Internationalization of the RMB and Historical Precedents

Abstract

During the course of the twentieth century, three major national currencies rose to international currency status: the dollar in the first half of the century and the mark and the yen over the two decades following the 1971-73 breakup of the Bretton Woods system. The three cases differ in many respects, including the terms on which the currencies ended the century. But there are some commonalities in the circumstances in which each rose to international currency status, which may hold lessons for the renminbi. This paper considers briefly the internationalizations of the three currencies. One striking conclusion is that in none of the three did nationalist sentiment initially push the international role for the currency. have widespread support for its actions. Three fundamental strengths determine whether a currency is suited for international status. The first is the size of the home economy, as measured by GDP or trade. The second is confidence in the value of the currency, as measured by the long-term trend in its exchange rate, the variability of the exchange rate, the country's long-term inflation rate, and its position as an international net creditor. The third is the development of its financial markets, particularly depth, liquidity, dependability and openness. What is more controversial is the speed at which the process of internationalization takes place: when the fundamental strengths of one currency come to surpass those of others, does the international role of the rising currency evolve quickly (perhaps accelerated by a tipping phenomenon) or only slowly (gradual adjustment due to inertia)? This article considers China's currency in light of this historical record.