Internationalization of the Renminbi: Theory and Evidence

We investigate the possibility of the Chinese currency, Renminbi (RMB), becoming a dominant international currency. Using qualitative analysis of the volume of trade and financial transactions, especially cross-border exchanges conducted in RMB from 1980 to 2011 as well as Beijing’s recent move to globalize its currency we found that RMB fares well as a candidate to become a dominant international currency. While China’s ‘sub-optimal’ approach in this regard has had marked success in the neighbourhood, the RMB’s global success as a reserve currency will depend on how Beijing reforms its financial system. Nevertheless, given the rapid changes in the global economy, market forces might prompt RMB’s arrival much earlier than scheduled. Further, the paper indicates that the world is perhaps heading towards an era of multiple currency reserve systems whereby the RMB could play a greater role in the global economy along with the USD, the euro, and the Japanese yen.

Authors: Islam, M. Shahidul; Bashar, Omar Khaled M R
Type: Working Paper
Year: 2012