Eswar Prasad

The Renminbi’s Role in the Glogbal Monetary System

Eswar Prasad and Lei Ye

Of the currencies of the world’s six largest economies, China’s renminbi is the only one that is not a reserve currency. In this study, we consider three related but distinct aspects of the renminbi’s role in the global monetary system:

Internationalization: its use in denominating and settling cross-border trade and financial transactions, that is, its use as an international medium of exchange.
Capital account convertibility: the country’s level of restrictions on inflows and outflows of financial capital. A fully open capital account has no restrictions.
Reserve currency: whether the renminbi is held by foreign central banks as protection against balance of payments crises.

Given its size and economic clout, China is adopting a unique approach, which we refer to as “capital account liberalization with Chinese characteristics.” We anticipate the following outcomes:

The government’s medium-term objective, which we believe will be achieved in the next five years, is an open capital account but with numerous “soft” controls. This will allow the currency to play an increasingly significant role in global trade and finance, but in a manner that allows the government to retain some control over capital flows.
The renminbi will be included in the basket of currencies that make up the International Monetary Fund’s Special Drawing Rights basket within the next five years.
Although China’s rapid growth will help promote the international use of its currency, its low level of financial market development is a major constraint on the likelihood of the renminbi attaining reserve currency status.
The renminbi will become a reserve currency within the next decade, eroding but not displacing the dollar’s dominance.

Executive Summary

Full report

Launch event: Brookings Institution, Washington, DC (featuring Don Kohn and Stephen Roach)

“Will the Renminbi Rule?” Finance & Development, March 2012. (254k pdf)

“The Renminbi's Prospects as a Global Reserve Currency,” VoxEU.org, 16 February 2012. (135k pdf)

“Will China's Yuan Rival the Dollar?” Wall Street Journal, 8 February 2012. (291K pdf)