Paths to a Reserve Currency: Internationalization of the Renminbi and Its Implications

32 Pages Posted: 27 May 2014

See all articles by Yiping Huang

Yiping Huang

Peking University, National School of Development

Daili Wang

Peking University

Gang Fan

National Economic Research Institute, China Reform Foundation

Date Written: May 26, 2014

Abstract

In this paper we try to address the question of what could help make the renminbi (RMB) a reserve currency. In recent years, the authorities in the People's Republic of China (PRC) have made efforts to internationalize its currency through a two-track strategy: promotion of the use of the RMB in the settlement of cross-border trade and investment, and liberalization of the capital account. We find that if we use only the quantitative measures of the economy, the predicted share of the RMB in global reserves could reach 12%. However, if institutional and market variables are included, the predicted share comes down to around 2%, which is a more realistic prediction. By reviewing experiences of other reserve currencies, we propose a three-factor approach for the PRC authorities to promote the international role of the RMB: (i) increasing the opportunities of using RMB in the international community, which requires relatively rapid growth of the PRC economy and continuous liberalization of trade and investment; (ii) improving the ease of using RMB, which requires depth, sophistication, and liquidity of financial markets; and (iii) strengthening confidence of using RMB, which requires more transparent monetary policy making, a more independent legal system, and some political reforms. In general, we believe that the RMB's international role should increase in the coming years, but it will take a relatively long period before it plays the role of a global reserve currency.

Keywords: RMB internationalization, reserve currency, anchor currency, capital account openness

JEL Classification: F30, F33, F36, F42

Suggested Citation

Huang, Yiping and Wang, Daili and Fan, Gang, Paths to a Reserve Currency: Internationalization of the Renminbi and Its Implications (May 26, 2014). ADBI Working Paper 482, Available at SSRN: https://ssrn.com/abstract=2441821 or http://dx.doi.org/10.2139/ssrn.2441821

Yiping Huang (Contact Author)

Peking University, National School of Development ( email )

No. 38 Xueyuan Road
Haidian District
Beijing, Beijing 100871
China

Daili Wang

Peking University ( email )

No. 38 Xueyuan Road
Haidian District
Beijing, Beijing 100871
China

Gang Fan

National Economic Research Institute, China Reform Foundation ( email )

Beijing
China

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