Academic journal article Seoul Journal of Economics

RMB Internationalization and Its Implications for Asian Monetary Cooperation

Academic journal article Seoul Journal of Economics

RMB Internationalization and Its Implications for Asian Monetary Cooperation

Article excerpt

I. Introduction

Many international experts and authorities widely shared the view of America's inevitable decline when the global financial crisis, the worst economic crisis since the Great Depression, arose in 2008. While the U.S. has been severely buffeted by financial meltdown and economic setbacks, China has shown remarkable resilience with its steady growth trajectory. The real gross domestic product (GDP) growth rate of China recorded in 2010 was in double digits-10.4%.1 China surpassed all other advanced industrial nations except for the U.S. in overall economic size, and is now rapidly closing the gap with the U.S.

The status of the renminbi (RMB), China's currency, is not commensurate with the country's global economic prowess. When the global financial crisis revealed the inherent defects of the existing U.S. dollar-centric international monetary system, the government of People's Republic of China (PRC) initiated efforts to promote the international use of the RMB. Since then, China has taken a gradual approach in seeking the global status of the RMB.

RMB internationalization is particularly interesting because China is the first emerging market economy attempting to internationalize its currency, without full capital account convertibility, free floating exchange rate, and credible domestic financial market. People's Bank of China (PBOC) appears well aware of the difficulties inherent in the experiment of RMB internationalization. To achieve the goal of fully advanced financial market through RMB internationalization, China must surmount many daunting obstacles. Beijing will have to deal with the unintended consequences of policy actions in the course of RMB internationalization. Presently, no one can surely predict whether China's experiment is doomed to fail.

A large volume of literature on RMB internationalization exists. Some papers deal with the feasibility of RMB internationalization in light of necessary conditions for currency internationalization originally introduced by Cohen (1971) and Kenen (1983). Other papers focus on the sequencing issue-on RMB internationalization-by drawing an inference from the literature regarding the order of economic liberalization in the transition from a planned economy to a market system. Several papers also review the benefits and costs of RMB internationalization in both domestic and global contexts. Some empirical analyses have recently provided insights into the currency composition of the RMB in using settlement, investment, and foreign exchange reserves. Nonetheless, research on the issue of monetary cooperation in the regional context is limited.2 This paper intends to examine the various issues related to the emergence of the RMB as an international currency and future course of monetary cooperation in Asia.

The rest of the paper is organized as follows. Section II briefly reviews the historical experience of international currencies and draws implications for the RMB. Section III addresses some of the imperfections in the current international monetary system and the background and motivation of the recent emergence of RMB internationalization. Section IV discusses the main developments in RMB internationalization since 2009. Section V deals with the remaining issues related to RMB internationalization, such as capital account liberalization, exchange rate regime, and domestic financial market reform. Section VI highlights the implications of RMB internationalization for future Asian monetary cooperation. Finally, section VII concludes with the future prospects of RMB internationalization.

II. Historical Experiences of International Currencies

When ruminating on the future prospects of RMB internationalization, reviewing the historical experiences is helpful. This section briefly overviews the historical records of international currencies and draws the lessons and implications for the RMB.

After 1821, the monetary unit of Britain-pound sterling-was defined in terms of gold. …

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