ABSTRACT
Through overall research on the internationalization of the RMB and review of related literature and opinions, we reach the following conclusions.
The internationalization of the RMB refers to the situation where the RMB acts as one of the major pricing, settlement, and reserve currencies in the international monetary system. Internationalization of the RMB is an event symbolic of the rise of China, and it is also an important tool as China develops its economy and plays a more important role in the world. Therefore, the internationalization of the RMB is one of the national strategies of China.
In order to describe the degree of internationalization of the RMB, we selected six indicators from the three functional areas of international currencies—international settlement, financial transactions, and official foreign exchange reserve—and produced the internationalization index of the RMB. In 2011, the index level was 0.45; by 2013 this had risen by 21.5 times, and revealed that the RMB was more accepted by the international markets. However, in the same years, the index level for the USD was 54.18, for the EUR 24.86, for the JPY 4.56, and for the GBP 3.87. Compared with these major international currencies, the RMB still has a long way to go in its internationalization.
Great progress was achieved in 2011 in the internationalization of the RMB. China expanded the experimental use of RMB as the settlement currency in cross-border trades to all the country, and the settlement volume reached 2.09 trillion yuan. The RMB foreign exchange market also put forward important innovative products. Foreign exchange optional products were introduced in 2011, which together with forward and swap products provided risk management tools for the RMB exchange market. The trading volume of the Hong Kong offshore RMB exchange market reached almost 600 billion yuan and various RMB inflow methods were introduced. China has signed currency exchange agreements with 14 national or regional currency authorities, with the total contract volume reaching 1.301,2 trillion yuan. Seven countries, Nigeria, Malaysia, South Korea, Cambodia, Belarus, Russia, and the Philippines, have included the RMB in their foreign exchange reserves.
Two important breakthroughs were realized in public policies and market developments in 2011. Several new policies were introduced to eliminate institutional obstacles to the RMB functioning as an international currency. The RMB is widely used as a settlement currency in cross-border trading. Experimental cross-border capital account transactions nominated in RMB were launched. And several foreign countries chose the RMB as one of their foreign exchange reserve currencies. As for market developments, the process of internationalization of the RMB attracted the attention of major domestic and foreign financial markets. The Hong Kong offshore RMB market developed very quickly with more products, higher trading volume, and more market participants. Meanwhile, current foreign exchange markets developed the depth of RMB products. Currency exchange businesses between the RMB and minor currencies were developed in market mechanism and trading products. All these steps forward are helpful in making the RMB an internationalized currency.
Appreciation is not a precondition of the internationalization of the RMB. Expectations of the RMB's appreciation will attract hot money inflow, which is harmful to China's economic transition and financial stability. On the other hand, the stable and balanced RMB exchange rate level helps to avoid speculative capital flows and provides the internationalization of the RMB with a strong monetary mechanism support.
Full opening of the capital account is necessary for complete internationalization of the RMB. However, in the short to mid term, modest capital control is needed to avoid overseas shocks brought about by short-term hedge capital, especially under the uncertain international economic environment. Capital account opening and internationalization of the RMB are not opposing aims but supplement each other. The Chinese government should plan its capital account opening schedule taking into account the process of RMB internationalization and other economic considerations.
The development of the offshore Hong Kong RMB market is helping to speed up the process of RMB internationalization. However, we need to pay attention to the arbitrage risks resulting from different settlement systems, different exchange rate systems, and monetary systems between the offshore and domestic markets. To remove the arbitrage risks, we need to deepen reforms of the domestic financial system.
In contrast to the recession in Western developed countries, the rise of the emerging economies, represented by the BRICS countries, has established a material base for the reform of the architecture of the international monetary system, as well as the internationalization of the RMB. The top-ranking economic aggregate and foreign trade volume, the sustainable high growth rate, and the huge foreign exchange reserves will all help in achieving the successful internationalization of the RMB.
Now the internationalization of the RMB faces three major challenges. The first challenge is the economic growth model, which relies heavily on external demands, and the current foreign trade structure, which is dominated by low value-added processing trades. The second challenge is the less developed and less market-oriented financial system in which the rigid foreign exchange rate system does harm to the independence of monetary policy, and thus makes the RMB assets less attractive in the international markets. The final challenge lies in the sluggishness of the international monetary system, which puts China in a risky external situation and causes uncertainty in RMB assets being accepted by foreign markets.
