Barry Eichengreen, Professor of Economics and Political Science at the University of California, Berkeley, outlines what it will take for the renminbi to become an international reserve currency and discusses the likely impact on the global financial system.
Title: Prof Barry Eichengreen on the Prospects for Renminbi Internationalization
Description: Barry Eichengreen, Professor of Economics and Political Science at the University of California, Berkeley, outlines what it will take for the renminbi to become an international reserve currency and discusses the likely impact on the global financial system.
Professor of Economics and Political Science
University of California, Berkeley
Q: Does the surge in cross-border trade settled in renminbi mean the internationalization of the currency is now a real prospect?
A: The use of renminbi in cross-border trade settlements and invoicing is a natural development to start with. It is advantageous to Chinese banks and firms to be able to do cross-border business in their own currency and it’s attractive to foreign banks and firms in so far as they can get their hands on the currency; and in so far as the renminbi is expected to gain value overtime, so I think the Chinise authorities are taking advantage of this to try and promote the practice and accelerate the process of currency internationalization.
Q: What factors will determine whether PRC’s plan to transform the renminbi into an international reserve currency succeeds?
A: I think there are 3 important prerequisites: 1) Scale. 2) Stability. 3) Liquidity.
Scale means if you’re going to be the issuer of a true international currency you have to be big country that engages in a lot of international transactions. China qualifies now, and it will qualify even more in the future. Although its growth rate will inevitably decelerate over time.
Stability means economic stability, financial stability, political stability, so a currency is attractive if there’s a stable economic policies and stable financial markets standing behind it, and China increasingly satifies that prerequisite.
And liquidity, that’s the hard one, building deep and liquid financial markets takes time, it requires building infrastructure, it’s a process that only a few countries have really completed.
Q: What would be the impact on the global monetary system if renminbi were to become genuine international reserve currency?
A: There are 2 points of view here:
One, that currency competition between say the dollar and the renminbi could yield an unstable international monetary system as investors are switched eradically between the two.
The other point of view is that having multiple international and reserve currencies will be a good thing. It will ensure an adequate supply of international liquidity and it will impose some discipline on the issuers because there will be alternatives to the dollar in the event that the US doesn’t follow sound and stable policies. I’m of the second point of view. I think it’s a good development and ultimately it will make the world a safer financial place.