One currency, two markets : China's attempt to internationalize the renminbi

This book is for anyone who is interested in the economic analysis of the future of the international monetary system and the USD, and the rising importance of the RMB. It points out the unsustainability of the dollar standard in the long run, that China has unique incentives to internationalize its currency, and how Hong Kong plays an important role. It explains the real reasons for China to internationalize its currency, including using external commitments to force financial sector reforms ('daobi' in Chinese). It applies economic theories accessible to laymen to establish that financial development and openness are crucial for RMB internationalization to succeed, and that greater exchange rate volatility is inevitable due to the 'open-economy trilemma'. Employing the 'gravity model', the book predicts quantitatively that the RMB is likely to be a distant third payment currency after the USD and the euro, but surpassing the Japanese yen in the next decade. "The Chinese government is trying to internationalize the RMB. But what are the real reasons for doing it? Will it succeed? What are the factors working in its favor? What are the impediments? What are the implications for the rest of the world? In this book, I explain how the problem with the international monetary system since the demise of the Bretton Woods system and the recent global financial crisis prompted China to seek independence from the dollar standard. One way is to make the RMB a widely accepted currency internationally. China, however, is in an awkward position. On the one hand, it is the second largest economy and the largest trading nation in the world, and it would likely become the largest economy before long. This works in favor of the internationalization of the RMB. On the other hand, China is still an emerging economy, meaning that its financial and legal institutions are still immature compared with the more advanced system in the West. Yet, China does not want to fully integrate its financial system with the West any time soon. As currency internationalization requires the currency to be largely convertible in the capital account, this factor works against the internationalization of the RMB. Thus, China tries to internationalize its currency in its own unique way, i.e. by adopting the "one currency, two markets" approach, which entails establishing a global offshore RMB market"-- Provided by publisher 03.0_pp_iv_iv_Copyright_page 04.0_pp_v_vi_Dedication 05.0_pp_vii_vii_Contents 06.0_pp_viii_x_Figures 07.0_pp_xi_xii_Tables 08.0_pp_xiii_xiv_Boxes 09.0_pp_xv_xx_Preface 10.0_pp_xxi_xxiii_Acknowledgments 11.0_pp_xxiv_xxxiii_A_Short_Summary_of_This_Book 12.0_pp_xxxiv_xxxviii_Abbreviations 13.0_pp_1_21_Introduction 14.0_pp_22_36_Chinas_Aversion_to_a_Floating_Exchange_Rate 15.0_pp_37_57_Why_Does_China_Want_to_Internationalize_the_RMB 16.0_pp_58_94_Chinas_Strategy_of_Internationalizing_the_RMB 17.0_pp_95_137_The_Importance_of_Capital_Account_Liberalization 18.0_pp_138_193_The_Importance_of_Financial_Sector_Reform 19.0_pp_194_240_The_Importance_of_the_Offshore_RMB_Market 20.0_pp_241_268_The_Potential_of_the_RMB_as_a_Payment_Currency 21.0_pp_269_286_The_Prospects_of_RMB_Internationalization 22.0_pp_287_298_References 23.0_pp_299_300_Further_Reading 24.0_pp_301_308_Index Written for readers interested in the economic analysis into the future of the USD, and the rising importance of the RMB. It points out the unsustainability of the dollar standard in the long run, that China has unique incentives to internationalize its currency, and how Hong Kong plays an important role.