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RMB Internationalization In The Perspective Of Institutional Change

Posted on:2016-09-21Degree:DoctorType:Dissertation
Country:ChinaCandidate:J LuFull Text:PDF
GTID:1109330503487648Subject:Political economy
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Since July 2009 when the government initiated cross-border RMB settlement, RMB internationalization has reached striking achievement. By the end of 2014, the amount of RMB cross-border settlement reached 16,000 billion yuan. The proportion of trade paid by RMB of total import and export increased to around 16%. 174 countries use RMD for cross-border settlement. The oversea RMB stock is expected to reach nearly 2,600 billion yuan. The cooperation on currency keeps developing. By the end of 2014, central banks in 28 countries signed bilateral currency swap contract with China, and the total amount of money it involves is more than 3,000 billion yuan. More than 30 central banks have incorporated RMB into its foreign exchange reserves. According to the latest report from SWIFT, RMB has become the fifth largest currency of payment. Despite the astonishing development of RMB internationalization, facing the predomination of other foreign currency such as USD, the internationalization of RMB still meet great challenges.Despite great development, facing monopoly of U.S. dollars, RMB still confront many challenge. Currently, RMB internationalization has become national strategy. To promote RMB internationalization is important to decision makers. To understand RMB internationalization, and to make RMB become global currency, we need to analyze the mechanism of RMB internationalization, the facilitating factors and hindrances.This research has two contributions. First, institutional change theory provides a fresh perspective to understand RMB internationalization and therefore help us to take effective methods facilitate RMB internationalization. On the other hand, institutional change theory has made great achievement on reforms on landownership, state enterprises, countries under transformation. Nevertheless, few research has been done on RMB internationalization from this perspective. This article is going to make up this deficiency and apply institutional change theory to RMB internationalization analysis.The first chapter makes argument why RMB internationalization can be viewed as a process of institutional change. RMB internationalization includes the extension of RMB using space, and the transformation from domestic currency to international currency which combine to produce institutional change.Over long time, China distinguishes RMB from US dollars, Euro and Japanese Yan, and constructs an institution of local currency discrimination: forbid using RMB during international trade and investment, forbid trading RMB in international formal market, and therefore limits the function of RMB as an international currency. From this local currency discrimination institution to internationalization of RMB, this change involves a series of new institutional establishments, and removing the old institutional settings. From this point of view, RMB internationalization can be viewed as a comprehensive change of institutions. Accordingly, institutional change theory is applicable to analyze RMB internationalization.Based on new institutional economics, the third chapter propose the analysis framework of perspective of effective institution. The major actors in this framework are the state and enterprises. When the state anticipates that the rewards of promoting RMB internationalization is larger than the cost, it will provide institutional settings. When the enterprises anticipate that the rewards of using RMB for international accounting is larger than the cost, enterprises will use RMB as international currency and facilitate informal institutional setting. RMB internationalization is driven by both state and enterprises.Based on that, I construct state and enterprise full information dynamics game model: the state will initiate the process by choose the best supply of formal institutional under outside restraints; after the enterprises observe the action of state, they will choose to use RMB as international currency or not. This interaction between state and enterprise will lead to four outcomes:First, in the planning economy with small size of national economy and shortage of foreign currency, the rewards of local currency internationalization is smaller than cost, and the state will choose local currency discrimination policy. The game model is going to end at this stage.Second, when it comes to market economy, as the size of economy continuously grows and foreign currency reserve accumulates, anticipated rewards of RMB internationalization is increasing and surpassing the cost. Unfortunately, under national optimal institutional supply, the rewards that enterprises will receive when they use RMB in international trade is larger than the cost. Therefore, at the second stage of game, enterprises will choose to not use RMB for international settlement. Due to the common knowledge of participants’ utility function, state can anticipate that enterprises will refuse to use RMB at the second stage and therefore the state will continue to maintain local currency discrimination institutional arrangement. In the first and second stage, the state lacks motivations to provide formal institutional supply.Third, after subprime crisis, high liability ratio, high current account deficit and the increased risk, depreciation caused by QE, combine to contribute to the fall of USD credit. Besides, the economic size of China increased. The anticipated rewards of RMB internationalization strikingly rise. Meanwhile, the country’s foreign exchange reserves from shortage turned to surplus, enable countries to start the decline in the cost of RMB internationalization of the conversion, in the role of the two changes in the external environment, the national system optimum supply level in the first stage of rise. Under this institutional arrangement, the anticipated rewards that enterprises will receive when they use RMB for settlement is higher than cost, and therefore choose to use RMB for international settlement. The state is expected to choose the second stage of the enterprise, so the best choice of the country in the first phase is to provide the supply of the above optimal system, that is to start the internationalization of the RMB process.After China starts the process of internationalization of the RMB, as companies are increasingly accustomed to RMB international settlement system arrangement, enterprises changes cost of informal institution transformation cost is reduced to zero, the enterprises to accept RMB international settlement of critical system supply levels decrease. At this time, even if the dollar credit degree of rebound, economies of scale decline in the country is expected to decline in net income, or foreign exchange from surplus to re is scarce, so that the switching costs rise, enterprises choose the net proceeds of the RMB settlement is still greater than switching costs. Accordingly, in the second stage of the game, the enterprise will choose to use the RMB for international settlement ". The country is expected to choose the second phase of the enterprise, so the country in the first phase of the best choice is still to provide the system supply, that is, continue to promote the internationalization of the RMB.The fourth chapter constructs currency choice model to analyze the choice of currency for settlement. When Chinese enterprises and its competitors, foreign companies all anticipate that rewards of using RMB is larger than cost, RMB will be used then. Or when both side anticipate the use of the net return of the RMB is less than the conversion costs, the RMB withdrawal from circulation. When only one side benefit, the other side when the two sides have differences. The two sides negotiate, the beneficiaries transfer part of benefits to the damaged party, to compensate for its lose. Once the benefit it transfers is higher than the lose, Kaldor-Hicks efficiency will be reached. Two sides will achieve consensus on RMB settlement. Based on above analysis, model research gets conclusions as following,First, controlling other factors, the smaller the initial size of USD, the lower the dollar comprehensive rate of return, the lower the dollar clearing efficiency, the easier the settlement agreement of the enterprises is. These are three external factors for the internationalization of the RMB.Second, if other factors do not change, participants in the popularity of RMB expect higher, comprehensive income of RMB rate higher, RMB clearing system efficiency is high, system conversion cost is low, enterprises are easier to agree on RMB settlement. These four are internal factors to influence the RMB internationalization. Factors to change the status of international currency are coming from inside and outside. In the history of international monetary competition, there is example that external factors mutation resulted in the substitution of precedent,but the internationalization of the RMB can’t hope that the change of external factors, but focus on the improvement of internal controllable factors, in order to seize the opportunity of the external factor mutation to achieve breakthrough.Accordingly, we propose four types of formal institutional arrangements: to improve anticipated institutional arrangements, to broaden capital market institutional arrangement, to increase institutional arrangement of clearing efficiency, and other institutional settings for customs and business. The first two types are going to increase the net profits of RMB settlement. And the last two types are about to decrease the cost of RMB settlement for enterprises. This dissertation adopts comprehensive measurement to measure four institutional arrangements. After weighted average, the research gets institution supply index(isi). This index measures formal institutional supply degree of RMB internationalization of the country.Finally, the fifth chapter establishes an empirical model to conduct co-integration analysis. It takes RMB international index(rii) of Renmin University, RMB global index(rgi) of the Standard Chartered Bank as dependent variables, and takes isi as core independent variable, and choose inflation rate and effective currency rate as controlling explanatory variables.The empirical result shows that coefficient of isi is significantly positive, which shows the mentioned four institutional arrangements have significant positive effects on RMB internationalization. This result strongly demonstrates the conclusion of this theoretical model: if the state provides four institutional arrangements, this institutional change will be helpful to promote RMB internationalization.
Keywords/Search Tags:Institutional change, RMB internationalization, dynamic game, currency choice, institution supply index(isi), cointegration
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