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The Function, Influence and Route of RMB Internationalization

Author: ZhaoRanRan
Tutor: ChenDianFa
School: Nankai University
Course: Finance
Keywords: RMB Internationalization Offshore Market Capital MarketOpenness
CLC: F832.6
Type: PhD thesis
Year: 2013
Downloads: 264
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International currency generally refers to those are widely used as settlement and contracting currency, as well as widely held by foreign countries and citizens. Similar to the domestic functions of currency, international currency serves as unit of value, exchange media and value reserve at the global level. Such functions are also a yardstick for measure to what extent the currency are already internationalized. More specifically, for the measuring internationalization purpose, it is of essence to examine the range of good trade settled in the domestic currency.Many are hoping to internationalize their currency, the motivation of which is that international currency would be of help for private sector to avoid exchange risk, and for public sector to access to low cost fund. In the meanwhile, there are also a handful of risks inherent in the process, such as new risk factor to the domestic financial market. As such, countries should balancing the cost and benefit upfront.To fuel the internationalization, the government had better identify the dispositive factor for the process. This paper examines the experiences of thriving dollar and slumped Yen. US chose a perfect timing for internationalization, properly found its central bank and provides the initial momentum for the bank acceptance, whereas Japan wrongly chose a bad timing and adopt very conservative means to motivate the international use of yen. Accordingly, the paper concludes that the drive force of the internationalization derive from international demand, determined by economy scale of the countries. Alongside this, a set of open and aggressive monetary policies would bring the internationalization home.With the accelerated development, emerging market as a whole has occupies almost50%of the world economy amount. Therefore, it is the perfect time to examine the potential of main developing countries becoming international currency. Ground on the estimation on BRICS’s currency, the paper contends that only RMB is capable of becoming main international currency in short term. In addition, the internationalization would not only benefit the issuing country, but also bring about positive external effect:it would make the asset pool for foreign portfolio manager regardless in public or private sector, more diverse.With aforesaid objective, China has already designed a roadmap for internationalize RMB. But the plan was too much focus on RMB import settlement in offshore market, therefore generating an avenue for trade firms to take advantage of appreciation expectation of RMB and arbitrage, which in turn creates substantial risk in the market. To address this problem, China has to keep RMB internationalization in line with the pace of capital market openness. This approach would also ensure the internationalization to be unfolded in a progressive manner.Beside opening capital account, the policy as to developing RMB off-shore market is of paramount importance. China has already put into place a bundle of policies that encourage the Hong Kong offshore market’s development. In short-run, London, as well as Singapore still cannot replace Hong Kong as the dominant player in terms of offshore markets. Therefore, China should maintain the Hong Kong’s status as the offshore RMB financial hub, while using Hong Kong’s financial infrastructure to facilitate other offshore markets’development.Another important influence of RMB internationalization is that IMF has been sincerely inviting RMB to join its SDR currency market. This is supposed to be an official acknowledge of RMB’s wide international use. IMF was hoping that RMB would be included in SDR in2015, but this paper suggests otherwise. Although including SDR into SDR basket would bring China a desirable investment vehicle for foreign reserve management, it would also pose substantial risk on China’s undeveloped financial market. Therefore, the benefit of accelerating internationalization of RMB would probably be outweighed by the associated risk, and thus the IMF’s tempting offer should be denied.

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CLC: > Economic > Fiscal, monetary > Finance, banking > China's financial,banking > Exchange rate,foreign financial relations
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