Renminbi Rising: A New Global Monetary System Emerges



"In Renminbi Rising, Overholt, Ma and Law, shine a bright light on the causes and consequences of the growing international use of the Chinese currency, the RMB, in trade and investment, and explore the future coevolution of the RMB and the international monetary system. They present a superbly detailed and nuanced account of the Chinese economy, its financial system, its capital markets, its risks, and its growing external impact. It is crucial reading for anyone seeking an insight into the future of the Chinese and Global economies and financial systems."
—Michael Spence, Winner of the 2001 Nobel Prize in Economic Science

"The Overholt, Ma and Law book Renminbi Rising adds significantly to our understanding of the evolutionary role of the Renminbi (RMB) in international transactions and investment. This book is particularly timely with the addition of the RMB into the SDR basket. I enjoyed the book's economic insights coupled with its detailed discussion of institutional considerations such as the current and future development of Chinese markets. There are myriad lessons to internalize from this excellent book."
—Myron S. Scholes, Winner of the 1997 Nobel Prize in Economic Science

Renminbi Rising is a vital resource that tracks the emergence of China's internationalizing currency and offers expert analysis of the global repercussions. Noted economics researchers—William Overholt, Guonan Ma and Cheung Kwok Law—describe the circumstances that enabled the emergence of this new global monetary system and clearly show why China's Renminbi has become the next in line system as the leadership of the United States diminishes.

The authors offer economic policymakers and regulators a thorough examination of the changes driving the shift to this new currency. In addition, financial professionals will find valuable guidance in the discussion surrounding business opportunities that the RMB brings to the worldwide economy.

Renminbi Rising covers a range of essential topics including the emergence of new Chinese-sponsored financial institutions, the scale of various RMB businesses and the predicted transformation of the global financial system.

WILLIAM OVERHOLT is a Senior Fellow at Harvard University's Asia Center and is the former President of the Fung Global Institute in Hong Kong. He is the author of Asia, America and the Transformation of Geopolitics and The Rise of China.

GUONAN MA is a Fellow of Bruegel, the Belgian think tank and advisor to several central banks, and has served as senior economist at the Bank for International Settlements and major investment banks.

CHEUNG KWOK LAW is an economist at the Chinese University in Hong Kong and a veteran economist of several major investment banks.

List of Figures xi

List of Tables xiii

Foreword xv

Acknowledgments xvii

About the Author xix

CHAPTER 1 Internationalizing the RMB 1

The Conditions for Becoming a Global Currency 2

Business and RMB 10

RMB-Product Markets 11

Reserve Currency 14

The Emerging Monetary Order 16

CHAPTER 2 The Rise and Fall of Currencies - Historical Lessons for the RMB 21

Risks in International Monetary System Transitions 23

The Role of Eurodollars in the 2008 Global Financial Crisis 26

2008: Year Zero for a New International Monetary System? 27

Conditions for Currency Internationalization: Market Demand and Institutional Supply 30

Institutional Inertia and Disruptive Events 35

Offshore Currencies and International Liquidity 36

Current International Reactions to the RMB’s Rise 41

RMB Internationalization 44

Conclusion 46

References 47

CHAPTER 3 Economic and Institutional Foundations for the Rise of the RMB 49

Economic Foundation 49

Surprises 58

New Growth Engines 60

Capital-Account Liberalization 62

Institutional Quality 68

Conclusion 80

References 81

CHAPTER 4 Can the Chinese Bond Market Support a Potential Global Renminbi? 83

Overview of the Chinese Bond Market 84

Chinese Treasury Market in International Perspective 91

A Dilemma and a Bold Public-Debt Consolidation Scheme 98

Government-Backed Debt Securities 103

Conclusion 107

References 107

CHAPTER 5 Waxing and Waning of the Chinese Stock and Banking Markets 109

Chinese Stock Market: Growing Despite Immaturity Flaws 109

A Massive Chinese Banking Market Opening 125

Conclusion 133

References 133

CHAPTER 6 Rising FX Turnover of the RMB 135

Could the Market Accommodate More Global Currencies? 135

What Determines the FX Liquidity of the RMB? 138

Potential for Rising RMB Turnover by Market Segment 143

Conclusion 149

References 150

CHAPTER 7 A Spreading Global Network for RMB Trade 151

The RMB’s International Position 152

Hong Kong Still the Dominant Offshore RMB Center 155

More Offshore Centers Catch Up to Spread a Global Network 158

Prospects for Offshore RMB Centers 164

Conclusion 169

References 169

CHAPTER 8 Brief Examples of Business Use of the Internationalizing RMB 171

Samsung’s Use of RMB to Reduce Foreign Exchange Conversion Costs 171

Alstom’s Use of RMB as Corporate Treasury Currency 173

Chinese Importers’ Profit Incentives from Use of RMB Trade Settlement: Changhong 175

Conclusion 178

Reference 178

CHAPTER 9 The RMB as a Reserve Currency 179

Global Perspectives 179

Scale of RMB Holdings 181

Drivers of Change 182

Exchanging RMB in a Crisis 190

Onshore and Offshore Access 190

Offshore Alternatives 191

Conservatives Change Course 192

Roadblocks Ahead? 193

RMB Inclusion in SDR 195

Capital-Account Reform 197

Conclusion 198

References 199

CHAPTER 10 Concluding Reflections 201

Appendix A: China RMB Financial Statistics and Forecasts by Other Institutions 207

Glossary 213

Index 215