The Research On Currency Substitution In The Background Of RMB Appreciation

The phenomenon of currency substitution is a specific monetary disturbance inthe open economy. It performed as the demand change of citizens under the premiseof currency convertibility. With the speeding pace of economic reform, the mobilityof international capital is increasing dramatically, fully convertible of RMB would beput on the agenda, the RMB currency will participate in the international monetarycompetition. The same as competition in commodity markets, the competitionbetween currencies also follow the law of survival of the fittest, which appeared theproblem of currency substitution. At present, scholar’s study already achieved a lot inthe field of currency substitution, but the study only focused on the phenomenon ofRMB subsisted by foreign currency, while ignoring the case of other currenciesinstead by RMB. In recent years, in the background of continuous appreciation ofRMB, replacement of foreign currency is not realistic. For now, RMB replaced bysome strong currency in China, while appears as “alternative currency” inneighborhood countries, these two economic phenomenon are taking placesimultaneously, the discussion will be launched separately in this report.The introduction part first described the background and significance of choosingthis topic, and reviewed the study results of domestic and foreign scholars, then itconstructed the content and framework for this study, including some relevanceconcept. The second chapter gave the definition and measure of currencysubstitution,and analyzed the influence factors of currency substitution, thenintroduced the classic theories of currency substitution. This chapter also expounds acurrency substitution model that is most fit for China. In Chapter3we focused on thecurrent situations of currency substitution, including the background of RMBappreciation and dollarization in China, and even RMB-ization in circumjacent states.Chapter4is the main part of this essay, which demonstrated each factors’ influenceon currency substitution with the method of Demonstration. The conclusion showsthat real GDP is the most significant factor that can influence the degree of China’sdollarization and neighboring countries’ RMB-ization. In the last chapter, based onthe result of the research, the recommendation and conclusion will be given.