IEMS Newsletter - Jun 2015 - page 1

Issue
Internationalization of the renminbi (RMB)
is China’s long-term strategy aimed at creating
a stable international monetary environment
for its own economic development. Its goal
is for Chinese and non-Chinese alike to use
the RMB for trade, lending, borrowing, and
investing internationally. One consequence
of this is that Chinese citizens can use the
RMB to buy and sell goods and services,
and to borrow and lend internationally. This
can minimize Chinese currency risk in trade
and financial transactions and minimize
the chance of balance of payment crises
occurring in China caused by speculative
attacks on the RMB. Developing countries,
which usually cannot borrow in their own
currency, are vulnerable to such crises, which
have been termed “original sin” by Barry
Eichengreen. The Asian Financial Crisis of
1998 is a good example of such a crisis,
with China unaffected mainly because of its
capital controls. However, China is under
pressure to liberalize its capital account and
allow freer flows of capital as it tries to raise
its international influence.
The use o f RMB f o r i n t e r na t i ona l
transactions is an important measure to
resolve the “original sin” issue. Additional
benefits of RMB internationalization to
China are enhanced political influence, the
ability to extract seigniorage (issuing RMB
to foreigners in exchange for real goods),
and the ability to borrow large amounts from
abroad cheaply in China’s own currency.
Under the current international monetary
system (IMS), the USD is the dominant
invoicing, investment, and reserve currency in
the world. The system is highly asymmetric,
in the sense that most countries want to
maintain a stable exchange rate with the
USD by intervening in the foreign exchange
market, while the US does not need to
worry about the value of its own currency
relative to others. For this reason, like many
developing countries, China’s RMB was
pegged to the USD in the 1980s, 1990s, and
2000s, and nowadays is still closely tracking
the USD (though the peg is a “crawling”
one). As a result of such pegging, China’s
central bank accumulated a huge amount
of USD assets (a substantial percentage of
3.8 trillion USD worth of foreign reserves
in January 2014 was in USD). Any drastic
depreciation of the USD can lead to huge
losses to China.
In order to escape from the above-
mentioned “dollar trap”, China advocates
JUNE
2015
THOUGHT
LEADERSHIP
BRIEF
No.9
1
Close Up of 100 Yuan Note by David Dennis
BY-NC-SA 2.0
Renminbi
Internationalization:
The Prospects of China’s Yuan as
the Next Global Currency
Edwin L.-C. Lai
KEY POINTS
Establishing offshore RMB
markets with the help of
government policy is crucial to
international RMB usage.
There is still a large gap between
the potential and actual use of
RMB outside of China, despite
dramatic increases in RMB bank
deposits, RMB-denominated
bonds issued, the percentage of
China’s trade settled in RMB, and
the foreign exchange turnover
share of the RMB.
China needs to relax its
capital controls, allow more
convertibility of the RMB, and
reform its financial sector much
more deeply in order to provide
incentives for people outside
China to use RMB.
Fundamentally, the
internationalization of the
RMB should be regarded as
a consequence of financial
development, rather than
than a goal to be pursued
independently.
1 2,3,4
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