The Renminbi’s Role in the

Global Monetary System

INTERNATIONAL FINANCE

SCHOOL OF ECONOMICS AND

MANAGEMENT

GROUP-5

THE RENMINBI’S ROLE IN THE GLOBAL

MONETARY SYSTEM

ALI,GHAZANFAR 223145534

FAROOQUE, ASAD 223145532

ARAIN, KAMRAN 223145528

ZHASSULAN 223145537

INTRODUCTION

The Yuan is the base unit of a number of former

and present-day Chinese currencies, and usually

refers to the primary unit of account of the renminbi,

the currency of the People’s Republic of China.

The ISO 4217 is the standard code for renminbi.

CNY, an abbreviation of “Chinese Yuan”.

Chinese Yuan (CNY) refers to the renminbi (RMB)

which is the official currency used in mainland

China.

THE MODERN YUAN CURRENCY

Modern Yuan is issued by the People’s Bank of China to

stabilize the economic crisis after World War II.

Yuan was issued in 1, 2, and 5 Jiao, as well as 10, 20,

50, and 100 Yuan notes.

In 1962, the third issue of Yuan notes was released to

include security features and display the culture of

China.

The fourth series of Yuan banknotes was released in

1987 with a watermark and magnetic and fluorescent ink

for additional security against counterfeit notes.

WHAT IS INTERNATIONAL CURRENCY

A currency such as the US dollar, the pound or the

Euro that is commonly used in trade between

different countries

The Dollar is an International Unit of Account

In the foreign exchange market and international

finance , world currency, or global currency refers to

a currency that is transacted internationally, with no

set borders.

UN WANTS NEW GLOBAL CURRENCY TO

REPLACE DOLLAR

o The dollar should be replaced with a new global

currency, the United Nations has said.

o In a radical report, the UN Conference on Trade

and Development (UNCTAD) has said the system of

currencies and capital rules which binds the world

economy is not working properly, and was largely

responsible for the financial and economic crises.

.

CONT…

oAlthough a number of countries, including China and

Russia, have suggested replacing the dollar as the world's

reserve currency, the UNCTAD report is the first time a

major multinational institution has posited such a

suggestion.

THE DOLLAR AS A RESERVE CURRENCY

o By the end of the 20th century, dollar wasconsidered the worlds most dominant reserve

o Throughout the last decade, an average of twothirds of the allocated foreign exchange reserveswere in US dollars. For this reason, the US dollar issaid to have “reserve currency status”, making itsomewhat easier for the United Status to run highertrade deficits with greatly postponed currency crisis

o Why is the dollar an international reserve currency?

ASSUMING THE DOLLAR FALLS

o What would happen if the dollar’s role were to decline sharply?

o There are really two questions here. The first is one of the transition; would a decline in the dollar’s role as a store of value, in particular, amount to a devastating run on the bank?

o Second, once the transition is accomplished, how much harm would the dethroning of the dollar do the world economy?

o The important point to notice in discussing the transition is that the problem is not one of the United States having given the world paper in exchange for real goods and services. Very little of the “dollar” holding of the world is backed up by high-powered money; essentially it consists of short-term securities and bank deposits, many of the latter outside the United States.

CONT…

o In principle, then, a change in the desired currency

composition of liquid assets could be

accommodated without any redistribution of wealth.

o Banks could convert their depositors’ Eurodollar

deposits into Euro mark or European deposits at

the current exchange rate; the Federal Reserve

could buy up Treasury bills while selling mark-

denominated securities. The currency

transformation need not involve capital gains and

losses to anyone.

INTERNATIONAL MONETARY SYSTEMS

o Sets of internationally agreed rules, conventions

and supporting institutions, that facilitate

international trade, cross border investment and

generally the reallocation of capital between nation

states.

o They provide means of payment acceptable

between buyers and sellers of different nationality,

including deferred payment.

o To operate successfully, they need to inspire

confidence, to provide sufficient liquidity for

fluctuating levels of trade and to provide means by

which global imbalances can be corrected.

THE INCREASINGLY IMPORTANT STATUS OF

THE RENMINBI

Although the euro lost (and the dollar gained) some

ground during the six years between 2007 and

2013, the USD and the euro maintained their first

and second ranks, respectively.

However, the RMB climbed from the 20th to the 9th

slot.

Economists believe that RMB will certainly achieve

the status of a key currency within the next decade.

CONT…

o It is supported mainly by a record of fast rates of

growth of the Chinese economy, by the growth of

China’s share in international trade during the last

30 years. In this respect, the RMB is obviously far

behind major key currencies like the USD and the

euro. In terms of both turnover on forex markets

and use as a reserve currency, Yuan is still

dominant on many currencies.

THE FUTURE OF THE USD, THE EURO, AND THE

RMB AS KEY CURRENCIES

It was clear even prior to the Global Financial Crisis

that, in terms of GDP, China will eventually be the

largest economy in the world. China is currently

second only to the US.

Chinese policymakers are more anxious to attain

key currency status soon.

They are taking steps for increasing the role of the

RMB in the settlement of trade transactions.

CONT…

Since 2006, the Chinese government has allowed

controlled appreciation of the RMB – from over 8

RMBs to one USD in 2005, to the current

(November 2014) rate of 6.13.

o By1914 US trade had surpassed that of the UK, the

leading key currency of the time was the sterling

pound.

CONT…

The USD surpassed the sterling as a leading

international and reserve currency within a span of

just ten years.

Chinese authorities seriously undertake the

international promotion of their currency, the RMB

is likely to become a key currency relatively quickly.

THE RENMINBI AS AN INTERNATIONAL CURRENCY

The internationalization of a currency depends on a

host of factors— the size of the country’s economy

and its relative share in the world.

China’s GDP had reached $2.7 trillion in 2006,

compared to $13.2 trillion in the United States,

$10.5 trillion

CONT…

Convertibility under the capital account. 224 Cato

Journal Based on our simulation model, the

convertible RMB will likely account for 15–20

percent of international reserves by 2020.

WHAT CAN OTHER COUNTRIES AND

INTERNATIONAL ORGANIZATIONS DO?

The extent measures have been deployed to

promote renminbi internationalization, they are

largely actions by the Chinese authorities in the

areas of trade invoicing, swap agreements with

selected central banks.

THE FUTURE OF THE RENMINBI AND CHINESE

CAPITAL IN THE WORLD ECONOMY

Fundamentally the renminbi will continue to grow in

its international profile, and whether capital coming

out of China will attract increasing attention are first

and foremost determined by two key questions.

China will overtake the United States in terms of the

absolute size of its economy before the end of this

decade, while the pessimists think that the Chinese

economy is on the verge of a collapse.

CONCLUDING REMARKS

In conclusion, although the USD/sterling historical

precedent supports the view that Chinese

authorities have the ability to quickly elevate the

RMB to major currency status.

On the other hand, recent experience shows that a

financial crisis, such as the Global Crisis in the

countries issuing major key currencies, encourages

Chinese authorities to speed up the process of

liberalization in order to achieve key currency status

sooner.