Understanding China’s Renminbi Strategy: The Two-track Road to RMB Internationalization
Lusmägi, Sandra (2016)
Lusmägi, Sandra
Metropolia Ammattikorkeakoulu
2016
All rights reserved
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi:amk-201605188461
https://urn.fi/URN:NBN:fi:amk-201605188461
Tiivistelmä
The People’s Republic of China overtook United States as the world’s largest economy the first time in 2014 based on purchasing power parity. It is the largest trading nation and the largest holder of foreign reserves, the bulk of it being United States dollars. The PRC needs a currency with international status to match its economic status in the world economy.
What China is trying to do is unprecedented. It is the first time an emerging country seeks to establish a truly international currency where there is no link, even residual, between the reserve currency and gold. This means China’s attempt does not follow a clear pre-defined road map. The chosen strategy follows a two-track road: the use of RMB in cross-border trade settlement and the creation of an RMB offshore market. Essentially, this strategy was chosen because it allows China to maintain a closed capital account, although state officials have claimed that eventually the capital account will be opened.
China has never published a formal policy document to outline the RMB internationalization program. This means that understanding the motivation behind the internationalization requires further investigation. The most apparent reason why China activated RMB internationalization reforms in 2009 is the response to US dollar overdependence after the Global Financial Crisis. China still remains the number one foreign holder of US Treasury securities, in the long-term, RMB internationalization is believed to help China escape the dollar trap.
From a political economy point of view, having an international currency and being added to the International Monetary Fund’s Special Drawing Rights, is a symbol of status for China. Now China’s relations with the world have entered a new stage, where China is actively trying to participate in the making of international rules.
What China is trying to do is unprecedented. It is the first time an emerging country seeks to establish a truly international currency where there is no link, even residual, between the reserve currency and gold. This means China’s attempt does not follow a clear pre-defined road map. The chosen strategy follows a two-track road: the use of RMB in cross-border trade settlement and the creation of an RMB offshore market. Essentially, this strategy was chosen because it allows China to maintain a closed capital account, although state officials have claimed that eventually the capital account will be opened.
China has never published a formal policy document to outline the RMB internationalization program. This means that understanding the motivation behind the internationalization requires further investigation. The most apparent reason why China activated RMB internationalization reforms in 2009 is the response to US dollar overdependence after the Global Financial Crisis. China still remains the number one foreign holder of US Treasury securities, in the long-term, RMB internationalization is believed to help China escape the dollar trap.
From a political economy point of view, having an international currency and being added to the International Monetary Fund’s Special Drawing Rights, is a symbol of status for China. Now China’s relations with the world have entered a new stage, where China is actively trying to participate in the making of international rules.