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The conditions and potential of RMB as an international reserve currency: The empirical evidences from the history of eight major international reserve currencies

Jun Wu (Finance Department, Shanghai Jiaotong University, Shanghai, PR China)
Yingli Pan (Finance Department, Shanghai Jiaotong University, Shanghai, PR China)
Qi Zhu (School of Management, Fudan University, Shanghai, PR China)

China Finance Review International

ISSN: 2044-1398

Article publication date: 13 May 2014

1007

Abstract

Purpose

The purpose of this paper is to identify the determinants for currency internationalization and forecast the potential of RMB as an international reserve currency.

Design/methodology/approach

This paper performs linear or non-linear regressions of the shares of eight major international reserve currencies as the reserve assets in global central banks on the macro economic and financial variables of their corresponding countries to identify the determinants for their international positions, and conducts an “counter-factual simulation” for the potential of RMB as an international reserve currency.

Findings

This paper finds that the economic size and the “network externalities” are the most important determinants for the international status of a reserve currency; that exchange rate volatility has negative impacts; the conditions for the RMB internationalization are basically available. The simulation for the potential of RMB as an international reserve currency reveals that the international role of RMB could surpass that of the Japanese Yen and the British Pound, and get close to Euro in the coming 15 years. Based on the empirical evidence, this paper suggests a promoting strategy for RMB internationalization.

Research limitations/implications

This paper has not taken the influence of economic systemic and political factors on the process of RMB internationalization into account.

Practical implications

RMB internationalization promotion should follow the strategy of “stably create RMB international demand in the initial period and dramatically release the RMB overseas supply in the latter period” in the coming 15 years.

Originality/value

The conclusions and policy implications are from the results of the empirical analysis on the 45-year historical experience on the eight main international currencies.

Keywords

Acknowledgements

JEL Classification — F47

This paper is a partial result of the 2009 key project “Study on the Adjustment of The International Financial System and China's Countermeasures” sponsored by the Chinese National Social Science Foundation (09AJY003). Qi Zhu gratefully acknowledges the financial support from the National Science Foundation of China (71001069). The authors especially appreciate Professor Leonard Cheng, Dean of Business School of Hong Kong University of Science and Technology (KHUST), Professor Edwin Lai of Economics Department (HKUST), Miss Zhuang Yongzhen of UBS, Professor Lin Shu of Finance Department of Fudan University, Associate Professors He Zhengyu, Zhu Xi and Qian Junhui of Economics Department of Shanghai Jiaotong University (SJTU) for their helpful comments and suggestions. Any opinions and all errors are the authors’.

Citation

Wu, J., Pan, Y. and Zhu, Q. (2014), "The conditions and potential of RMB as an international reserve currency: The empirical evidences from the history of eight major international reserve currencies", China Finance Review International, Vol. 4 No. 2, pp. 103-123. https://doi.org/10.1108/CFRI-07-2012-0077

Publisher

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Emerald Group Publishing Limited

Copyright © 2014, Emerald Group Publishing Limited

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