M-RCBG Faculty Working Paper No. 2012-13

Internationalization of the RMB and Historical Precedents

Jeffrey Frankel

August 2012


The RMB hopes to enter the ranks of international currencies. This paper looks to history for help in evaluating the factors determining its prospects. Three precedents in the twentieth century were the rise of the dollar from 1913 to 1945, the rise of the Deutsche mark from 1973 to 1990, and the rise of the yen from 1978 to 1991. The fundamental determinants of international currency status are economic size, confidence in the currency, and depth of financial markets. The new view is that, once these three factors are in place, internationalization of the currency can proceed quite rapidly. Thus some observers have recently forecast that the RMB may even challenge the dollar in a decade. But they underestimate the importance of the third criterion, the depth of financial markets. The Chinese government could decide to create that depth, which would require accepting an open capital account, diminished control over the domestic allocation of credit, and a flexible exchange rate. But although the Chinese government has been actively promoting offshore use of the currency since 2010, it has not done very much to meet these requirements. Indeed, to promote internationalization as national policy would depart from the historical precedents. In all three twentieth-century cases of internationalization, businessmen feared that the currency would strengthen and damage their export competitiveness. China seems, likewise, not yet fully ready to open its domestic financial markets and let the currency appreciate, so the renminbi will not be challenging the dollar for quite some time.

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