Econ 2130Econ 2130Money and BankingMoney and Banking

The internationalization of RenminbiThe internationalization of Renminbi

Wong Chak Hung (10005560)

Lam Man Man (10005552)

Chow Chun Fung (09012532)

Lo Chun Wang (10004084)

ObjectiveObjective

To evaluate the internationalization To evaluate the internationalization of Renminbi:of Renminbi:

1) As a medium of exchange1) As a medium of exchange2) Benefits2) Benefits3) Risks3) Risks

4) Condition for further internationalization4) Condition for further internationalization

As a medium of exchangeAs a medium of exchange

Internationalization of RMB for Internationalization of RMB for government usage:government usage:– Bilateral Swap Arrangement (BSAs)Bilateral Swap Arrangement (BSAs)– Foreign countries are allowed to interchange Foreign countries are allowed to interchange

their domestic currencies for the purposes of their domestic currencies for the purposes of reserves. (e.g. RMB in Japan)reserves. (e.g. RMB in Japan)

– China signed BSAs with Korea, HK, Malaysia China signed BSAs with Korea, HK, Malaysia and Belarus.and Belarus.

– All new BSA contracts are agreed to pay RMB All new BSA contracts are agreed to pay RMB rather than US$.rather than US$.

As a medium of exchangeAs a medium of exchange

Use of RMB for private purpose:Use of RMB for private purpose:

Renminbi dominated bondsRenminbi dominated bonds– The Asian Bond Fund second stage (ABF2) The Asian Bond Fund second stage (ABF2)

launched in 2005launched in 2005– Seed money up to US$2 billionSeed money up to US$2 billion– RMB is allowed to denominate bond insuranceRMB is allowed to denominate bond insurance– China also allow commercial banks to issue China also allow commercial banks to issue

yuan-dominated bonds in HKyuan-dominated bonds in HK

As a medium of exchangeAs a medium of exchange

Use of RMB for private purpose:Use of RMB for private purpose:

Renminbi in trade settlement and bank Renminbi in trade settlement and bank loansloans

– Increased RMB circulation in China’s Increased RMB circulation in China’s neighboring countriesneighboring countries

– Second largest exchange currency in HKSecond largest exchange currency in HK– Legitimately exchanged in TaiwanLegitimately exchanged in Taiwan

Benefits of RMB internationlizationBenefits of RMB internationlization

Avoid exchange rate riskAvoid exchange rate risk

Strengthen the international Strengthen the international competitiveness of Chinese financial competitiveness of Chinese financial institutionsinstitutions

Boost cross-border transactionsBoost cross-border transactions

Preserve the asset values of China’s Preserve the asset values of China’s savingsaving

Increase business for domestic financial Increase business for domestic financial institutioninstitution

Risks of RMB internationlizationRisks of RMB internationlizationFluctuations in the international demand Fluctuations in the international demand would complicate domestic monetary would complicate domestic monetary policypolicy

Increase average demand for currency will Increase average demand for currency will put appreciation pressure on the exchange put appreciation pressure on the exchange raterate

Burden of responsibility: increase China’s Burden of responsibility: increase China’s responsibility to maintain financial stabilityresponsibility to maintain financial stability

Condition for further Condition for further internationalization of RMBinternationalization of RMB

China’s increasing importance in the world China’s increasing importance in the world economyeconomy

Full convertibility of RMB: increasing private use Full convertibility of RMB: increasing private use of RMB in Asia reflects the importance of Chinese of RMB in Asia reflects the importance of Chinese economy in Asiaeconomy in Asia

Development of offshore market for RMB: Development of offshore market for RMB: financial transactions conducted outside China financial transactions conducted outside China not be subjected to China’s jurisdictionnot be subjected to China’s jurisdiction

ConclusionConclusionRMB is a competitor to the US dollarRMB is a competitor to the US dollar

China ranks the top four economy in terms China ranks the top four economy in terms of nominal GDPof nominal GDP

Greater use of RMB will be a balancing Greater use of RMB will be a balancing factor to global financial stabilityfactor to global financial stability

Political elements are equally importantPolitical elements are equally important

Result in increased influence of ChinaResult in increased influence of China