Working Paper: CEPR ID: DP17498
Authors: Barry Eichengreen; Camille Macaire; Arnaud Mehl; Eric Monnet; Alain Naef
Abstract: It is widely assumed that the renminbi (RMB) cannot acquire a meaningful place in central bank reserve portfolios without full liberalization of China’s capital account. We argue that the RMB can in fact develop into a consequential reserve currency in the absence of capital account convertibility. Trade and investment links can drive official use and accumulation despite limited access to Chinese financial markets. But this route to currency internationalization requires policy support. China must allow access to RMB through loans and People’s Bank of China (PBoC) currency swaps. It must ensure convertibility of RMB into US dollars on offshore markets. It must provide these RMB services at a stable and predictable price. Currency internationalization without full capital account liberalization thus requires the RMB to be backed by dollar reserves, which the PBOC consequently will continue to hold and use. Hence we do not foresee RMB internationalization as supplanting dollar dominance.
Keywords: international monetary system; renminbi; international reserve currencies
JEL Codes: F31; F38; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| RMB can develop into a consequential reserve currency without full capital account convertibility (F31) | RMB's potential to acquire reserve currency status (F31) |
| trade and investment links can facilitate RMB becoming a reserve currency (F31) | RMB's potential to acquire reserve currency status (F31) |
| countries can accumulate RMB reserves by exporting to China and receiving payment in RMB (F31) | accumulation of RMB reserves (F31) |
| foreign direct investment from Chinese sources (F23) | accumulation of RMB reserves (F31) |
| accumulation of RMB reserves is positively correlated with trade invoiced in RMB (F31) | accumulation of RMB reserves (F31) |
| establishment of RMB clearing banks and bilateral swap agreements with the PBOC can enhance confidence in holding RMB (F33) | attractiveness of RMB as a reserve currency (F31) |
| offshore RMB market provides liquidity and ensures conversion into dollars (F31) | attractiveness of RMB as a reserve currency (F31) |
| increase in trade invoicing in RMB (F19) | RMB's role as a reserve currency is likely to grow (F31) |
| China's diplomatic and geopolitical relationships with other countries (F59) | growth of RMB as a reserve currency (F31) |