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Contribution Details

Type Master's Thesis
Scope Discipline-based scholarship
Title The Chinese Renminbi on its Way to a Convertible and International Currency
Organization Unit
  • Raffael Willi
  • Thorsten Hens
  • Richard T. Meier
  • English
Institution University of Zurich
Faculty Faculty of Economics, Business Administration and Information Technology
Date March 2015
Zusammenfassung This thesis strives to create a comprehensive assessment of the Chinese currency. To achieve this goal, it examines the Chinese currency – the renminbi – on several levels. It depicts its development, analyses the currency convertibility and level of internationalisation, and compares it to the development of the US dollar – today’s dominant international currency. It also shows the practical impact of policy changes on business conducted in and with China, and depicts the current processes of cross-border renminbi flows. The analyses show that cross-border capital account transactions involving China are still restricted, and the capital controls seem to be effective, since sufficient capital mobility would not allow for the observed interest rate differentials. As a vehicle currency, the RMB entered the top five currencies in global payment volume in December 2014 – having more than tripled its share of global volume within two years. With a share of more than 8% of world trade financing, the renminbi is now second to the dominant US dollar (81%). Since Mainland China began renminbi invoicing in 2009, already more than 50 countries show a renminbi-invoicing share of more than 10% of transactions with China or Hong Kong. The currency does not have a track record as an intervention, peg, or reserve currency. The role of an intervention currency does not seem to be in the focus of the current government strategy. There already are some central banks adding renminbi to their portfolio and some currencies, especially in East Asia, already seem to use the renminbi as an anchor currency. The Chinese financial markets are large in size, but still protected from foreign investment. Programs launched in the last years have changed this somewhat, while the regulator remains in control of the size of capital in- and outflows and enforces caps on foreign equity stakes. The caps on the programs have steadily been raised and the recent push for offshore renminbi hubs may foster onshore and offshore activities in products denominated in renminbi. Still, risks from the large shadow banking sector and credit assessments are hard to assess for foreign investors, and the domestic capital markets currently lack depth. This may impede the role of the renminbi as an international banking currency. The current cross-border transaction processes and the depiction of the platform and clearing setup in Hong Kong as the most sophisticated offshore renminbi hub provide an overview of the technical side of the outsourcing of banking activity for international use. Compared to the rise of the US dollar in the 20th century, the Chinese markets are underdeveloped and the Chinese economy is less dominant in relative size. Also, the two World Wars and the Bretton Woods agreement implied macroeconomic shocks and shifts in foreign exchange currency accelerating the rise of the US dollar. China’s currency might not yet be in a position to take advantage of such a shock, but it is trying to bring itself into position as an important international currency.
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