Econ 2130 Money and Banking The internationalization of Renminbi Wong Chak Hung ( ) Lam Man Man ( ) Chow Chun Fung ( ) Lo Chun Wang ( )

Objective To evaluate the internationalization of Renminbi: 1) As a medium of exchange 2) Benefits 3) Risks 4) Condition for further internationalization

As a medium of exchange Internationalization of RMB for government usage: –Bilateral Swap Arrangement (BSAs) –Foreign countries are allowed to interchange their domestic currencies for the purposes of reserves. (e.g. RMB in Japan) –China signed BSAs with Korea, HK, Malaysia and Belarus. –All new BSA contracts are agreed to pay RMB rather than US$.

As a medium of exchange Use of RMB for private purpose: Renminbi dominated bonds –The Asian Bond Fund second stage (ABF2) launched in 2005 –Seed money up to US$2 billion –RMB is allowed to denominate bond insurance –China also allow commercial banks to issue yuan-dominated bonds in HK

As a medium of exchange Use of RMB for private purpose: Renminbi in trade settlement and bank loans –Increased RMB circulation in China’s neighboring countries –Second largest exchange currency in HK –Legitimately exchanged in Taiwan

Benefits of RMB internationlization Avoid exchange rate risk Strengthen the international competitiveness of Chinese financial institutions Boost cross-border transactions Preserve the asset values of China’s saving Increase business for domestic financial institution

Risks of RMB internationlization Fluctuations in the international demand would complicate domestic monetary policy Increase average demand for currency will put appreciation pressure on the exchange rate Burden of responsibility: increase China’s responsibility to maintain financial stability

Condition for further internationalization of RMB China’s increasing importance in the world economy Full convertibility of RMB: increasing private use of RMB in Asia reflects the importance of Chinese economy in Asia Development of offshore market for RMB: financial transactions conducted outside China not be subjected to China’s jurisdiction

Conclusion RMB is a competitor to the US dollar China ranks the top four economy in terms of nominal GDP Greater use of RMB will be a balancing factor to global financial stability Political elements are equally important Result in increased influence of China