Introduction

Internationalization of the Renminbi (RMB) has become a new buzzword, leading to various theories about its impact and prospects. “Currency War,” a best seller in China that Chinese leaders have reportedly read, engages in a conspiracy theory depicting how the United States and its investment banks made the US dollar the international reserve currency. Commentators have therefore established that currency internationalization requires strong state action at a critical juncture. The British pound, for example, remained the dominant currency even after the United States replaced the United Kingdom as the biggest economy in the late nineteenth century. Not until after World War II did the United States spend nearly two decades pushing the US dollar to the pinnacle by using the postwar economic conditions in the United Kingdom to its advantage. It has also been argued that the transition to a high-growth economy requires exogenous “accidents and good fortunes” that break the path dependence and institutional equilibrium at a lower level of growth. Interestingly, this sounds very similar to the recent comment of Zou Xiao-chuan, the President of the People's Bank of China (PBoC): “RMB internationalization requires luck and opportunity, and the [recent] global financial crisis is the one.”

The long-term goal of the RMB internationalization scheme (the “Scheme”) is to make the Chinese yuan an international settlement, investment, and reserve currency. With the RMB as the settlement and investment currency, China no longer needs to accumulate large amounts of foreign reserve due to foreign exchange; rather, foreign direct investment (FDI), as well as overseas revenues of Chinese export firms, could flow directly into domestic markets in RMB without conversion. Chinese firms will also be free from currency exchange risks. At present, to manage its immense foreign reserve, China has no better option than to purchase US treasury bonds, thereby subjecting the value of its assets to the fluctuations of the dollar and US monetary policy. Perhaps more importantly, if the RMB becomes an international reserve currency, China may resort to printing RMB to diffuse its own economic risks, similar to what the US Federal Reserve did during the 2008 financial crisis. There is no doubt that China would be able to exert more influence on the global stage with a genuinely internationalized RMB.