Chinese RMB has risen in importance in the international monetary system in recent years, although opinions about its prospects of becoming a principal reserve currency vary widely among economic pundits.
Chinese government is working to achieve modified “liberalization” of the renminbi in an effort to increase its use in international markets, and to eventually make it the next international reserve currency.
The rise of Chinese RMB has implications for international monetary stability.
Because China’s share of global GDP and international trade is increasing, the renminbi is increasing in importance in the global economy. Its potential adoption as a global reserve currency is predicated on its increased use as an international medium of exchange, China’s government easing restrictions on inflows and outflows of capital (open capital accounts), and whether foreign banks have confidence in it as protection against balance of payments crises.
Currently, the Chinese RMB is the only primary currency of the world’s six largest national economies that is not a reserve currency. This is primarily due to the fact that China does not have a flexible exchange rate or open capital accounts. To make the Chinese RMB currency more attractive to international banking organizations, the Chinese government is making a number of changes. They are gradually permitting the settlement of more trade balances with the renminbi, easing restrictions of cross-border transactions, issuing renminbi-denominated bonds in Hong Kong, and allowing some Chinese banks to arrange renminbi deposit accounts offshore. According to most international monetary experts, China still needs to develop a more robust domestic financial market – with a stronger banking system and deep, liquid bond markets – before the renminbi is a serious contender to become the next global reserve currency.
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