Abstract
As the world’s second largest economy, largest trading nation, and the largest foreign holder of United States (US) government bonds, the People’s Republic of China (PRC) needs a currency with international status that can match its economic status in the global economy. However, sequencing is important. Before the internationalization of the yuan can make meaningful progress, necessary conditions, such as the existence of deep and liquid financial markets, a flexible exchange rate and interest rates responsive to market conditions must be created.
The process of yuan internationalization essentially is a process of capital account liberalization. Due to the unprecedented and complex global financial crisis and the PRC’s huge imbalances, capital account liberalization has to be pursued in a cautious way. As a result, the internationalization of the yuan is bound to be a long-drawn process.
The PRC’s road map for the internationalization of the yuan is flawed with many missing links and wishful thinking. Yuan internationalization guided by the current road map may prove to be counterproductive.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
Unfortunately, the assumption is likely wrong. With the yuan as invoicing and settlement currency, the appreciation of the yuan will lead to the loss of market shares by the PRC exporters and hence the reduction of exports anyway.
- 2.
Seigniorage amounts to the return on the extra assets (real and financial) that a country is able to acquire because of the external holdings of its currency, less the interest paid on the assets in which the foreigners invest their holdings and less any extra administrative costs arising from the international role of its money (Pearce 1981: p. 389).
- 3.
Eichengreen and Flandreau have argued differently (2010).
- 4.
Park (2010) proposed that the PRC should follow a regional approach to the internationalization of the yuan.
- 5.
The PRC authorities have not published any formal documents to present the road map of yuan internationalization. However, based on available documents that are aimed at addressing operational problems with regard to yuan internationalization and talks and papers by those who are close to the decision makers, we still can have a glimpse at what is in the mind of authorities on how they are prepared to push yuan internationalization.
- 6.
Perhaps this is because the chosen settlement currency usually is the same currency for invoicing.
- 7.
Hong Kong, China institutions also created various types of yuan assets for investment.
- 8.
Or the yuan stays in Hong Kong, China to facilitate trade and financial transactions in Hong Kong, China, if the yuan is accepted to perform these functions.
- 9.
The PRC’s enthusiasm for yuan internationalization is partially a result of the disappointment for the lack progress of regional financial cooperation.
- 10.
As of the end of September 2011, deposits in Hong Kong, China reached CNY622.2 billion.
- 11.
It can be argued that if nonresidents invest in yuan assets with the yuan made available by yuan trade settlement scheme, an equivalent amount of dollar investment in the PRC will be reduced. This substitution between yuan investment and dollar investment is not very likely, because the investors are different with different motivations.
- 12.
This is the most discussed feature of asymmetry in the PRC.
References
Bloomberg News. (2010). http://www.bloomberg.com. Accessed 20 August 2010.
Chinn, M., & Frankel, J. (2005). Will the euro eventually surpass the dollar as leading international reserve currency? (National Bureau of Economic Research (NBER) Working Paper 11510). New York: NBER.
Eichengreen, B., & Flandreau, M. (2010). The Federal Reserve, the Bank of England and the rise of the dollar as an international currency, 1914–39 (Bank for International Settlements (BIS) Working Paper 328). Basel, Switzerland: BIS.
Friberg, R., & Wilander, F. (2008). The currency denomination of exports—A questionnaire study. Unpublished.
Goldberg, L. S., & Tille, C. (2008). Vehicle currency use in international trade. Journal of International Economics, 76(2), 177–192.
Grassman, S. (1973). A fundamental symmetry in international payment patterns. Journal of International Economics, 3(2), 105–116.
Ito, T. (2011). The internationalization of the RMB: Opportunities and pitfalls. In: Manuscript for CDRF–CFR Symposium, Beijing. November 1, 2011.
Ito, T., Satoshi, K., Sato, K., & Shimizu, J. (2010). Why Has the yen failed to become a dominant invoicing currency in Asia? (The National Bureau of Economic Research (NBER) Working Paper 16231). New York: NBER.
Kawai, M. (1996). The Japanese yen as an international currency: Performance and prospects. In R. Sato, R. V. Ramachandran, & H. Hori (Eds.), Organization, performance and equity: Perspectives on the Japanese economy (pp. 305–355). Boston/London/Dordrecht: Kluwer Academic Publishers.
Kenen, P. (1983). The role of the dollar as an international currency (Occasional Papers 13). New York: Group of Thirty.
Kenen, P. (2009). Currency internationalization—An overview. Manuscript. BoK–BIS Seminar on currency internationalization: Lessons from the global financial crisis and prospects for the future in Asia and the Pacific, Seoul, Republic of Korea. March 19–20, 2009.
Park, Y. (2010). RMB internationalization and its implications for financial and monetary cooperation in East Asia. China and World Economy, 18(2), 1–20.
Pearce, D. W. (1981). The Macmillan dictionary of modern economics. London: Macmillan Press Limited.
People’s Bank of China (PBOC). (2011). Financial statistic report. Beijing: PBOC.
Takagi S. (2009). The internationalization of the yen. In: Currency internationalization: Lessons from the global financial crisis and prospects for the future in Asia and the Pacific (BIS Paper No. 61) (pp. 75–85).
World Trade Organization (WTO). (2010). Press Release. PRESS/598. March 26, 2010.
Zhang, C. (2012). The development of the offshore RMB business. Presentation at ADBI–OECD Roundtable on Capital Market Reform in Asia, Tokyo. February 8, 2012.
Zhang, B., & Xu, Q. (2011). RMB internationalization in the context of exchange rate and capital account control. Unpublished (in Chinese).
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2014 Asian Development Bank Institute
About this chapter
Cite this chapter
Yu, Y. (2014). Revisiting the Internationalization of the Yuan. In: Kawai, M., Lamberte, M., Morgan, P. (eds) Reform of the International Monetary System. Springer, Tokyo. https://doi.org/10.1007/978-4-431-55034-1_5
Download citation
DOI: https://doi.org/10.1007/978-4-431-55034-1_5
Published:
Publisher Name: Springer, Tokyo
Print ISBN: 978-4-431-55033-4
Online ISBN: 978-4-431-55034-1
eBook Packages: Business and EconomicsEconomics and Finance (R0)