Internationalization of the RMB

CEIC China Data Talk - April 21, 2015 Will the RMB become a global reserve currency? The answer will appear after IMF’s twice-a-decade review of the basket of currencies underlining the Special Drawing Rights (SDRs) late this year. If the IMF decides to add the RMB into the basket, the path to RMB internationalization will be very well paved. The related impact will be much greater than that of China’s participation in WTO. To push for the IMF’s endorsement of the RMB as a global reserve currency alongside a strong US dollar would certainly be a very challenging task for the RMB given the current slowdown of the China’s economy. It is expected that the RMB will face a lot of setbacks and will encounter hardships in its journey as a global currency, given China’s current domestic and international economic-political environment. As the saying goes, “good things never come easy”. We may not be able to illustrate how this great undertaking will be carried out and accomplished. Yet, there is a close relationship between the RMB money supply system and China’s foreign exchange whereby the US dollar content is very high in the money supply. We will now use foreign reserves, position of foreign exchange purchases, M1 and M2 for the estimations below. Estimates based on December 2014 statistics 1. Foreign reserves account for 67.6% of M1. If 65% of foreign reserves are US dollars, then it shows that M1 contains up to 44% of US dollars. 2. When money creation by FX position reaches 104 trillion yuan, then it is equivalent to 84.5% of M2. With the ongoing US dollar appreciation, the RMB must first maintain its stable value and appreciate at a gradual pace. Otherwise, the progress of RMB internationalization will be hindered. However, future development of the RMB will be more likely affected by political purposes as well as the prevailing international situation. Economic factors may have a much less important role to play. Contributed by the China Database Team Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. Back to Blog
21st April 2015 Internationalization of the RMB

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