Research On The Experience Of Currency Internationalization And RMB Internationalization

In the past 30 years, China has shown its economic power to the world and integrated into the world economy. Nowadays, China is the second largest economy in the world, with the biggest trade share. While RMB, which Chinese currency, is the only one without reserve status in the currencies of the world’s six largest economies. Given China’s sheer size and its rising shares of global GDP and trade, the RMB should play a more important role in global trade and finance. The internationalization of RMB was put on the agenda by the Chinese authorities after the global financial crisis of 2008 while research on the RMB internationalization and financial reforms is not enough. That is the motivation of this paper.The paper is structured as follows. Chapter 1 is the introduction. Chapter 2 provides the definition of currency internationalization. Chapter 3 presents an empirical application on the factors which decide the internationalization of a currency. Chapter 4 concludes the history of dollar and other major currencies. Chapter 5 analyzes the basic conditions and cost-benefit of the RMB internationalization. Chapter 6 shows the starting point of the RMB internationalization and its constraints. Chapter 7 proposes the RMB internationalization path and policy recommendations. Chapter 8 includes the conclusions.The main conclusions of this paper and innovative points lie in:Firstly, currency internationalization is a multi-level concept. Functional internationalization and area internationalization are the two mainly aspects. Secondly, empirical research with cross-country panel data shows that a currency’s international status is decided by economic foundation, financial development, openness of the capital account and stability of the currency value. Economic and trade foundation are base factors while financial development and capital account openness are key points. Thirdly, study of the history of major international currencies shows that they are all belong to powerful economy with well-developed financial markets and strong support of government (or central bank). We also find that international currency has strong inertia. Fourthly, the internationalization of the yen is not completely failed. Yen’s international status is compatible with its economic conditions. Fifthly, currency internationalization reflects the potential motivation of the government. Sixthly, RMB internationalization is still at the beginning point. Measuring results by composite index and functional index all indicate that the internationalization of RMB is limited, especially in the financial field. Seventhly, the constraints of RMB internationalization mainly exist in the insufficient financial foundations and the capital controls. Eighthly, RMB internationalization is unique, along with the process of financial openness and capital account liberalization. Ninthly, the internationalization of RMB should be promoted by financial reform power. Tenthly, the combination of market demand and government promotion is the best mode for the RMB internationalization.The innovation of paper includes:Firstly, the paper is conducted from the view of economic condition, financial condition and government promotion of the currency internationalization. Secondly, in the empirical analysis, we extend the function of currency from one to three. Thirdly, in order to eliminate the correlations of the variables, we use principal component analysis (PCA) method to investigate the determinant factors of the three functions of international currency. Fourthly, the paper indicates that financial factors are very important to the internationalization of RMB.