The build-up of huge foreign exchange reserve makes China a net creditor and also brings in significant challenges to the Chinese economy. Considering the internationalization of the renminbi as China’s response to the global imbalance, this paper analyzes the effect of renminbi internationalization on the formation of reserves and compares its benefits and costs in rebalancing China’s external position with those of outward direct investment. It assesses the current progress in the practice of using the renminbi in cross-border trade settlement and in the development of the offshore renminbi market. It further examines the possibility of the renminbi serving as a global reserve currency in the future.
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