Research Of Currency Substitution In The Process Of RMB Regionalization

The international financial crisis has made people realize that the world economy has profound changed, the center of world economic is gradually shifting to Asia. China has increased its position in the international arena as one of the major economies in Asia. China takes the initiative to develop an open economy, actively promotes regional economic integration and monetary and financial cooperation in the Asian region. The rapid development of RMB settlement of cross-border trade and foreign direct investment, expands the use and circulation of RMB in neighboring countries and regions, especially in some Southeast Asian countries.In the process of regionalization of RMB, inevitably there will be substitution of RMB to foreign currencies. With China’s rapid growth of economic, the international competitiveness of RMB has gradually increased. Therefore, what we research is the substitution of RMB to foreign currencies. The substitution not only happens in China but also in the process of RMB regionalization to substitute currencies of other countries. As the balance of RMB outside China is difficult to accurately measure, we research the RMB substitution in China on the basis of the Money Demand Portfolio Theory of David T. King (1978). We find that the economic factors of China inflation, the real effective exchange rate and real gross domestic Product have important impacts on the substitution degree. Then, respectively, from the perspective of seigniorage, monetary policy, the domestic financial markets and balance of payments, the substitution has both positive and negative effects on Chinese economy. Lastly, we put forward policy recommendations to further promote the regionalization of RMB.