Renminbi As An International Currency
Renminbi As An International Currency
Last Updated on Monday, 24 August 2009 08:09 Written by Danny Quah Monday, 24 August 2009 08:10
An employee of the China Merchants Bank counts Chinese 100 yuan notes at a branch in Beijing, China
Bandar Seri Begawan - The global recession has placed unprecedented responsibilities on China. For the first time in the modern era the world is looking at Beijing to take the lead in reviving the global economy and in helping build a balanced and sustainable global financial system.
So far, China has responded primarily by implementing a four trillion yuan public spending package to pump prime the world's fourth-largest economy through investments in rural healthcare and public infrastructure projects. This programme is already having a marked impact on local consumer spending which, in turn, is helping resuscitate the economies of its major trading partners in Asia and in the West.
Another way China could play a bigger role in the emerging economic order would be by reshaping the international monetary system. At present, the US reigns supreme, with the US dollar as the world's primary currency for international reserves and trade. Recent decisions by Beijing suggest that China is proactively moving towards making the renminbi a truly global currency.
What would it take for the renminbi to rank among the world's major units of exchange and, eventually, match the US dollar's status as the world's foremost store of value? There is no one definition of what is required to be a reserve currency, or indeed to be a heavily traded currency, but let me suggest a few, and see how does China and the renminbi score.
The first characteristic of a truly international currency is its trustworthiness. People, companies, savers and investors need to have trust in how the currency will be managed.
The second trait is that of an enduring store of value. There has to be confidence that the policymakers will retain the value of the currency, not necessarily every day but over time, by ensuring inflation is low and the currency retains its longer-term value against other assets and versus other currencies.
The third quality of a reserve currency is its liquidity. People need to know that they can not only buy the currency when they want it but that they can sell it whenever they need. Deep capital markets are required for this. So too is convertibility. Finally, the fourth quality of a reserve currency is derived from its scale. The unit needs to be widely used as a currency of denomination for international trade.
So, a truly global legal tender is a trusted currency that is well managed, retains its value, is fully convertible, widely traded in liquid currency markets and used as a currency of denomination for international trade.
The renminbi has a long way to go before it can score highly on many of these attributes. However, once this is achieved, success will breed its own success. There will be more savings and more investments attracted into using the yuan as the reserve currency.
It is evident that China has achieved tremendous success in developing its economy and its financial system in a short space of time. Its rapid growth and huge scale suggest it is possible to move towards achieving a greater role for the renminbi.
There is a need to be bold as well as gradual bold in making clear one's aims, gradual in ensuring that the implementation process works.
This gradual and parallel approach has many components but let me highlight the key ones: First, China needs to gradually relax its capital and currency controls and, second, it should foster the development of an offshore market for trading the yuan.
Already change is evident. Witness China's recent bilateral currency swap arrangements with a range of countries. Witness also the regional swap arrangement between China, Korea, Japan and the Asean countries. Allowing the use of the renminbi in trade settlement and the issuance of yuan securities in Hong Kong are important steps.
Still, China needs to do more. It needs to create more yuan-denominated financial assets; it has to develop new financial tools to help investors manage yuan risk; and, it needs to build up cross-border financing and multi-currency platform.
Success will also require in-depth understanding and network in local and regional trade finance, especially in China and Hong Kong.
In the long-run, the renminbi is credible as a reserve currency, as one of many, and
China's rapid growth will give it an increasingly influential role in the global economy.. But institutional reforms will be needed to speed up this process.
-- Courtesy of Borneo Bulletin
Subscribe to this comment's feed
written by Seira , August 28, 2009
| < Prev | Next > |
|---|
Hot Topics of the Day
-
Education Course: Australia Much Tougher Than In The UK The courses in Australia are much tougher compared to UK. My own experience,...
-
Don't Underestimate Australian Universities I want to comment about what a writer name ‘honored' commented on the honours...
-
Australia's Postgraduate Scholarship Pay You More (1)The average entry requirement in Australian universities is not lower than...
-
Please Allow Us To Celebrate Valentine! Just a couple more days come Valentine Day. It is a day where people and the...
-
You Have To Do Honours In Australia To Understand I don't agree with the fact that honours degree is the same as masters from UK....
-
Odd Claim From "Prof Canadian" I read with interest an article on Canada Universities by Prof Canadian and I...
-
Don't Fret Over Licence Test Issue I would like to comment on an article entitled Do We Need Stunt Rider Test To...
Already, China has dethroned the US in having the most internet and mobile phone users in the world, and Shanghai knocked off Tokyo to be the world second largest stock market last month (July 2009) Its time China joins its peers in Singapore, Taiwan, HongKong & Macao, which are all highly developed and progressive economies.