On the internationalization of the Renminbi

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The issue of internationalization of the Renminbi, broadly defined as the process of allowing the Chinese currency as a currency for international payments, settlements, investments, reserves, has been extensively debated and discussed among academics, politicians, regulators and journalists. Some of them are excited about the possibility of the Renminbi soon becoming the globally accepted means of financial transactions, as there is a need for more currencies to be involved in the international monetary system, as it will strengthen the system as a whole. However, others apparently have been sceptical about that. They think that the internationalization of the Renminbi will be unlikely to be accepted by China’s trading partners because the currency still do not have critical features to be a global reserve currency such as free convertibility, market oriented interest rate mechanism and freely accessible capital markets and they doubted that the Chinese government would ease grip on the capital markets and monetary system.

However, neither side denies that the Chinese government wants to make its currency internationally important. China has the second largest trade volume in the world and it facilitates the international trade settlements with the world’s largest foreign exchange reserves. With the Renminbi as a globally accepted currency for trade settlements allowing direct transactions with trading partners, China’s international trade can become much more efficient. Furthermore, the Renminbi internationalization would also help improve the efficiency of the domestic economy. With the internationally recognised Renminbi, it would be much easier for Chinese investors to make an investment in overseas assets as there will be less concerns over multiple currency conversions, which would then help stabilizing the asset prices in the domestic stock markets and property markets by reducing excessive demands with increased access to alternative investment opportunities.

Therefore, if one wants to follow the Renminbi debate, then one needs to see what are the measures that China has taken to internationalize its currency. As of 2013, it is still true that China’s monetary and financial system is still under tight government control. However, there are some trends during the past few years that the Chinese government is experimenting with a few initiatives to make their monetary economy more open such as issuance of corporate bonds denominated in RMB since 2007, cross border trade settlements since 2009, and allowing free flow of the renminbi between individual and corporate accounts since 2010. All of such initiatives use Hong Kong as a trial platform and an off-shore centre to facilitate the cross border transactions of the renminbi.

In this manner, it can be said that the process of the Renminbi has already started. One of the most critical issues for now is to see if the cross border trade using the Renminbi in Hong Kong and other offshore financial centres is growing, which is a sign that the currency is being accepted in the international markets. This of course will not take place with the monetary policies and regulatory frameworks set for the Renminbi internationalization alone. China’s overall economic strength should continue to be improved whilst maintain economic development and political stability.