Since 2009 China pursues policy of the internationalization of its national currency. Renminbi is used as a primary currency for cross-border settlements between China and its core partners. With that, the effects of the global financial crisis 2009-2009 forces Chinese government to expand usage of renminbi through internationalization policy that contributes to the status of this currency at the international market in comparison to US dollar. Up to 2017, RMB internationalization has achieved significant results that were gained with OBOR initiative started in the second decade of this century. Experts conclude that the policy of the internationalization of Chinese currency affects the economy of the state and exercised influence over several other emerging economies. In turn, it is rather hard to agree that this policy produces only positive results as economists differentiate numerous adverse effects of the internationalization. Among them are complication of the domestic monetary policy, rise of the scale and volatility of the capital flow. Given this analysis, it appears the Chinese government should adopt certain plan of actions in order to promote stability at the international financial market with the use of renminbi (CIGI, 2015).
Analysis of the Internationalization Policy
Promotion of Chinese currency at the foreign markets was initiates after collapse in the United States at the real estate market resulting in financial crisis 2008-2009. The first dimension of the internationalization took form of pilot project where renminbi was used as settlement currency for cross-border state operations in Shanghai and other major cities in China. With that, the other dimension was made with deposition of renminbi (CIGI, 2015). For sure, this policy has direct influence over economy of China due to the fact that this policy was launched with a purpose to improve status of Chinese currency similarly to the position of the country (CIGI, 2015). Being the second-largest economy in the world, China intended to diminish any reliance of the advanced economies and emerging states on the use of the American dollar for international trade operations (CIGI, 2015). In addition, Chinese government desires to reduce accumulation of foreign exchange reserves with the implementation of the effective internationalization strategy (CIGI, 2015). With beginning of the realization of OBOR initiative and foundation relevant financial institutions, Chinese government succeeded to establish solid offshore RMB market and support its use as cross-border settlement currency in operations with Japan, Russia and the Middle East region (CIGI, 2015).
As for now, Chinese economy requires further liberalization and openness of its financial market in order to achieve improvement of the status of RMB at the international market. In fact, in 2015 approximately 23% of all trade operations of the country including exports and imports were settled in national currency (Chey, 2016). Moreover, RNM was values as fifth in rating currency for international payments. Following these achievements, in 2016 RMB gains status of the elite currency basket of the Special Drawing Right (Chey, 2016). Hence, the rise of renminbi-based trade operations and settlements undermined position of the American dollar and overall dominance of the United States (Chey, 2016).
Strengthening of Chinese currency forces the state bodies of the country to transform the economy, its operation and structure in support of the development occurring with the currency. It should be noted that the prospects of the further use of RMB are still not clear, while, the global companies observe instantly the state of the financial environment of the country (Kamel, 2017). The acceleration of the international use of the Chinese currency, China’s state bodies had to adjust to the Federal Reserve’s monetary policy where the use of US dollar prevailed. At the same time, the operation of three primary institutions as the People’s Bank of China, the Ministry of Finance and the Ministry of Commerce affects the internationalization of the currency and contributes to the reliance of China’s economy in views of the emerging markets (Kamel, 2017).
The effect of the internationalization on China’s economy is seen in the fact that the China’s government is looking for partnership and collaboration with other countries through signing and conclusion of the free trade agreements under which RMB should have status of the primary mean of payment. Due to the fact that the internationalization of the currency is ongoing in parallel with technological developments and transformations in the economy of the country, it is evident that this policy will accrue relevant benefits to China’s economy and its partners in full. Moreover, one should not ignore the fact that China is one of the most attractive destinations to the regional economies. This fact supports regional use and expansion of RMB as well as it increases exports to China. In addition, one should admit the fact that economy of China depends on the internationalization of the currency as well as it is clear that structural transformation of economy will continue as for now even without rapid implementation of this policy. This implies that the process of the development of the international relevance of RMB has been already started and China’s government can not terminate it on voluntary basis (Tatom, 2017).
Analysis of the available studies shows that experts do not pay enough attention to the reasons of China’s currency internationalization policy and following evaluation of the effects of this policy on China’s economy. From one perspective, internationalization will produce to China several long-term benefits as rising power and influence of the country at the international arena. In addition, the trade efficiency of China should be improved as well as there are appropriate supplementary risks as volatility and exposure to external shocks, loss of power over the flow of the domestic monetary system (Yukon Huang, 2017). In general, internationalization of China’s currency should support desire of China’s government to achieve better self-control and economic management. Besides, China’s government anticipates that maintenance of the stability of the economy of the country may be achieved with the further institutionalization of RMB at the foreign financial markets (Yukon Huang, 2017).
The other important effect of the internationalization of the currency is linked to the trade efficiency of the currency. Due to the fact that the amount of countries using RMB as settlement currency steadily rises, China succeeds to strengthen its surplus and alleviate deficit (Yukon Huang, 2017). In turn, the ongoing use of China’s currecny decreases transactions costs and asists with insulation of China (Yukon Huang, 2017). If this strategy will be continued, one may anticipate that the emerging countries in Asian region will not have to adjust to the rules developed by the United States and European Union at the financial markets as they will be able to managed arising risks with existing reserves of US dollar and EUR (Yukon Huang, 2017). Finally, internationalization of RMB is useful for China’s economy in view of the fact as it supports the motivation for further liberalization of the economy of th estate that was started with accession of the country to the WTO in 2001 (Yukon Huang, 2017).
Since the beginning of the twenty-first century, China is one of the major economic powers. Numerous emerging markets depends on the performance of this country so that China’s government invests resources in the promotion of the internationalization of RMB and expansion of its use as international reserve currency. In conclusion, the effects of the internationalization should be further considered in view of the fact that this activity of China’s government has just started attract attention of business experts.
- CIGI. (2015). Internationalization of the Renminbi Developments, Problems and Influences. Cigionline.org. Retrieved 17 December 2017, from https://www.cigionline.org
- Chey, H. (2016). Chinese trade and Renminbi internationalization. China Policy Institute: Analysis. Retrieved 17 December 2017, from https://cpianalysis.org/2016/11/16/chinese-trade-and-renminbi-internationalization/
- Kamel, M. (2017). Gaining currency: the rise of the renminbi. International Affairs, 93(4), 979-981. http://dx.doi.org/10.1093/ia/iix106
- Tatom, J. (2017). The US-China Currency Dispute: Is a Rise in the Yuan Necessary, Inevitable or Desirable?. Global Economy Journal, 7(3). http://dx.doi.org/10.2202/1524-5861.1298
- Yukon Huang, C. (2017). Does Internationalizing the RMB Make Sense for China?. Carnegie Endowment for International Peace. Retrieved 17 December 2017, from http://carnegieendowment.org/2013/09/01/does-internationalizing-rmb-make-sense-for-china-pub-53119