An Empirical Study On RMB Internationalization

RMB internationalization has been a heated topic in recent years. Because of the 2008 economic crisis and the later European debt crisis, the global economic and financial systems are asking for some reforms. With the rapid development of Chinese economy and the gradual liberalization of financial regulation, RMB internationalization is having great chances. Currently, RMB has been used in cross-border settlement and offshore trading hubs have been established in some countries such as Singapore and the United Kingdom. However, only a few countries have held RMB as foreign reserves in a small quantity, which means that RMB internationalization still has a long way to go.The share of a currency in international official holdings of foreign reserves is an important figure to measure the degree of internationalization of a currency. In the status quo, there are four major international reserve currencies:dollar, euro, yen and pound. My thesis first describes the historical development of these four international reserve currencies and mark which was one important international reserve currency before, and then I discuss about the concept and functions of international reserve currency. Finally I create panel data model and research on the relationship between the share of international reserve currencies and the country’s general economic situation, the development of financial market and the stability of currency value.The significance of the results of my thesis is based on the expectation that China will open the capital account and make RMB freely convertible in the near future. From empirical study, my thesis comes to some conclusions. First, general economic situation which is measured by one country’s GDP ratio in world aggregate GDP in this thesis has significant influence on the share of this country’s currency in international foreign reserves. Second, the development of financial market which is measured by percentage of the value of total stocks traded in the country’s GDP has no significant relationship with the share of this country’s currency in international foreign reserves. Third, the stability of currency value which is measured by GDP deflator of this country in this thesis does not have a significant influence on the share of this country’s currency in international foreign reserves.The limitations of this thesis are as follow. First, this thesis does not include the development of bonds market in measuring the development degree of financial market. Second, this thesis does not include euro when choosing variables of currency. Third, this thesis studies on the situation of major international reserve currencies. However, a comparative study between international reserve currencies and currencies which have not become international reserve currencies may provide a better result.