Feasibility Analysis Of RMB Internationalization

Since the implementation of the Reform and Open policy in 1978, Chinese economy has maintained a momentum of rapid growth, especially after formally joining the World Trade Organization(WTO) in 2001, where in numerous areas such as commerce and finance, the country has continuously reinforced the openness of its swift reforms. Following the vigorous promotion of Renminbi business by the People’s Bank of China and the international monetary system generated demand towards new currencies, the internationalisation of the RMB is imperative.Although various research conducted to date in regards to the internationalisation of the RMB has reached a degree of consistency, whether the conditions for the RMB in becoming an international reserve currency is ripened or otherwise, the existence of disputes continues to be an issue. While one group of scholars believe that the RMB has acquired all the necessary prerequisites to be formally recognized as an international reserve currency, others disagree by deeming the actual disparities apparent in between the RMB and the well-established international reserve currency.This paper utilises Bergsten’s(1975) theory on international monetary policy as the base for the perspective research, and further exploits econometrics model designed by Chinn & Frankel(2007) as a form of research reference. By means of theoretical research, this paper initially summarizes current research outcomes on reserve currency internationally, also in connection with the core research objective of this paper, thorough analysis of the sufficient conditions entrenched within a currency in developing into the international reserve currency is conducted by enabling the methodical examination of the existing international reserve currency data.Furthermore, this paper constructs models through 1973-2013 penal data, aiming at the nucleus in “seeking conditions for being an international monetary currency” to perform regression tests for 8 major international reserve currencies over 40 years. Empirical test results have revealed significant economic conditions for an able-bodied international reserve currency should at least comprise the following: a gargantuan economic aggregate,a relatively strong ability in crisis response, a comparatively high degree of market opening, a moderate economic independence, and a controllable monetary stability.This paper recognizes the fact that two of the economic conditions surrounding the current RMB, where a gargantuan economic aggregate, and a controllable monetary stability, have been met; however there are still room for improvements. For example, China’s economic development is more dependent on the involvement of international direct investment, where it lacks independence in economic growth; insufficient Gold reserves would pose difficulties in handling sudden international crisis, relative low financial market openness is unable to fulfill the ever-growing demands from international investors, hence weakening diversified supports for the RMB.Moreover, this paper uses IMF forecast data to conduct scenario analysis for the RMB, and through this, the necessary conditions for the analysis of the RMB are also verified. Among the aforementioned economic conditions, China has fairly good control over its CPI, however in areas of Gold reserves, economic independence and the extent of its market opening, China does lack behind.Therefore, through the current construction of the financial center that is Shanghai, the hypothesis of continuous opening of China’s financial markets as well as reinforcing its Gold reserves are seemingly critical in simulating future prosperities of the RMB in progressively becoming the international reserve currency. The research result shows, the RMB has great potentials in overtaking Japanese Yen and British Pound around 2020-2021, thus becoming the third most significant international reserve currency.In conclusion, this paper believes that with the continuous economic growth, improved economic development re-structure, gradual liberalization of the financial markets, and the increase in official Gold reserves can provide concrete support for the ultimate goal of enabling the RMB to progressively become one of the more solid international reserve currencies.