Article
Renminbi Internationalization
China is by all accounts an economic powerhouse. It is the second largest economy in the world and the second largest trading nation. Inbound foreign direct investment (FDI) and outbound direct investment flows rank first and ninth in the world, respectively. However, China’s currency, Renminbi (Rmb), plays virtually no role in China’s international dealings. In June 2011, 98% of China’s international payment was settled in currencies other than the Rmb – 80% in US dollar.
This reliance on foreign currencies is costly. First, with the overwhelming share of China’s international trade settled in US dollar, Chinese traders face increased exchange rate risk and transaction costs. Second, years of trade surpluses and foreign capital inflows have seen China’s foreign exchange reserves balloon to the largest in the world. As of September 2012, China’s foreign exchange reserves amounted to US$ 3.29 trillion, most of which were held in assets denominated in US dollars. With the deteriorating economic and fiscal conditions in the US, this reliance on US dollar is both a sizable risk and a concern for the Chinese Government.