China Yuan Becoming Reserve Currency Essay example

1822 Words Nov 3rd, 2012 8 Pages
Market Liberalization… with Chinese Characteristics:
Can the Chinese Yuan become a Global Reserve Currency?

Jessica Davis

Fort Hays State University

ECFI 644 International Economics

April 30, 2012

Dr. Dosse Toulaboe

Abstract

China’s economy is growing ever larger, but is that enough to get the Chinese Renminbi (more commonly known as Yuan) to be accepted as a global market currency? This paper will look into the liberalization, but with Chinese characteristics, of five determining factors in becoming a country whose currency is a global reserve currency. These factors are as follows: economic size, macroeconomic policies, flexible exchange rates, financial market development, and finally having
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These swaps help allow further influence of the Yuan to be used as a settlement currency, and the Yuan since 2009 has seen a vast increase in trade settlement, as can be seen in figure 1. This shows the rapid growth of China in international markets.

Figure 1
[pic]

Nevertheless, China’s debt markets are far behind those of other reserve currency economies, as you can see in figure 2. According to the International Monetary Fund website, “Without a sufficiently large debt market, the renminbi cannot be credibly used in international transactions. If there is insufficient liquidity in markets for renminbi-denominated debt, the currency will not be attractive to foreign businesses” (Prasad, 2012).

Figure 2 [pic]
However, even through China’s financial market is developing, it is necessary also to boost development through having a more open capital account.

Open Capital Account
Over the last thirty years China has become much more liberalized, however they still significantly lag behind the U.S. and U.K. because of tight government controls. Portfolio investment, debt financing, and overseas direct investment still have some of the tightest restrictions.

Using an index of capital account liberalization

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