Executive Summary
Key insights from Xing Ziqiang’s address at the Phoenix Bay Area Finance Forum 2025 highlight critical paths for RMB internationalization.
- RMB internationalization breakthrough requires prioritizing economic fundamentals over technical instruments like stablecoins.
- Enhancing RMB asset yields is essential to attract long-term international capital and achieve a double circulation similar to the US dollar.
- Domestic reforms, including debt restructuring and consumption support, are urgent to break the low-price cycle and boost corporate profits.
- Global investors should focus on policy signals from Chinese authorities for actionable investment strategies in RMB-denominated assets.
The Core Challenge in Currency Internationalization
The journey of RMB internationalization has been a topic of global finance for over a decade, yet tangible progress remains elusive without addressing foundational economic issues. Xing Ziqiang (邢自强), Morgan Stanley’s Chief China Economist, recently underscored that technical advancements alone cannot substitute for robust economic health. His insights, delivered at the Phoenix Bay Area Finance Forum 2025, emphasize that a true RMB internationalization breakthrough hinges on deeper structural reforms. For international investors, this signals a need to look beyond short-term tools and focus on China’s economic trajectory.
Market participants often gravitate towards innovative solutions like stablecoins or real-world assets (RWA) to facilitate cross-border transactions. However, Xing notes that enthusiasm for these instruments has waned, revealing their limitations without underlying economic strength. This perspective aligns with historical precedents where currency internationalization succeeded only when backed by sustainable growth and attractive asset returns. Thus, the path to a RMB internationalization breakthrough is not paved with technology but with policy coherence and economic resilience.
Understanding the Dao Versus Shu Framework
In Chinese philosophy, ‘Dao’ (道) represents the fundamental way or principle, while ‘Shu’ (术) refers to technical tactics. Xing Ziqiang applies this dichotomy to RMB internationalization, arguing that Shu-like tools—such as digital currency initiatives—are merely supportive. The Dao, in contrast, involves correcting economic imbalances and enhancing productivity. For instance, despite China’s efforts to promote RMB usage in trade, partners hesitate without viable investment avenues for RMB holdings. This disconnect highlights why a RMB internationalization breakthrough must address the Dao first.
Xing cites the US dollar’s ascent as a benchmark, where its double circulation—both as a trade and investment currency—was bolstered by strong economic fundamentals. Similarly, for RMB, achieving a double circulation requires making Chinese assets appealing through higher yields and stability. Current challenges, like low inflation dampening returns, underscore that technical fixes are insufficient. Investors should thus prioritize monitoring reforms aimed at boosting corporate earnings, as these are pivotal for any meaningful RMB internationalization breakthrough.
Current State of RMB Internationalization
RMB internationalization has seen incremental advances, such as its inclusion in the IMF’s Special Drawing Rights basket, but broader adoption stalls amid economic headwinds. Data from the People’s Bank of China (中国人民银行) shows that RMB usage in global payments hovers around 3%, paling compared to the US dollar’s 40% share. Xing Ziqiang attributes this to structural issues within China’s economy, where asset volatility and regulatory shifts deter long-term capital. The quest for a RMB internationalization breakthrough is thus intertwined with domestic economic health.
International interest in RMB assets remains nascent, with foreign holdings of Chinese stocks and bonds growing slowly. Factors like property market corrections and equity fluctuations have heightened risk perceptions. For example, the CSI 300 Index’s volatility in 2023-2024 led many global funds to reduce exposure. Xing emphasizes that without higher and more stable returns, RMB assets cannot compete globally. This reality makes the RMB internationalization breakthrough contingent on reversing these trends through targeted policies.
Market Sentiment and Capital Flow Dynamics
Surveys from institutions like the Institute of International Finance (IIF) indicate that foreign investment in Chinese equities has plateaued, reflecting caution over yield disparities. Xing Ziqiang points out that China’s low-price cycle—a phenomenon of subdued inflation—compresses profit margins, reducing asset attractiveness. In contrast, US Treasury yields often exceed those of Chinese bonds, drawing capital away. To achieve a RMB internationalization breakthrough, China must close this yield gap through monetary and fiscal adjustments.
Recent capital flow data underscores this challenge. According to the State Administration of Foreign Exchange (国家外汇管理局), net inflows into Chinese securities have been inconsistent, with spikes only during policy easing periods. Xing argues that sustained inflows require confidence in China’s reform agenda, such as the three-step plan introduced in 2023. Investors should watch for signs of accelerated implementation, as these could catalyze the next phase of RMB internationalization breakthrough.
Economic Fundamentals as the Linchpin
The low-price cycle in China, characterized by weak consumer price growth, has direct implications for RMB asset yields. Xing Ziqiang explains that this cycle stems from overcapacity and debt burdens, which suppress corporate profitability. Breaking this cycle is essential for a RMB internationalization breakthrough, as it would elevate returns on assets like equities and bonds. For instance, if reforms boost nominal GDP growth, yields could rise, making RMB assets more compelling for international portfolios.
Reforms focused on debt restructuring and consumption stimulation are critical. Xing highlights that the 2023 three-step agenda—restructuring debt, supporting consumption, and reforming to stabilize confidence—is progressing but needs urgency. Recent economic data, such as modest retail sales growth, underscores the gap between current conditions and ideal outcomes. A RMB internationalization breakthrough depends on closing this gap through bolder action, possibly including fiscal stimulus or sectoral reforms. Investors should assess progress via indicators like industrial profit reports from the National Bureau of Statistics (国家统计局).
The Role of Corporate Profitability
Corporate earnings are a bellwether for currency strength, as higher profits attract foreign investment. Xing Ziqiang notes that Chinese firms’ profit margins have lagged due to deflationary pressures. For example, the average return on equity for CSI 300 companies dipped below 10% in 2024, compared to over 15% for S&P 500 firms. Enhancing profitability through supply-side reforms or tax incentives could spur a RMB internationalization breakthrough by improving asset appeal.
Xing suggests that policies encouraging innovation and efficiency, similar to those in advanced economies, could uplift earnings. Case studies from sectors like technology show that where China leads, such as in electric vehicles, investor interest surges. Scaling such successes requires addressing structural bottlenecks, like state-owned enterprise inefficiencies. A RMB internationalization breakthrough is feasible if reforms translate into tangible profit growth, signaling to global markets that RMB assets offer competitive returns.
Policy Imperatives and Global Implications
Xing Ziqiang’s call for larger-scale reforms resonates with broader policy discussions at forums like the Central Economic Work Conference. He stresses that incremental changes won’t suffice; instead, comprehensive measures to boost domestic demand and stabilize markets are needed. For a RMB internationalization breakthrough, policies must ensure that RMB holdings can be recycled into productive investments, mirroring the dollar’s ecosystem. This could involve deepening China’s capital markets or easing capital account controls.
International investors should track announcements from Chinese regulators, such as the China Securities Regulatory Commission (中国证监会), for clues on reform timing. Xing advocates for a holistic approach where monetary, fiscal, and structural policies align to elevate asset yields. For instance, if consumption-led growth accelerates, it could reduce reliance on exports and make RMB a more balanced international currency. The potential for a RMB internationalization breakthrough thus hinges on policy credibility and execution.
Strategic Advice for Investors
For global fund managers, positioning for a RMB internationalization breakthrough involves focusing on sectors poised to benefit from reforms. Xing recommends monitoring industries like green technology or consumer goods, where policy support may enhance returns. Additionally, diversifying into RMB bonds during periods of yield expansion could capture early gains. Tools like the Bond Connect program offer access, but success depends on economic improvements.
Xing also advises patience, as reforms may unfold gradually. Investors should use resources like the World Bank’s reports on China’s economic updates to stay informed. By emphasizing fundamentals over short-term trends, they can align with the Dao of RMB internationalization. Ultimately, a RMB internationalization breakthrough will reward those who prioritize economic indicators over technical hype.
Navigating the Path Forward
Xing Ziqiang’s analysis reaffirms that RMB internationalization is not a technical puzzle but an economic one. The emphasis on Dao—economic revitalization—over Shu—technical tools—provides a clear framework for stakeholders. As China advances its reform agenda, signs of progress in asset yields will be the true test of a RMB internationalization breakthrough. Investors and policymakers alike must collaborate to foster an environment where RMB assets shine globally.
The journey ahead requires vigilance and adaptability. By focusing on core economic drivers, China can transform RMB into a truly international currency. For now, the message is clear: prioritize fundamentals, and the breakthrough will follow. Engage with ongoing developments through reputable sources like the International Monetary Fund to make informed decisions in this evolving landscape.