A Study On Internationalization Of The RMB

A Study on Internationalization of the RMBFor some time now, the internationalization of the RMB has been a hot topic in the field of global economics. With the globalization and liberalization of finance in the 1980s, the global circulation of private capital has accelerated greatly along with the frequent occurrence of financial crises. While many countries are seeking regional cooperation and macroeconomic stability amidst this unending stream of financial crises, they have also started to question malpractices within the current system of international currency. More doubts have arisen over the hegemony of the US Dollar. In order to strengthen the diversification of the system of global currency, some countries have proposed creating a new monetary unit defined and maintained by the IMF (Special Drawing Rights, SDR) while others have proposed raising the status of other principal currencies. Theorists have suggested that along with the Euro, English Pound, the Japanese Yen, and other global currencies, the RMB should play a more important global role.Nowadays, RMB has drawn more and more attention all over the world. Firstly, although in its international circulation the RMB has yet to achieve independent convertibility, in their peripheral trading with China, many countries are now settling their accounts in RMB. Moreover, many national governments are now keeping their reserve currency in RMB. Secondly, the value of the RMB is steadily rising. An increasing number of investors outside of China are choosing to invest in RMB assets. Thirdly, with regard to the problem of RMB exchange rate, in recent years many US congressional members have proposed classifying China as an "Exchange Rate Control Country." In 2010 Obama publicly stated that he would take a harder stance on the RMB exchange rate problem. Current realities make it clear that international society has its eyes on the RMB. Whether or not we take on an active strategy to internationalize the RMB, it is already playing a decisive role on the world stage.Historical reality indicates that the economic rise of a large country often goes hand-in-hand with the internationalization of its standard currency. An internationalized currency will bring the issuing country huge benefits. But because these benefits also come with more duties and risks, there are also many countries that are not willing to internationalize their currency. With regard to China, however, as a developing country occupying an increasingly important position in the global economy--regardless of China's national benefit--regional economic stability still depends on the demands of the reform of the system international currency. The internationalization of the RMB is an inevitable choice.The dissertation comprises eight chapters.The first chapter is introduction, in which the background of the topic, the reason to do research on this issue, the approaches and methodology of this dissertation is presented. This chapter classified and concluded the existed publications among which there are so many argument about whether the RMB is qualified to internationalizing and how to do it. The innovation and shortcomings in the present research is also presented in this chapter.The second chapter is basic theories and general analysis. Based on the monetary theory of Marxist political economy, this chapter analyses the definition and function of currency, and the meaning of currency internationalization according to currency's global function. The function of global currency is affected by the GDP, exchange rate, interest rate, development of domestic financial markets, etc. There are strict limitations on currency internationalization, the issue country should have a GDP big enough, the currency itself should play an important role in the official foreign exchange reserves, international trade settlement, and international financial settlement. Currency internationalizing has its inherent incentives, such as the seigniorage, saving of foreign exchange reserves, reducing the risk of exchange rate fluctuations and stabilizing finance. There are also prices to pay for the currency internationalization, such as the external impact to the national finance, it will be more difficult to control the macro economy, along with it is the duty to maintain the regional stability.The third chapter is the related theory of currency internationalization. The first one is currency substitution theory, which means currency internationalizing is the process of one principal currency take the place of another currency, the change of the balance between the holding of foreign currency and domestic currency is the identity of currency substitution. National income, the interest rate of foreign currency and domestic currency, foreign exchange rate and conversion cost cause the currency substitution. The second is the theory of Optimum Currency Areas. The Euro is typical, and it is a good example for RMB to realize internationalization by means of FTA, to realize regionalization before fully internationalization. The third is the Mundell and Fleming Model and Trilemma. How can we coordinate the internal and external equilibrium in an open economy? According to the IS-LM-BP model suggested by Robert A.Mundell and Fleming, we can get different combination programs of monetary policy and fiscal policy, we should make decisions among the macro economic goals, which is fixed exchange rate, independent monetary policy and no constrain of capital flow under the condition of Trilemma.The forth chapter is the necessity and feasibility analysis. We should stress the strategy of RMB internationalization. From the domestic view, it is very important for China's economic development and is also good method to avoid the financial crisis. From the global prospect, it is a review of malpractices within the current system of international currency which is under the hegemony of the US Dollar. The world needs the RMB internationalization to change the current system of international currency. RMB has some advantages, such as the growing GDP, huge international trade scale which payment is overall balanced, the value of the RMB is steadily rising; China has the world's largest foreign exchange reserves and credible solvency.The fifth chapter is the current situation of RMB internationalization. Although China's capital account is not open yet, the RMB has yet to achieve independent convertibility, the practice of RMB internationalization is has begun. From the official point of view, China has signed many Currency swap agreement under the frame of Chiang Mai Initiative, many national governments are now keeping their reserve currency in RMB. From the private point of view, RMB is in circulation among Hong Kong, Macao, Taiwan and Southeast Asian region by means of trade, investment, tourism, study, etc. RMB has played an important role in some countries.The sixth chapter is the international reference of RMB internationalization. This chapter focus on several important global currency, such as English Pound, US dollar, Euro, the Japanese Yen. By comparing the process of internationalization of these currencies, we can draw a conclusion that all the international currencies have features as follows: strong economy, successful institutional arrangement, free trade networks and the promotion of regional economic cooperation. It is positive significance of the reference and inspiration. The seventh chapter is the obstacles. RMB has little influence in the system of global foreign exchange reserve and foreign exchange market turnover; China's economic base is relatively weak and its financial market is not well-developed.The eighth chapter is the suggestions. For RMB is still not so qualified to realize fully internationalization, it is a rational choice to start with peripheral and regionalization. China should expand the settlement of RMB in the peripheral trade with neighbors, and transfer to general international trade gradually; China need to continue to improve the domestic financial market, especially the well-developed securities market, which provides diversified options for the investment of foreign holders of RMB asset; offshore financial markets should be set up to create a back and oversight mechanism for the offshore RMB; China should promote the market mechanism of RMB interest rate. It is an arduous job and there is still a long way to go for the implementation of RMB internationalization strategy.