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Cons Of RMB Internationalization

By Stephen7766 Mar 26, 2015 1076 Words
Cons

The status of current china economics strength

For a currency to be an international currency, it must be based on the strong economics strength, which is the most powerful warranty. When a country's currency is traded outside, it will lose the government mandatory protection on purchasing power naturally. What makes a currency continue to implement monetary role in wider geographical areas, is the asset represented by the paper currency, namely the issuer’s and matter accumulation and economic power. Both the United States and Japan, when their currencies were toward the outside world, had been the hub of the world economy. Their overall economic strengths, compared to other countries, are far beyond over them. The currency supported by them can become the core role of the international monetary stage. And the euro, produced by international trade and economic cooperation, are with previous monetary support based on a strong economic entity, which is the same as historical international monetary. As a result, powerful economic strength is material base of currency internationalization.

But, at present, although China has been the world's largest manufacturing facility, but technology and capital strength is far from the global trust level. If China want to gain global recognition, it must be on the top line in GDP, the capital market, science and technology, culture and military of several indicators. When the strength of China has not yet completed the span, it is too early to make RMB become one of the world's currencies.

The challenge of foreign trade in our country

During the process of internationalization, china may encounter "Triffin dilemma". If RMB become an international currency, on the one hand, it need to meet the world demand for the RMB through continuous balance of payment deficit. On the other hand, it should maintain relatively stable currency value. Export is one of the main power of economic growth in China, for a long period, china still has to expand exports, to maintain a large foreign trade surplus. However, remaining huge trade surplus in our country can cause relatively insufficient foreign investment, and lead to excessive demand for the RMB, make RMB face continued appreciation pressure, which will have adverse impact on our country's economic growth.

From the perspective of the failure of the Japanese yen internationalization, one of the important factors is that Japan's foreign trade size and structure is not reasonable. Usually, the bigger a country's foreign trade, the higher demand of its domestic import and export commodities in local currency, payment, settlement, and then the degree of local currency accepted in international trade will be higher, so the degree of internationalization will be high. Japan is the third trading powers in the world, with the conditions of currency internationalization. But as its export products are mainly sold to America, and about 85% of the imported goods in the U.S are settled in U.S. dollars, so the international payment function of yen is limited. China now has similar situation in some aspect with Japan at that time: large foreign trade scale, high foreign trade dependence and unreasonable export structure. So we need to accelerate the economic transformation, expand domestic demand to drive economic growth, to provide a good environment for the internationalization of the RMB.

Challenge on financial market

In the battle of sterling pound and franc, the pound eventually overcame the franc and main reason was that Britain had a highly developed financial market. Britain's financial market development, no matter on the financial innovation, the diversity of financial products, and on the scale of the financial market, was at the world's highest level at that time, which provided good conditions for London to become the world's financial center, and pound to become international currency. As the dollar rise, the financial market in New York shared the world with London. In Tokyo, its status in Asian financial market provided a strong support for yen internationalization. In the process of the birth of the euro and growth, the establishment of the European central bank, enough European banking sectors and the European financial system integration contributed a lot.

If RMB want to become an international currency, then current financial system will suffer impact and China’s macro financial regulation is facing the challenge. In our country, at present the government controls money supply mainly through control the total quantity of the state-owned commercial bank credit, has not realized complete indirect control. The financial system is not complete enough for comprehensive RMB internationalization. And after internationalization, the change of money supply and demand of the international financial market and the interest rate fluctuation, will directly affect domestic financial market, thus increasing the degree of difficulty of control the money supply.

Besides, financial regulations need adjustment. On the one hand, as the internationalization of the RMB, with the uncertainty of financial risk and China's financial supervision and regulation department need to face a more complex financial environment. On the other hand, supervisory work is mainly based on domestic, has not established a supervision internationalization indirect regulation system yet, which is unable to meet to the requirement of the internationalization of the RMB.

Impacts on economic policy

RMB internationalization is not conducive to the independence of the economic policy in China. It can increase the difficulty of the macroeconomic regulation and control. After RMB internationalization, China will be in the center of the world economic system with strengthened economic connection with other countries, the influence of economic conditions and economic policies of other countries increases. When making economic policies and monetary policies, therefore, the government should not only consider the operation of the domestic economy, but also the effect on other countries. This will influence the effects of macroeconomic regulation and control policy implementation in China, causing relative economic operation problem and loss.

Conclusion

Under the condition of financial liberalization and globalization, currency internationalization has very important practical significance for a country's economic development. RMB internationalization cannot only gain huge economic benefit, it also can promote China's international influence. Currently RMB internationalization has made certain achievements. However the internationalization of the RMB also faces limitation from imperfect domestic financial system, inadequate government macro-control and other immature factors such as interest rate and exchange rate. To fully realize the internationalization of the RMB, it will need a long historical process. In the long run, the internationalization of the RMB income is far greater than the cost, therefore, promote the internationalization of the RMB is necessary and feasible.

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