???.??????????????.??????.? 11??2003. [14]???.?????????.?????????.2003 [15]????.????????.??????.? 1??2000. [16]???????.?????????????? ?.http://blog.sina.com.cn/s/blog_4e0f582c01009dxb.html [17]??????????.??????????????????[M].? ???????????,2002. [18]????????.???????????????????.??? ???????????. [19]???????.????????????????.???.???? ????. [20]???.??????????????.???????.2004??? ?. [21]???.????????????????.????????2005? ?. [22]???.???????????????????.????????. 2000? ? 1? [23]???? ???.?????????.????.1996?? 1?. [24]??.?????????????.??????.1999?? 15?. [25]???.??????????????[J].????. 2001?? 5?. [26]???.??????????????.????.2002?? 8?. [27 ????.???????????????????????????. ????.2001 ?? 6 ?. [28]???. ?????????.????.2000?? 8?. [29 ]Internationalization of the Yen for the 21st Century, Japan's Response to Changes in Global Economic and Financial Environments ,April 20, 1999,www.mof.go.jp/english/if/e1b064a.htm. 13 The Editorial Department of China Economist Institute of Industrial Economics, Chinese Academy of Social Sciences (CASS) readeconomist@gmail.com chinaeconomist2006@gmail.com Tel: 86-10-88455870 14