A Study On The Exit Of Dollar Peg And The Internationalization Of RMB

The goals of RMB internationalization are elaborated in two aspects. In private field, RMB will become the medium and settlement currency of international trade, the means of value store of financial institutions and the issuance currency of international bond. In public field, it will become intervention currency and reserve currency, the standard of deferred compensation of Sovereign Bond of countries and, eventually, the reserve currency and intervention currency of main global central banks with being widely accepted and used overseas. But so far, public and private fields, the dollar is still the dominant international currency, and RMB is still in progress.Theoretically, the performance of the internationalization of a country's currency depends on factors followed:the enormous scale of economy and trade, financial market which is open and developed, confidence in stability of the value of currency and network externalities. It is showed in some empirical studies that the internationalization of currency correlates positively with the economic strength of a country. In history, dollar took the place of pound, which happened when American became the largest economy and creditor nation worldly. Euro become the second-largest international money next to dollar globally, which is attributable to the scale of economy and trade in euro area and the support for stable strong euro, as the independent European Central Bank set the stability of the value of currency as the primary goal. The internationalization of Yen began in the 1970s when Japan became the second-largest economy in the world with an average annual economic growth rate of 10 percent continuously for 20 years. Taking some potential negative impacts on domestic financial market into consideration, however, decision makers of Japan didn't pushing forward the process of internationalization of Yen positively until the eruption of Asia financial crisis and the birth of Euro. In retrospect, however, the international application scope of Yen was narrow, fairly. This reflects the fact that the negative attitudes towards the internationalization of Yen of Japanese officials, domestic financial market without opening up and the large-scope fluctuation of Yen exchange rate weakened the application in global investment and trade of Yen.Obviously, tremendous progresses have been made on cross-border trading settlement and financing and investment since 2009, however, RMB internationalization is, in the scope of the world, still in its beginning stage, presently. From the aspects of international monetary functions, RMB is neither functioning properly on value storage, nor intervention currency and reserve currency which is officially used. Although RMB has became the carrier and priced currency of trade and finance transactions, its use sphere is fairly narrow。Empirically, the degree and scope of the internationalization of RMB, to a certain extent, are bound to factors followed:capital programs which are not open comprehensively, interest rate which does not marketly decided completely, underdeveloped financial market and unstable exchange rates. However, our experience analysis shows that the main restrictive factor was the instability of Dollars anchor. (1) RMB, to a great extent, still under the condition of referring to dollars, the final result of depreciation pressure of dollar convert to the unilateral appreciation prospects of RMB, and caused international capital inflows, thus, formed passive money supply and inflation pressure, and influenced the value stability of RMB, consequently weaken the attraction of RMB as the international currency. (2) The instability of dollars anchor and the appreciation of RMB were weakening the monetary policy independence of Chinese central bank. Therefore, quantitative tools and non-price type tools becomes the norm use, which, however, can hardly make the interest rates structure of China to reach the optimization. Thus cause the internal economic growth of China in unbalanced structure, make the investment gathered excessively in inefficient production department, and the production of the excess investment has been sold to foreign countries. Finally trade surplus were formed, and further domestic monetary policy restriction was formed. Thereby bought out the internal and external imbalance of China economy was the root cause of restricting the potential future space of RMB internationalization and sustainability. (3) For the excessive dependence on dollar anchor through impact the breadth and depth of China's financial industry development, and then exert knock-on effects on RMB internationalization.Based on the theory and empirical analysis, the realistic choice of RMB internationalization is exit dollars anchor orderly. With reference to the basket of currencies, this comes to regarding the path choice of RMB internationalization has several meanings as following:(1) through the dynamic adjustment of the RMB effective rate to realize the amount balance of international payments, this means the country which deficit of current-account always existed with China will become the potential areas of RMB settlement and circulation. While these areas are just the emerging East Asian market which was the main source of payments deficit of China. (2) Choose Hong Kong as the offshore financial center of China, thus for the capital account liberalization and market-oriented interest rate reform of China provide testing ground. At the same time provide RMB-denominated financial instruments to international investors. Thus hedge foreign exchange risk when the investors participate in the RMB trade settlement and investment income. This is the transitional realization strategy of RMB international. (3) If the RMB realized value stability, it will be likely to join and gradually expand its share of the SDR. This will be the key step of RMB become to the international reserve currency.The RMB exchange rate with the reference to a basket of currencies preset situations, RMB accomplish internationalized map can be summarized as "two three-step program": From the RMB areas used by extent, regional level of RMB "three steps" should be started in peripheral melt, extension in East Asian emerging market countries, eventually, to cover the major countries worldwide. (2) From the perspective of fulfill international monetary functions of RMB, monetary function levels of "three steps" should be started in cross-border trade currency function, one of the main investment outspread global currency, and eventually become the competitive, can partial replace dollar international reserve currency. As the middle of the strategy of implementation of "two three-step plan", Hong Kong should be gradually become an offshore RMB centre, therefore, for the capital account liberalization and market-oriented interest rate reform of China provide testing ground. At the same time provides RMB-denominated financial instruments to international investors, thus hedge foreign exchange risk when the investors participate in the RMB trade settlement and investment income.