Internationalization of RMB: The Impacts on China and Its Trading Partner Essay

After the thirty years of great economic reforms, imposed in 1978, mainland mainland mainland mainland China has been showing an incredible results and performance. Due to the suitable economic conditions much(prenominal) as cheap labor force and low domestic species (RMB) swap rate, China has sustain the largest manufacturer of goods and receiver of abroad direct investments, the majority of which has been in manufacturing industry. And today China has totally changed from the ridiculous agricultural ground to the worlds arising economic power state. So with the rise of Chinese providence, its deep integration and significant influence in the world trade and at the same time with the instability of euro range and in transnational monetary system in a whole, the materialization of RMB internationalization and Chinas exchange rate constitution has give way of huge importance to the world.So in this essay I forget briefly analyze the characteristics of the international currencies, their benefits and costs, and then I ordain formulate Chinas interest and steps toward the RMB internationalization and go away principally focus on its impacts on China and its partners. The term of international currency has defined characteristics so that a currency can be considered international if it is used outside the issuing country for the transactions between new(prenominal) contrasted states (Investopedia). And according to Chinn and Frankel (2008) (as cited in Lee, 2010) there are four criteria to receive international currency status 1) Large enough size of countrys trade and output 2) Liberal developed pecuniary market3) Stable currency exchange rate4) High level of accept of the currency.Moreover, Kenen(1983) and Chinn&Frankel(2005) (as cited in Haihong Gao & Yongding Yu) stated that the international currency has some(prenominal) functions 1. act as a store value(i.e. countrys international reserve) 2. act as a medium of exchange(e.g. in tra de transactions ) and 3. be a unit of banknote. So, considering all these, lets check the suitability of kwai for international currency status and Chinese governments challenges and insurance policy steps in internationalizing RMB (Eichengreen, 2010). As their first step China worked up the use of RMB in setting trade and trade transactions with the attached countries by allowing the companies to open RMB-denominated accounts in the banks in Hong Kong and make operating transactions (payments, transfers, etcetera) in Yuan. Secondly, they encourage using Yuan in all kinds of financial transactions and permit private institutions to issue their RMB-denominated puzzles, making Hong Kong the offshore RMB bond market center.And as the third step, China made arrangements with interested foreign central banks about adding RMB into their international reserve baskets, reaching total of Chinas symmetrical currency swap agreements in RMB to over RMB 800 zillion (Cookson & Dyer 2010, as cited in Otero-Iglesias) and making RMB a world reserve currency. However, RMB is quieten far from the international status(due to highly government-controlled banking system and capital control) and its internationalization is comely beginning and all these shows moreover Chinas commitment to that policy and markets increasing interest. But still it is obvious that the internationalization of RMB is just only a matter of time. There are several obvious benefits of RMB internationalization for China and its duty partners (Haihong Gao & Yongding Yu). Since there provide be more RMB-denominated trade and financial transactions, the exchange risk for the trading parties ( twain Chinese and foreign) be will reduced and the related costs be eliminated. And this in turn will increase the cross border bilateral transactions and gains from it, especially in the East Asian region, where RMB has already beat a dominant currency.Secondly, with the internationalization of RMB, China an d other countries will be less dependent on USD (Haihong Gao & Yongding Yu). Since USD accounts for more than 70% of Chinas exchange currency reserve, China faces a huge risk of full-size losses as a result of USD exchange rate fluctuations. However, with the RMB-denominated claims, China would not be so dependent on USA. Moreover, with RMB other countries will have more choice on reserve currency and will not be so dependent on USD as well.Thirdly, RMB internationalization will allow the foreign direct investments into China and also cross-border outwards investments from it be in RMB. This will obviously benefit the investors, expand the circulation of RMB in both directions of investments and will expand Chinas financial market, and its fight and influence as well (Haihong Gao & Yongding Yu). Lastly, since the developed financial market, the currency exchange rate and currency convertibility are the criteria of the international reserve currency China will face a need for curr ency and capital account liberalization reforms and further financial reforms in a whole, including unpegging RMB and RMB appreciation.Although for an export-based Chinese economy appreciation of RMB would be harmful in a short run, in any event the drawbacks there are the benefits of strong RMB. Appreciation of RMB means the increase in cost of production, therefore an increase in cost for the importers from China. So the importers and the customers will switch to the cheaper substitutes produced in other countries (this statement may vary in different industries). The increasing demand for cheap substitutes will lead to developments and expansion of production in other countries, and will reduce their unemployment rates and etc.Thus, strong RMB as an international currency may benefit Chinas neighbors and other developing countries. Moreover, strong RMB benefits China as well. Losing combat in manufacturing industry, China will have to switch from low-efficiency and labor-inten sive industries to a more efficient and developed ones and transform from an industry-based economy to a knowledge-based economy (with dominating services sector). In conclusion, with the increasing role of China in the world trade and growing demand for RMB, the internationalization of RMB is just only a matter of time. Although changing the anchor currency(USD) to RMB may cause doubtful effects, the internationalization of RMB will obviously have positive impacts on both China and the rest of the world. And in the nearest future RMB is likely to become the third international reserve currency, after euro and USD.ReferencesInvestopedia, specie internationalisation, What Does Currency world(prenominal)ization Mean? Retrieved from http//www.investopedia.com/terms/c/currency_internationalization.aspaxzz1f5mjUVqBLee, J-W.(2010, June) Will the Renminbi Emerge as an International Reserve Currency? Retrieved from http//aric.adb.org/grs/papers/Lee.pdfHaihong Gao & Yongding Yu. Internat ionalisation of the renminbi. Retrieved fromhttp//www.bis.org/repofficepubl/arpresearch200903.05.pdfEichengreen.B.(2010, January). The Renminbi as an International Currency Retrieved fromhttp//elsa.berkeley.edu/eichengr/renminbi_international_1-2011.pdfOtero-Iglesias. M. The Internationalisation of the Renminbi (RMB) A Strategy of Crossing the River by Feeling the Stones. Retrieved from http//www.igadi.org/ chinaware/2011/pdf/moi_the_internationalisation_of_the_renminbi.pdf