Renminbi Internationalization

Renminbi Internationalization: Achievements, Prospects, and Challenges

BARRY EICHENGREEN
MASAHIRO KAWAI
Copyright Date: 2015
Pages: 388
https://www.jstor.org/stable/10.7864/j.ctt7zsvnv
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  • Book Info
    Renminbi Internationalization
    Book Description:

    Meet the next global currency: the Chinese renminbi, or the "redback." Following the global financial crisis of 2008, China's major monetary policy objective is the internationalization of the renminbi, that is, to create an inter-national role for its currency akin to the international role currently played by the U.S. dollar.

    Renminbi internationalization is a hot topic, for good reason. It is, essentially, a window onto the Chinese government's aspirations and the larger process of economic and financial transformation. Making the renminbi a global currency requires rebalancing the Chinese economy, developing the country's financial markets and opening them to the rest of the world, and moving to a more flexible exchange rate. In other words, the internationalization of the renminbi is a monetary and financial issue with much broader supra-monetary and financial implications. This book offers a new perspective on the larger issues of economic, financial, and institutional change in what will eventually be the world's largest economy.

    eISBN: 978-0-8157-2612-8
    Subjects: Business, Political Science

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Foreword
    (pp. vii-viii)
    NAOYUKI YOSHINO

    In view of the significant increase in the importance of the People’s Republic of China (PRC) in the global economy since the turn of the twenty-first century, it is not surprising that its domestic currency, the renminbi, is expected to play a major role in international trade and finance in the coming years. Indeed, the PRC has begun to promote the international use of the renminbi, as evidenced by the progress that has been made on renminbi trade settlements and on renminbidenominated bond issuance in Hong Kong, China.

    The PRC is successfully sustaining a gradual approach to making the exchange...

  4. Preface
    (pp. ix-x)
  5. 1 Introduction and Overview
    (pp. 1-24)
    BARRY EICHENGREEN and MASAHIRO KAWAI

    Internationalization of the renminbi (RMB, also known as the yuan) is one of the most contentious and widely debated aspects of economic reform in the People’s Republic of China (PRC).¹ Renminbi “internationalization”—that is, wider use of the RMB in international transactions, both commercial and financial transactions and those undertaken by central banks and other official institutions—can be understood as a natural response to the growing weight of PRC trade and investment flows in the world economy. Top PRC officials have repeatedly declared currency internationalization to be a stated goal of policy, and the People’s Bank of China and...

  6. Part I. The Context
    • 2 Will History Repeat Itself? Lessons for the Yuan
      (pp. 27-52)
      BENJAMIN J. COHEN

      There is a lot of talk about the potential role of the currency of the People’s Republic of China (PRC), the yuan, as an international currency. For many observers, internationalization is the yuan’s manifest destiny and a by-product of the PRC’s remarkable economic success. Widespread use of the yuan is confidently said to be “inevitable” (see, for example, Lee 2010; Subramanian 2011). The yuan has embarked on a Long March toward world status, reminiscent of the historic trek in the 1930s that was so pivotal in bringing the Chinese Communist Party to power in 1949. The only question, it seems,...

    • 3 How Far Can Renminbi Internationalization Go?
      (pp. 53-82)
      YU YONGDING

      Over the five years since the launch of the renminbi trade settlement scheme in 2009, renminbi internationalization has made impressive inroads. In Hong Kong, China, a renminbi offshore market has been established from which international investors have benefited greatly. Coveting the gains, many economies are trying to follow suit. Renminbi offshore markets in Singapore, Taipei, China, and some European countries have begun to take shape. However, all is not well with renminbi internationalization. Although the progress in renminbi trade settlement has more or less met market expectations, the use of the renminbi as a store of value has been lackluster...

  7. Part II. The Implications
    • 4 Global Ramifications of the Renminbi’s Ascendance
      (pp. 85-110)
      ESWAR PRASAD

      In terms of size and dynamism, the economy of the People’s Republic of China (PRC) stands out among the emerging markets. It has already become the world’s second-largest economy and is now one of the largest contributors to global growth. If the PRC continues on its present growth track, it may soon take over from the United States as the world’s largest economy. These developments have led to intense speculation that the PRC’s currency, the renminbi, will soon become one of the major international currencies.

      The potential for the renminbi to develop quickly into an international currency is not without...

    • 5 The Rise of the Redback: Evaluating the Prospects for Renminbi Use in Invoicing
      (pp. 111-158)
      HIRO ITO and MENZIE CHINN

      One of the key puzzles in international finance is why certain currencies become international currencies. “International currency” status confers both substantial privileges and burdens, although conventional wisdom places greater weight on the former. But what, exactly, is an international currency? Table 5-1 summarizes the various functions of an international currency.

      The table shows that there are several dimensions to consider in terms of the degree to which a currency fulfills the characterization of being international. Money has many roles, of relevance to different actors. Clearly, an international currency can fill some roles of money while not fulfilling others.

      With the...

    • 6 The Renminbi and Exchange Rate Regimes in East Asia
      (pp. 159-204)
      MASAHIRO KAWAI and VICTOR PONTINES

      The recent rise of the People’s Republic of China (PRC) as the world’s largest trading nation (measured by trade value) and second-largest economic power (measured by GDP) has been accompanied by the PRC’s greater economic influence over emerging economies in East Asia.¹ The dependence of these economies on the PRC through trade and investment has increased over time.

      The PRC used to peg its currency, the renminbi (RMB), tightly to the U.S. dollar, but over the ten years since 2005 it has engineered currency appreciation against the dollar by allowing a certain degree of exchange rate flexibility. The PRC shifted...

  8. Part III. The Process
    • 7 The Role of Offshore Financial Centers in the Process of Renminbi Internationalization
      (pp. 207-235)
      YIN-WONG CHEUNG

      Financial crises highlight the vulnerability of economic systems and feed on the weakness of market designs. One of the lessons from the global financial crisis of 2008–09 is the danger of building the international monetary architecture around a single dominating global currency. Specifically, the shortage of the U.S. dollar that occurred in the midst of the recent crisis has led to turmoil in the global financial market, and the resulting contraction of global liquidity has severely hampered international trade and financial transactions. The cataclysmic effects of the dollar shortage have alarmed the world that the current dollardependent international monetary...

    • 8 Regional Settlement Infrastructure and Currency Internationalization: The Case of Asia and the Renminbi
      (pp. 236-271)
      CHANGYONG RHEE and LEA SUMULONG

      Notwithstanding its success over the last decades, the international monetary system (IMS) has shown symptoms of fragility. Persistent and recurrent crises, global imbalances, volatility in exchange rates and capital flows, and the accumulation of large foreign exchange reserves are often cited as manifestations of such weaknesses. Indeed, the global financial crisis of 2008–09 revealed vulnerabilities in the IMS that led to the instability of world financial markets and the subsequent contraction of the world economy. Consequently, possible reforms to strengthen the IMS are being discussed more widely than previously, not only in academia but also in political circles.

      One...

    • 9 Are the People’s Republic of China Financial Markets Deep and Liquid Enough for Renminbi Internationalization?
      (pp. 272-308)
      PRINCE CHRISTIAN CRUZ, YUNING GAO and LEI LEI SONG

      Domestic financial market development is a key determinant of a currency’s international status (Tavlas 1990; Chinn and Frankel 2007; Forbes 2009; International Monetary Fund 2011). For a currency to be used internationally to settle financial transactions, international traders and investors must have access to a wide array of financial assets denominated in that currency. To provide such access, that country must have broad, deep, and liquid financial markets. The pace of internationalization of the People’s Republic China’s (PRC) currency, the renminbi, will be closely related to its financial market development. Moreover, to be a reserve currency the renminbi must be...

  9. Part IV. The View from the People’s Republic of China
    • 10 Paths to a Reserve Currency: Renminbi Internationalization and Its Implications
      (pp. 311-347)
      YIPING HUANG, DAILI WANG and FAN GANG

      Around mid-2008 at the height of the global financial crisis, the People’s Bank of China (PBOC) made two important decisions with regard to its currency policy: one was to significantly narrow the trading band of the renminbi–U.S. dollar exchange rate and the other was to promote the international use of the renminbi (RMB) in trade settlement, especially trade with neighboring economies. The former was similar to what the PBOC did during the Asian financial crisis to stabilize investors’ currency expectations. The latter, however, was likely motivated by the ambition to make the RMB an international currency.

      Many policymakers in...

    • 11 The Benefits and Costs of Renminbi Internationalization
      (pp. 348-376)
      LIQING ZHANG and KUNYU TAO

      The United States’ financial crisis of 2007–08 has created a new wave of discussion about the reform of the international monetary system. Once again, the U.S. dollar–centered reserve system has been strongly criticized for its exorbitant privileges, which not only cause financial instability but also give rise to inequality between rich and poor countries (Stiglitz 2009; Zhou 2009). Although various reform proposals have been repeatedly presented, such as a return to the gold standard, creation of a single world currency, special-drawing-rights-based proposals, and an improved U.S. dollar standard, many economists believe that a multipolar currency system is the...

  10. Contributors
    (pp. 377-378)
  11. Index
    (pp. 379-388)
  12. Back Matter
    (pp. 389-390)