Gaining Currency: The Rise of the Renminbi
IMF Blog, August 4, 2017
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- Authors: The Editors
- Published: August 4, 2017
Historical background and recent milestones
- The renminbi was created in 1949 when the People’s Republic of China was formed.
- The renminbi "didn't really play much of a big role in international finance until a few years ago," according to Eswar Prasad.
- The renminbi's addition "last year" to the IMF's Special Drawing Right basket of major currencies is described as "remarkable," given China's capital account remains relatively closed and its financial markets underdeveloped.
Current international role and characteristics
- Despite not meeting "the traditional prerequisites of a reserve currency," the renminbi "has become a reserve currency, and one that is playing a big role in international financial markets," Prasad says.
- Prasad characterizes the renminbi as a currency that can play "a big role in international financial markets" but notes limits tied to domestic policy and institutional development.
Preconditions and domestic reforms required
- Prasad identifies significant domestic reforms necessary for the renminbi to advance internationally:
- Developing domestic financial markets and institutions.
- Establishing an independent central bank.
- Strengthening the rule of law.
- For many reform-minded policymakers in China, advancing the renminbi's international role "serves a very useful purpose in providing a framework for getting around opposition to domestic reforms."
Outlook on global currency dominance
- On whether the renminbi could challenge the US dollar, Prasad states: "If China plays its cards right, it could become a significant international payments currency—perhaps even a significant reserve currency—but it’s highly unlikely to be a safe haven currency that challenges the dollar’s dominance."
Source: Gaining Currency: The Rise of the Renminbi — The Editors, August 4, 2017
