Internationalization of the RMB and Historical Precedents

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Internationalization of the RMB and Historical Precedents

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Title: Internationalization of the RMB and Historical Precedents
Author: Frankel, Jeffrey A.
Citation: Frankel, Jeffrey A. "Internationalization of the RMB and Historical Precedents." Journal of Economic Integration 27.3 (September 2012): 329-365.
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Abstract: The possibility that the renminbi may soon join the ranks of international currencies has
generated much excitement. This paper looks to history for help in evaluating the factors determining
its prospects. The three best precedents in the twentieth century were the rise of the dollar
from 1913 to 1945, the rise of the Deutsche mark from 1973 to 1990, and the rise of the yen
from 1984 to 1991. The fundamental determinants of international currency status are economic
size, confidence in the currency, and depth of financial markets. The new view is that, once
these three factors are in place, internationalization of the currency can proceed quite rapidly.
Thus some observers have recently forecast that the RMB may even challenge the dollar within
a decade. But they underestimate the importance of the third criterion, the depth of financial
markets. In principle, the Chinese government could decide to create that depth, which would
require accepting an open capital account, diminished control over the domestic allocation of
credit, and a flexible exchange rate. But although the Chinese government has been actively
promoting offshore use of the currency since 2010, it has not done very much to meet these
requirements. Indeed, to promote internationalization as national policy would depart from the
historical precedents. In all three twentieth-century cases of internationalization, popular interest
in the supposed prestige of having the country’s currency appear in the international listings was scant, and businessmen feared that the currency would strengthen and damage their export
competitiveness. Probably China, likewise, is not yet fully ready to open its domestic financial
markets and let the currency appreciate, so the renminbi will not be challenging the dollar for
a long time.
We begin, however, by asking: What is international currency status, and why does it matter?
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