Research On The Determinants Of RMB Internationalization

The internationalization of Renminbi(RMB) is an important content in China’s expand opening up, implementing more positive opening strategy and building open economy system. In 2014, the Central Economic Working Conference regarded the steady promotion of the RMB internationalization as the main content of next step of economic work. With this background, clarifying the determinants of RMB internationalization is very important. It does not only matters on the smooth advancement of the RMB internationalization, but also relates to the building of our country’s new open economy system. However, the internationalization of RMB seeks to develop under a series of particular backgrounds such as China’s macro economy in the transition period, as well as a large developing country, internal financial system lagging behind, the liberalization of interest rates and exchange rates to a relatively lower rate, stronger capital account regulations, U.S. dollar still dominates, despite the accelerating changes of the international monetary system after the global financial crisis, slow recovery after the global economic slowdown, the development of world economy step into low-speed adjustment periods etc., determining difference from the internationalization of main currencies such as U.S. dollar, Pound sterling, Deutsche mark, Japanese yen and Euro, RMB will become international not only following the general law of currency internationalization but also showing its own unique features. In this process, the determinants of RMB internationalization will be distinct from other currencies. This paper integrates foreign and domestic theory with China’s national conditions, plan for rapid increasing of China’s economic power and boosting the internationalization of RMB as a whole, analysing the determinants of RMB internationalization from all round and multi-level based on the view of international currency’s three functions and combing the use of RMB in both public and private sectors. Then it further puts forward the stereo and multi-dimension strategy of propelling the internationalization of RMB from four aspects: macro-economy dimension, trade dimension, finance dimension and spatial dimension.This thesis follows the logic of "raising questions, analyzing and solving problems". Its research content and main conclusion are as follows.The first chapter is introduction. It mainly states the research background and significance, summarizes and comments on the existing research of the determinants of currency internationalization and RMB internationalization and puts forward the logic and contents, innovations and shortcomings of this study.The second chapter looks at the current situation and traits of the internationalization of RMB. Based on the view of the medium of exchange, unit of account, and store of value functions of an international currency, the author analyzes the current situation of RMB internationalization combining the use of RMB in public and private sectors, based on which the traits about RMB internationalization are summed up. The result shows that RMB internationalization has made great progress in recent years and starts to perform an overall international currency functions in public and private sectors. However, compared with the degree of internationalization of other major international currencies, the RMB still falls behind. There are also some unbalanced problems during the process of RMB internationalization. The outstanding performance of these problems are as follows:Firstly, the develpoment of the functions of unit of account and store of value fall behind that of medium of exchange. Secondly, the use of RMB in public sectors is less frequent than that of private sectors. Thirdly, the development degree of internal various functions in public and private sectors has been out-of-balance. Fourthly, the regional distribution of RMB internationalization has also been out-of-balance.The third chapter focuses on the determinants of RMB internationalization from the perspective of medium of exchange function, which are discussed mainly from three aspects:China’s RMB bilateral swap agreements, RMB cross-border trade settlement and RMB transactions in the foreign exchange markets.Firstly, this chapter analyses the typical fact of China’s RMB bilateral swap agreements after the global financial crisis, teases out influencing factors and run the empirical test using the panel Logit model. The results show that the possibility of signing a bilateral swap agreement with the People’s Bank of China goes up with the higher the degree of sample economies depending on trade with China, the greater economies scale and the higher level of economic development of the sample economics. The geographical distance between China and sample economies and the degree of China dependent on trade with sample economies have shown negative effects on the possibility of signing bilateral swap agreements. Sample economies which are China’s strategic partners are also more likely to become partners of the People’s Bank of China in the bilateral currency swap agreements. In addition, although the effects of the resource and energy endowment of the sample economies are not significant, the possibility of signing a bilateral currency swap agreement with China increases when a country’ resource and energy endowment are more abundant.Secondly, this paper considers the background of vertical specialization, establishes an expected profit maximization model including imported intermediate goods, analyses determinants of the RMB settlement in exports theoretically and inspect with the time series VAR model. The results of the theoretical model show that:vertical specialization, the importers’price elasticity of demand of the final product, export enterprises’production returns to scale, export market share, other final product export enterprises’s denominated currency decisions and the degree of exchange rate fluctuations all have a significant impact on the final product manufacturers’options on denominated currency. But the impact of vertical specialization depends on the form of denominated currency of imported intermediate goods. Only when the imported intermediate goods are denominated in the vehicle currency, the vertical specialization will have an impact on the settlement currency options of export. And the higher the degree of vertical specialization is, the lower the possibility is to choose the producer currency in export trade settlements. Empirical results show that:vertical specialization results in a significant negative effect on RMB settlement in exports. In addition, differences in the degree of China’s export products, export market share, RMB exchange rate spreads between onshore and offshore markets, the expectation of RMB exchange rate appreciation all significantly affect the development of the business of RMB settlement in exports. The current changes in the proportion of RMB settlement in exports are mainly caused by changes in export market share, but the negative effects brought by China’s export highly dependent on imported intermediate goods denominated in the vehicle currency in the process of integration into the global vertical specialization still can’t be ignored.Finally, based on the monetary search theory, this article analyses factors influencing RMB transactions in the foreign exchange market empirically with cross-section spatial model. The results show that:on one hand, the RMB transactions in foreign exchange market have a significant spatial spillover effect, the rising of RMB transaction size of a country’s(region’s) foreign exchange market can significantly increase RMB turnover of adjacent countries(regions) in foreign exchange market. On the other hand, the developed degree of the foreign exchange market of the sample economies, the exchange rate and the volatility of the RMB against the sample economies’ currencies and inflation differences between China and the sample economies are factors that significantly affect the size of RMB transaction in foreign exchange market. And the more a developed foreign exchange market is, the less fluctuation of the RMB against the sample economies’currencies is, and the higher the inflation differentials between China and the sample economies is, the greater the size of the RMB transaction will be. On the contrary, the RMB appreciation against the sample economies’currencies will possibly result in the decrease of the size. In addition, although trade connections tightness between China and the sample economies is not significant, its positive result means that the more close bilateral trade relationship is, the more favorable it is for RMB’s rising turnover on the corresponding market.The fourth chapter covers the determinants of RMB internationalization from the perspective of unit of account function, which are discussed mainly from two aspects: RMB as an anchor currency and RMB-denominated international bonds.Firstly, on the basis of theoretical analysis of the RMB exchange rate policy spillover channels, the determinants of the RMB becoming the anchor currency is summarized and panel data model is adopted for empirical analysis. The results show that the trade integration effect, relative trade competitiveness, the differences of trade terms shock and that of the development of domestic financial sectors among China and the sample countries(regions) have a significant impact on the exertion of RMB’s anchor currency function. In detail, the greater the effect of the trade integration is, the higher the level of China’s trade competitiveness and the development of the domestic financial sectors in China is, the more conducive the exertion of the RMB’s anchor currency function is, the impact of trade terms shock differences between China and the sample economies on RMB’s anchor function is negative. In addition, despite the fact that the impact of inflation differences is not significant, the symbol is positive, which means the higher the degree of inflation difference between China and the sample countries(regions), the more conducive to the enhancement of the impact of RMB, and that the stability of price in China will contribute to the exertion of RMB’s anchor currency function.Secondly, based on the sorting out factors influencing a currency to become a bond denominated currency, this paper establishes the econometric model of the determinants of RMB as an international bond denominated currency, and use VAR estimation method for testing. The results show that the higher the degree of RMB appreciation, the more stable the RMB exchange rate would be, the more developed China’s bond market is, and the higher China’s economic scale and the proportion of the global trade are, the larger the amount of international bond denominated in RMB will be issued. Yet the higher the short-term interest rates is, the more unfavorable it is to the promotion of the scale of RMB-denominated international bonds.In recent years, the rise of the RMB-denominated international bond scale is mainly driven by the increasing scale of China’s economy and the continuous increase of foreign trade scale, but the negative effect of the high short-term interest rates on the rise of the RMB-denominated international bond scale can’t be ignored.The fifth chapter probes into the determinants of RMB internationalization from the perspective of store of value function, which are discussed based on the world currency composition of official foreign exchange reserves.Firstly, based on the world currency composition of official foreign exchange reserves from 1965 to 2014, this thesis analyzes the changes and alternation of major global foreign exchange reserve currency pattern and the main factors promoting the change of the share of the major reserve currency in world foreign exchange reserves. The results show that the change of the shares of each currency in the world foreign exchange reserves has obvious phase characteristics; the changes of the monetary status result from the changes of the issuing countries’(regions’) economic status and the stability of currency value in each stage. At the same time, it reflects the alteration of the global economic pattern. Concretely, the economic strength, development and openness of financial markets, the stability of the currency value and the inertia effect are the main factors propelling the changes.Secondly, based on the data of the world currency composition of official foreign exchange reserves published by IMF, the paper constructs a dynamic panel data model including the RMB sample data and tests the factors affecting a currency’s share in the world foreign exchange reserves by adopting the SGMM estimation method and further analyzes the factors affecting the RMB being the reserve currency. The main conclusions are as follows:economic scale, development of financial markets, the degree of financial openness, policy and institutional quality, military strength and inertia effect of the issuing countries(regions) have positive effects. The higher the inflation rate of the issuing countries(regions), the less favorable it is to the promotion of the international status of their currencies. The stable currency is more acceptable to the international markets. For RMB, while China becomes the second largest economy in the world, it still maintains a relatively higher economic growth rate, the sustaining stability and long-term appreciation of the RMB and the strong military power will have a significant promotion effect on the status of RMB as a foreign exchange reserve currency. But the inertia effect of main reserve currency like U.S. dollar and Euro, the low level of financial development in China and the higher capital account restriction will hinder the increase of the share of RMB in the world foreign exchange reserves. Besides, continuous improving the quality of policy and institutional in China will provide a solid guarantee for RMB to become the reserve currency.The sixth chapter is conclusion and policy proposals. Firstly, the author elaborates the basic conclusions, then come up with stereo and multi-dimension strategy to promote RMB internationalization thoroughly from several dimensions of macro-economy, trade, finance and space.Innovative points of this article are listed in three aspects:Firstly, based on the three functions of an international currency, the paper analyzes the determinants of RMB internationalization systematically combining the use of RMB in both public and private sectors, which makes up for lopsided defects of emphasizing conducting researches from the perspective of one function or several functions in existing studies. Secondly, using a combined methodology of qualitative analysis and quantitative analysis, which makes up for the defect of emphasizing qualitative analysis in existing studies. Thirdly, based on the experience of international currency, combing the reality of uniqueness of the development of RMB internationalization, including the factors of space along with policy and institutional quality timely based on the consideration of economic factors will not only make up for arbitrariness of copying international experience directly, but also broaden the study dimensions of the determinants of RMB internationalization.