M-RCBG Associate Working Paper No. 63

China's RMB Internationalization Strategy: Its Rationales, State of Play, Prospects and Implications

Hyo-Sung Park
August 2016


The international monetary system (IMS) is currently in flux because, as history has shown, reserve currencies come and go. The pound sterling ceded its position as the leading reserve currency to the US dollar in the mid-1920s,

1and since then, the greenback has reigned over the international monetary system. When the euro was finally launched on January 1st, 1999, it was considered an epoch-making event within the IMS. As Nobel Laureate in economics, Robert Mundell, expressed it: "The introduction of the euro will challenge the status of the dollar and alter the power configuration of the system." Although the Euro was to become the currency of more than 300 million people in Europe, it remained an invisible currency, used only for accounting purposes, during the first three years of its existence, until euro cash was introduced on January 1st, 2002, thereby replacing the banknotes and coins of the Eurozone’s national currencies. Central banks began to increase their euro holdings, which led some observers to wonder whether "the euro could challenge the dollar’s status as the world’s top reserve currency." The euro’s share in global foreign-exchange reserves started at 17.9% in 1999,hitting a peak of nearly 28% in the third quarter of 2009.

The rather smooth sailing of the euro, however, hit a snag when the Eurozone’s debt crisis erupted in 2010, causing the currency to lose some appeal. Euroscepticism gained traction. "The crisis in Greece and the debt problems in Spain and Portugal have exposed the euro’s inherent flaws," argued Harvard economist, Martin Feldstein. The currency was "bound to fail," Feldstein continued, because unlike "the United States able to operate with a single currency, despite major differences among its fifty states," Europe has none of the "three key economic conditions that allow the diverse US states to operate with a single currency: labor mobility, wage flexibility, and a central fiscal authority."

Although the euro remains the second largest reserve currency, the Eurozone crisis and the ongoing global economic crisis caused the euro’s share of total reserves to continue to go down. Its share decreased from 27.6% in 2009, before the outbreak of the Eurozone crisis, to 19.9% (compared with 64.1% for the dollar) in 2015.

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