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REASONS, ADVANTAGES AND DISADVANTAGES OF RENMINBI INTERNATIONALIZATION IN THE CONTEXT OF CURRENT FINANCIAL CRISIS

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REASONS, ADVANTAGES AND DISADVANTAGES OF RENMINBI INTERNATIONALIZATION IN THE CONTEXT OF CURRENT FINANCIAL CRISIS

    REASONS, ADVANTAGES AND DISADVANTAGES OF RENMINBI

    INTERNATIONALIZATION IN THE CONTEXT OF CURRENT FINANCIAL

    CRISIS

    By

     A thesis

    Submitted in partial fulfillment of the requirements

    for the Degree of

    BACHELOR OF BUSINESS ADMINISTRATION

    for

    ***Program

    between

    June 1st, 2010

    天津理工大学2010届本科毕业论文

    

    随着中国经济的高速发展和综合国力的跃升?人民币国际化问题引起了国内理论界和实务界的关注?成为理论研究的热点和前沿。本论文首先对货币国际化的相关概念和对金融危机背景下人民币国际化的现状做出了描述。其次分析人民币国际化的原因:国家经济实力的增强?人民币自由兑换进程的推动?金融业的全球化;金融危机的推动。分析总结了人民币国际化的五中利处和三种弊端。

    最后?在对人民币国际化的现状、原因、利弊分析的基础上?本文认为我国政府应该逐步推进人民币在资本项目下的自由兑换进程?建立更具弹性的人民币汇率机制?积极参与国际协调和国际区域货币合作。这种策略一方面可继续巩固和扩大人民币在东亚的影响和流通范围?另一方面可对人民币成为国际货币产生积极影响。

关键词: 货币国际化?人民币国际化?利弊

    天津理工大学2010届本科毕业论文

    ABSTRACT

    With the high speed development of china's economy and synthetic power, close concern of china's high rank policy makers and domestic theoretic circle are paid to the Renminbi internationalization. And research on Renminbi internationalization has become the frontier science. The paper firstly describes the definition of currency internationalization and the status of Renminbi internationalization under financial crisis. Then analyze the reasons of Renminbi internationalization which includes Economic Strength of China Becomes Stronger and Stronger; Renminbi Free Convertibility Process Promotes its Internationalization; The Globalization of Financial Industry Creates the External Conditions; the promotion of financial crisis. And also summarize the five advantages and three disadvantages of Renminbi internationalization.

    Finally, based on the above analysis the paper gives the following suggestions. During the process of Renminbi internationalization, the paper believes that our government should do the following: make capital account gradually to be convertible; establish a more flexible Renminbi exchange rate mechanism; participate actively in international and regional monetary cooperation. On one hand, this strategy does lots of efforts to make Renminbi become an international currency directly, the other it is to continue to consolidate and expand the impact of the Renminbi and circulation in East Asia area.

    KEY WORDS: Currency Internationalization; Renminbi Internationalization;

    Advantages and Disadvantages

    天津理工大学2010届本科毕业论文

    BRIEF CONTENTS

    CHAPTER 1 INTRODUCTION……………………………………………………..1 1.1 The Significance of the Research………………………………………………………………..1 1.2 Literature Review ………………………………………………………………………………..2

    CHAPTER 2 INTRODUCTION TO CURRENCY INTERNATIONALIZATION4 2.1 The Definition of Currency Internationalization………………………………………………..4 2.2 Different Levels of Currency Internationalization………………………………………………4

CHAPTER 3 THE STATUS QUO AND REASONS OF RENMINBI

    INTERNATIONALIZATION………………………………………..6 3.1 The Status Quo of Renminbi Internationalization………………………………………………6 3.2 The Reasons for Reminbi Internationalization………………………………………….………7

CHAPTER 4 THE ADVANTAGES AND DISADVANTAGES OF RENMINBI

    INTERNATIONALIZATION………………………………………….11 4.1 The Advantages of Renminbi Internationalization……………………………….11 4.2 The Disadvantages of Renminbi Internationalization………………………………13

CHAPTER 5 PROPOSALS FOR SPEEDING UP RENMINBI

    INTERNATIONALIZATION……………………………………….15 5.1 Making Capital Account Gradually to be Convertible……………………………..15 5.2 Establishing a More Flexible Renminbi Exchange Rate Mechanism………………..15 5.3 Actively Participating in International and Regional Monetary Cooperation16

    Chapter 6 CONCLUSION…………………………………………………...………17 REFERENCES………………………………………………………………………18 ACKNOWLEDGEMENTS………………………………………………………….19

    天津理工大学2010届本科毕业论文

    CHAPTER 1 INTRODUCTION

    1.1 The Significance of the Research

    Since the global financial crisis, U.S. dollar-based international monetary system shows more and more obvious shortcomings. The reform of the international monetary system has increasingly become the subject of people’s attention. In 2009, on the Group of Twenty (G20) finance summit,

    China, European Union, Russia, India and other countries have appealed for reform of U.S. dollar-dominated international monetary system, ending the era of dollar hegemony. China has surpassed Germany in 2007 and become the world's third largest economic powerful country. As one of the top three economies in the world, Chinese currency, Renminbi, has the possibility to become an international currency. And the break of financial crisis which caused the changing of the world currency system has offered a historical opportunity to speed up the process that Renminbi becomes one of the international currencies.

     The history of Europe, America, Japan and other developed countries shows that the internationalization of currency of a country will play a very important role in promoting economic development. Back in the 90s of 20 century, China and neighboring countries began to use Renminbi in the cross-border trade settlement. In 2003,the 16th Plenary Session of the 3rd Committee of the Chinese Communist Party ask our government to relax the restrictions on some cross-border capital trading activities step by step under the premise of effective control of risk and realize the capital account to be exchangeable gradually. July 1, 2009, China promulgated the "Regulations for Implementing the Administrative Rules on Pilot Program of Renminbi Settlement of Cross-border Trade Transactions", which officially opened the prelude of Renminbi internationalization. Although there is a considerable difference between the launch of Renminbi settlement in cross-border trade and truly Renminbi internationalization, and at present our country doesn’t have the internal and external environment to realize the Renminbi internationalization,

    doing in-depth research on the issue of Renminbi internationalization, identifying Renminbi internationalization of internal and external reasons, and the advantages and disadvantages will offer a reference for future policy formulation in China.

    1.2 Literature Review

    1.2.1 Domestic Research

    During the middle of 1990s, most scholars who research on the Renminbi internalization came to a conclusion that as the consistent fast development of Chinese economy, Chinese government should take more positive measures to make Renminbi become an international currency in the future.

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    天津理工大学2010届本科毕业论文

    [1]Haikuan Zhao (2001) suggested that Chinese government should make Renminbi become a world's currency gradually. With the rapid growth of China's economic strength and the accession to the WTO, China is more deeply involved in economic globalization compared to before, so Renminbi should become one of the world currencies and at least has some functions of international currencies in the world. It needs a process of natural development and maturation That Renminbi becomes a world currency. He pointed out that China should adopt a positive attitude and

    [2]a series of measures to speed up the process. Han Qiang (1999) hold that " based primarily on the

    improving china status on the world and on Renminbi’s performance on multilateral, freedom and

    stability, Renminbi have already have the potential of internalization and China should vigorously

    [3]promote the process of Renminbi’s internationalization. Zhong Wei (2002) gave the valuable,

    workable advices which point out the path of Renminbi internationalization and the problems during the process. He also suggest that when solve the problem of Renminbi internationalization, we should consider both the capital account to be exchangeable of Renminbi and the process of its

    [4]internationalization as a whole. Nianlu Wu (2002) introduced the difference between currency

    convertibility and currency internationalization, currency internationalization’s risk and return. He

    recommended that china should make capital account to be fully exchangeable and creates a

    [5]positive environment for Renminbi’s internalization. Yafan Wang, Tao Guan, Jiandong Wen

    (2002) have comprehensively analyzed the Renminbi’s circulation among its neighboring countries

    and regions and the methods which Chinese government used to manage the circulation of

    [7]Renminbi. Lin Zhou, Xiaozheng Wen (2001) made a comparison among the internationalizing

    process of the U.S. dollar, Japanese Yen, and some newly industrialized countries’ currencies and

    [8]got a summary. Chen Bingcai (2001) pointed out the asymmetry of the Renminbi convertibility

    issues and believe that the internationalization of the Renminbi should take the American path which is a way by raising the Renminbi's reputation and promoting the free convertibility of

    [9]Renminbi. Zhou Xiaochuan, the president of People's Bank of China,(2009) proposed to create a new international reserve currency to replace the domination of the U.S. dollar, which draws lots country’s attentions and aroused strong reaction from the United States.

    1.2.2 Foreign Research

    [10]When refers the definition of currency’s internationalization and prerequisite, Tavlas (1997) said

    that when a currency is considered as a unit of account, medium of exchange and store of value during international transactions which the country that issues the currency does not participate,

    [11]the currency become international currency. Mundell (2002) believe that, when the circulation

    of money goes beyond its statutory area, or the unit of the currency units as a reference by other countries or regions, the currency is on the international. Bergsten (1975) holds that the prerequisite of currency internationalization should include both the political and economic aspects. Politics

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    天津理工大学2010届本科毕业论文

    should have strong political power and the support of international cooperation. As to the economic aspects, he analyzed this problem in two perspectives, which are external and internal economic conditions. external economic conditions includes the maintenance of convertibility of confidence, a reasonable liquidity ratio and a health structure of payments balance; internal economic conditions include maintaining economic growth , price stability, and international comparative advantage on the economic scale, economic, monetary independence and well-developed financial markets. Mundell (2002) believe that a country's currency to become an international currency depends on the people's confidence in the stability of the currency, which in turn depends on the following factors: circulation of the currency or transaction size of the region; monetary policy stability; relaxed control; the strong power of the country and value stability of the currency itself. He believes that money as public goods with the inner scale, economies of scope. The breadth, depth of market is a measure of a currency advantage of economies of scale and the degree of economies of scope. The greater the flow of money is, the greater ability is to deal with regional shocks.

     The problem of Renminbi internationalization has attracted attention of many foreign scholars. The famous economist Dornbusch as early in 1999 published an article on the German "Der Spiegel" which holds that after 20 years late, the world will be only one of the few currencies: South America and North America will be dominated by the U.S. dollar; Asia will be dominated by the Chinese Renminbi. In 2001, the former German Chancellor Helmut Schmidt forecast in 30 years, the world will likely have three major currencies: dollar, euro, Chinese Yuan. In the same year, "Far Eastern Economic Review" entitled “Chinese Yuan era commentary” which pointed out: in the first decades of the 21st century, with the Chinese Yuan fully convertible, the Chinese Yuan will be the world's fourth highest frequency of a convertible currency after the U.S. dollar, euro and yen and Renminbi will become a new international currency. The Renminbi will break the balance of the international financial markets and if the world do not emphasize on the Chinese Yuan, it would

    [12]face risk. Renowned international investment bank Goldman Sachs expressed optimism about

    China's financial system reform and expected that in 5 to 10 years Renminbi will become the world's fourth-largest reserve currency.

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    天津理工大学2010届本科毕业论文

    CHAPTER 2 INTRODUCTION TO CURRENCY

    INTERNATIONALIZATION

    2.1 The Definition of Currency Internationalization

    [13]Currency Internationalization refers to a country's currency in the international context can play the role of the basic functions of money: that is to act as an international means of payment, international purchasing tools and means of international transfer of wealth. Internationalization should be study from both static and dynamic perspective: from a static perspective, it is that a country's currency as a complete, full and high in freely convertible currencies by governments used as the international reserve currency, be held by residents around the world and played the media role in the international monetary system; from the dynamic perspective, it is that under the permission of countries issued currency and the guidance of its policy when its currency move around the world , become a tool among international trade settlementinternational borrowing and

    international reserves as an international unit of accountthen it was widely accepted by the

    international community to the subjective and objective economic processes. Therefore, now we can give currency internationalization a complete definition: it is the national currency beyond international borders which play a mediapayment and international reserves role in the world. And

    that is a dynamic process which results a relatively stable state.

2.2 Different Levels of Currency Internationalization

    From a variety of internationalization process and its results, there are different currency internationalization levels. According to the regional division, international currency can be divided

    [14].into the peripheral, international regionalization, globalization at three levels

    The peripheral currency means that the currency can be Circulated in the country issued currency and the peripheral countries and regions. This is due to the currency represents the country’s

    strength of economies is stronger than neighboring countries and regions, while the country do businesses with its neighboring countries and regions. In order to save the cost of currency exchange, people in the region will select a currency with good reputation and sufficient quantity and widely accepted to replace some or all of their own national currency, so the use currency would be beyond its national territory and the currency will begins circulating in the peripheral countries and regions. Generally speaking, this is, currently the Renminbi in China's neighboring countries and regions (such as North Korea, South Korea, Mongolia, Russia, Vietnam, Myanmar, Cambodia and Singapore, Malaysia, Thailand and other countries)there are a large number of

     [15]circulation of Renminbi. This we can call the initial stage of Renminbi internationalization.

     International currency regionalization is the intermediate stage of currency internationalization,

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    天津理工大学2010届本科毕业论文

    as a currency circulates in an international regional instead of local currency as the common use of the currency, we can consider this phenomenon as the International currency regionalization. Dollarization in Latin America can be seen as dollar international regionalization. Another situation is that through the long-term cooperation among lots kind of currency and finally integrate currencies into a new currency, such as the euro.

    The globalization of currency is the next step of the international currency regionalization .it is

    further expansion in the region and eventually the currency became widely used in the global. In the history, pound and the dollar have been the globalization currency.

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    天津理工大学2010届本科毕业论文

CHAPTER 3 THE STATUS QUO AND REASONS OF RENMINBI

    INTERNATIONALIZATION

    3.1 The Status Quo of Renminbi Internationalization

    3.1.1 Renminbi Has Achieved Current Account Convertibility

    Renminbi current account convertibility in China is the results of economic reform and a long period of economic development and is also an important step towards internationalization of Renminbi. In 1994, foreign exchange system reform formed a banking exchange system, in which China's current foreign exchange market system established and developed. In 1996, further reform on the banking exchange system, achieving the Renminbi convertible under current account. Implementation of Renminbi convertibility under the current account system is a significant achievement brought by the reform which also builds a solid foundation for achieving the free convertible of the capital account.

    3.1.2 Renminbi Exchange Market Has Been Established

    It is compatible with the banking exchange system that China's current foreign exchange market and banks were running in the retail market and foreign exchange markets. In Renminbi and foreign currencies market, transactions of foreign exchange market among banks occupy an important position. China's foreign exchange center is in Shanghai and has sub-centers in major cities across the country. Now it linked 37 cities nationwide. All members of the interbank foreign exchange market connected together through a remote communication lines and computer networks to form a single market covering the whole country.

    3.1.3 The Effective Renminbi Exchange Rate Formation Mechanism

    Currently, China has adopted a market-based, single managed floating exchange rate system. Foreign exchange market is the core of the exchange rate formation mechanism with the bank’s payment balance. Central bank participates in the interbank foreign exchange market by selling and buying currency to decrease or increase the supply of currency which finally influences the exchange rate and help the implementation of monetary policy to get a better result. 3.1.4 Circulation of Rinminbi Outside China

    Currently, China Actively adopts some measures to promote reform of the foreign exchange, foreign exchange market in order to speed up the internationalization of Renminbi. Meanwhile, the Renminbi begins circulating in neighboring countries. This is the natural process of

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