Does Internationalizing the RMB Make Sense for China

Abstract

The last time a Chinese currency was used as an international medium of exchange was four centuries ago, when China’s share of global GDP in PPP terms was nearly 30 percent (about twice its cur-rent level), the country was a major global trading power, and Chinese copper coins circulated throughout East Asia to India and even beyond (Horesh 2011). In the following centuries, silver dol-lars and paper bills replaced copper coins and China’s share of exter-nal trade declined. Now, with China’s return to the position of largest global trader and second-largest economy in the world, it is not surprising that discussion of internationalizing China’s currency has resumed. Since the onset of the 2008 global financial crisis, China has taken a series of steps to promote internationalization of the renminbi (RMB). Some observers have taken the financial crisis and weak recovery of Western economies as an argument that the RMB should in the foreseeable future equal, or eclipse, the dollar as the dominant international reserve currency. But despite a number of significant initiatives to increase use of the RMB externally, RMB international-ization is still in its early stages. The starting gun for serious discussion of RMB internationaliza-tion can be dated to March 2009, when People’s Bank of China Governor Zhou Xiaochuan called for reform of the international

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