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Internationalization of the RMB and Historical Precedents

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  • Frankel, Jeffrey

    ()
    (Harvard University)

Abstract

The possibility that the renminbi may soon join the ranks of international currencies has generated much excitement. This paper looks to history for help in evaluating the factors determining its prospects. The three best precedents in the twentieth century were the rise of the dollar from 1913 to 1945, the rise of the Deutsche mark from 1973 to 1990, and the rise of the yen from 1984 to 1991. The fundamental determinants of international currency status are economic size, confidence in the currency, and depth of financial markets. The new view is that, once these three factors are in place, internationalization of the currency can proceed quite rapidly. Thus some observers have recently forecast that the RMB may even challenge the dollar within a decade. But they underestimate the importance of the third criterion, the depth of financial markets. In principle, the Chinese government could decide to create that depth, which would require accepting an open capital account, diminished control over the domestic allocation of credit, and a flexible exchange rate. But although the Chinese government has been actively promoting offshore use of the currency since 2010, it has not done very much to meet these requirements. Indeed, to promote internationalization as national policy would depart from the historical precedents. In all three twentieth-century cases of internationalization, popular interest in the supposed prestige of having the country’s currency appear in the international listings was scant, and businessmen feared that the currency would strengthen and damage their export competitiveness. Probably China, likewise, is not yet fully ready to open its domestic financial markets and let the currency appreciate, so the renminbi will not be challenging the dollar for a long time. We begin, however, by asking: What is international currency status, and why does it matter?

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Bibliographic Info

Article provided by Center for Economic Integration, Sejong University in its journal Journal of Economic Integration.

Volume (Year): 27 (2012)
Issue (Month): ()
Pages: 329-365

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Handle: RePEc:ris:integr:0576

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Web page: http://econo.sejong.ac.kr/
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  1. Arvind Subramanian, 2011. "Renminbi Rules: The Conditional Imminence of the Reserve Currency Transition," Working Paper Series WP11-14, Peterson Institute for International Economics.
  2. Dominguez, Kathryn M & Frankel, Jeffrey A, 1993. "Does Foreign-Exchange Intervention Matter? The Portfolio Effect," American Economic Review, American Economic Association, vol. 83(5), pages 1356-69, December.
  3. Barry, Eichengreen, 2011. "The renminbi as an international currency," Journal of Policy Modeling, Elsevier, vol. 33(5), pages 723-730, September.
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  10. Arvind Subramanian, 2011. "Eclipse: Living in the Shadow of China's Economic Dominance," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 6062.
  11. Shinji Takagi, 2011. "Internationalising the yen, 1984-2003: unfinished agenda or mission impossible?," BIS Papers chapters, in: Bank for International Settlements (ed.), Currency internationalisation: lessons from the global financial crisis and prospects for the future in Asia and the Pacific, volume 61, pages 75-92 Bank for International Settlements.
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Cited by:
  1. Arvind Subramanian & Martin Kessler, 2012. "The Renminbi Bloc is Here: Asia Down, Rest of the World to Go?," Working Paper Series WP12-19, Peterson Institute for International Economics, revised 2013.

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