Internationalization of the Renminbi: theory and evidence

Abstract

We investigate the possibility of the Chinese currency, Renminbi (RMB), becoming a dominant international currency. Using a 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 globalise 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 neighborhood but 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 the schedule. Further, the paper indicates that the world is perhaps heading towards an era of multiple currency reserve system whereby the RMB could play greater role in the global economy along with the USD, the euro and the Japanese yen.