RMB: Towards Internationalization

The following sections are included:

• Preface
• Contents

The following sections are included:

• Introduction
• The Implications of RMB Internationalization
• Reforms in the RMB Exchange Rate Regime and RMB Internationalization
• RMB Convertibility and RMB Internationalization
• Capital Account Liberalization and Internationalization of the RMB
• Timetable for the Internationalization of RMB
• Bibliography

The fictitious economy, as the counterpart to the real economy, is composed of both the economic activity related to the allocation of fictitious capital (mainly through financial platforms), and the resultant complexity of the various relationships arising from this activity. As a special commodity that serves as a universal medium of exchange, currency has many functions including as a measure of value, medium of exchange, means of payment, store of value, and as a world currency in the commodity economy. It plays an important role in both real and fictitious economic activity. According to the theory of the fictitious economy, we can observe the RMB exchange rate from the following six aspects.

The exchange rate arrangement is an important part of a government's exchange rate policy. It provides an institutional framework of specific measures to influence exchange rate changes. Under different exchange rate arrangements, the government should follow different rules to realize a balanced economic target, indicating the central position of the exchange rate arrangement in national exchange rate policy.

On July 19, 2010, the People's Bank of China (PBOC) announced that it would resume reform of the RMB exchange rate system. It signed the “Settlement Agreement on the Clearing of RMB Businesses in Hong Kong” on July 19 of the same year with Hong Kong's RMB Clearing Bank; Bank of China (Hong Kong) limited (BOCHK). This accelerated the process of RMB internationalization. As of 2012, banks in Hong Kong have absorbed deposits of over RMB600 billion and 76 of them are authorized to engage in RMB business. Meanwhile, the scope of RMB usage outside of China has been increasing. In 2008, China and its eight neighboring countries (e.g., Vietnam) signed a bilateral local currency settlement agreement. Many other countries have enacted laws to admit settlements and payments for trade in RMB or have adopted the RMB as a currency in their foreign reserve portfolio. From 2009 to the end of 2012, China has signed bilateral currency swap agreements with 18 countries, including South Korea, adding up to a total value of RMB1600 billion. All these achievements mark the march towards RMB “internationalization”…

The exchange rate is the tie that links a country's economy and trade with other countries. The exchange rate regime is an important part of the national economic system and an appropriate exchange rate regime is an important guarantee of a country's economic growth. RMB exchange rate reform is an extremely complicated systematic project. As an important part of China's financial system reform, it is integral to improving the socialist market economy: not only to reshape the pattern of domestic and foreign interest groups, but also to confront the many uncertainties that will follow exchange rate regime reform. Therefore, it is difficult for the designers and decision-makers of the exchange rate regime to accurately predict the target of reform before it has begun. They will need to adjust their strategies in a timely manner during the reform…

To build the exchange rate target zone, a basket of central currencies should be adopted. This would allow the RMB to accurately reflect China's foreign trade and international balance of payments, fully embodying the RMB's international purchasing power. China's foreign trade, foreign capital and foreign debt structure should be taken into consideration when choosing currencies and weightings for the basket. In the initial stage of building an exchange rate target zone, it is not proper to strictly adopt the equilibrium exchange rate as the central rate. On the one hand, China has not yet formed a platform for the equilibrium exchange rate model to be fully accepted. On the other hand, China can use a weighted currency basket to maintain the relative stability of the RMB exchange rate, smoothing the transition to a flexible exchange rate target zone. In its adjustment stage, along with expansion of the target zone, the central rate can move slowly towards the equilibrium exchange rate, based on specific circumstances, and thus drive the whole target zone. In the final stage, the central rate should increasingly approach the equilibrium exchange rate. As reform is deepened, opening-up is extended, and the socialist market economy system is improved, the present rigid structure of China's foreign exchange market and the central bank's monopoly over said market will gradually change. Ultimately the central rate of the RMB exchange rate target zone should approach the equilibrium exchange rate. Only when enterprises and banks truly become market-driven entities can the RMB exchange rate be determined based on supply–demand relationships…

The following sections are included:

• The Definition and Trend of Capital Account Opening
• The Opening-up Process of the Capital Account in China
• Strategic Analysis of China's Capital Account Openness
• Bibliography

Currency Internationalization means that the sovereign currency of a country can carry out the general functions such as being a store of value, medium of exchange and unit of account in international markets. Both Chinese and foreign scholars have deeply explored the functions which an international currency should perform. Chinn and Frankel (2005) hold that the official functions of an international currency include being an international reserve, acting as a vehicle currency to intervene in the foreign exchange market and serving as an anchor currency pegged to the home currency. Further, an international currency's private usage include replacing local currency in circulation and acting as an accounting currency and invoicing currency in international trade and international financial transactions. All these official and private uses can in fact be generalized under the concept of a “vehicle currency”. According to the definition given in the The New Palgrave Dictionary of Money and Finance, a vehicle currency is a medium currency for pricing, conducting foreign trade and making international capital transactions. It has three functions of a traditional currency: being a unit of measure, a medium of exchange and a store of value. In fact, the internationalization of the RMB is the process of gradually making the RMB a vehicle currency commonly used in the world…

The following section is included:

• Index