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Management & Engineering 14 (2014) 1838-5745
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Empirical
Analysis
Internationalization
of
Factors
Influencing
RMB

Lihong JIN1, Wenjie DU2
1. School of Finance and Economics, Jiangxi Normal University, 330022, P.R.China
2. School of Finance, Central University of Finance and Economics, 100081, P.R.China
KEYWORDS
ABSTRACT
RMB internalization,
Influencing factors,
Offshore market
The rapid development of China economy has aroused our rethinking of the prospect of the
world economy, one of the most remarkable subjects is the possibility of the Chinese
currency RMB springing up to be the international currency. Through the econometric
analysis of GDP, balance on current account, price index and fixed deposit rate of China, this
paper aims to digging out the inner causes which could influence RMB internationalization.
The notable causes that studied by the paper include the total amount of economical
development, inflation rate and real interest rate, etc. This paper considers that some
measures can be taken simultaneously which could give full play to the role of both domestic
and foreign markets, including implementing step-by-step and progressive convertibility of
capital account, gradually improving the operational efficiency of the financial market in the
territory, making full use of the advantage of Hong Kong outside of the territory, expanding
size of the RMB offshore market and stock market and promoting the process of RMB
internationalization.
© ST. PLUM-BLOSSOM PRESS PTY LTD
1 Introduction
Since the reform and opening up the economy has been developed rapidly for 30 years. China has become the world’s second largest
economy and the world’s largest foreign exchange reserves kingdom, therefore the economic growth and trade development calls for
RMB internationalization. However, compared to the advanced financial superpowers, our country is still a developing country with
relatively weak financial system. We should be awarded that in strategic transition period RMB does not have the fundamental
qualifications to be completely international and to become an international reserve currency. Consequently, our country should be
careful in the analysis and evaluation of the influencing factors of RMB internationalization. To accelerate the process of RMB
internationalization, we should be prepared in advance to avoid hazards.
This paper has set up three model measurement analyzing the influencing factors of monetary international level under three
measures. This paper structures as follows: The second part summarized the meaning of RMB internationalization and the present
situation of RMB circulation and the connotation of internationalization; the third part measurement analyses the main deciding
factors of the degree of RMB internationalization. The fourth part of RMB analyses the feasible internationalization path and puts
forward the feasible plans.
English edition copyright © ST. PLUM-BLOSSOM PRESS PTY LTD
DOI:10.5503/J.ME.2014.14.006
33
2 The Meaning of RMB Internationalization
2.1 The meaning of currency internationalization
Academic circles at home and abroad have quite a lot of writings about the meaning of currency internationalization. Generally
speaking, currency internationalization refers to the valuation, settlement and value storage function played in the international
communications and is the currency in the expansion of function from domestic to abroad. International valuation communication
contains the trade among goods, services, and financial assets. Valuation function refers to the currency as the standard of value in
international economic communication, reflecting the general equivalence function of currency on the foundation of value stability.
Settlement function gives play to the means of payment, realizing the transfer of rights and obligations in the form of currency,
reflecting the function of trading media, and taking settlement and clearing system as the foundation. Value storage function can
transfer the value in the matter of time, reflecting currency credit function. These three functions are closely connected. Standard of
value is the foundation and value storage function is the core which is the embodiment of currency internationalization achievements
and the important national strategic interests. The nature of international currency is that it can be held by the residents and can be
circulated overseas.
2.2 The current situation of RMB
Since the 1980s, our country has gradually relaxed the foreign exchange control, realizing the free convertibility under the current
account which is in line with the international monetary fund (IMF) agreement article 8 “Avoid Regular Pay Limits”; “Avoid
Discriminatory Monetary Measures”; according to “Exchange Foreign Holdings of National Currencies” provisions, on January 1,
1997, China is transited to “the 8th term countries” and RMB is recognized as a convertible currency. At present, the state
administration of foreign exchange is planned to loose the restrictions of free convertibility on capital accounts and implement capital
accounts freely convertible in a certain range. According to the regulation of International Monetary Fund, if the currency of one
country can realize current account and capital and financial project convertible, it can become free convertible currency. Table 1 is
the proportion of RMB in the economy and trade settlement of neighboring countries and regions in 2006. Table 2 is the condition of
RMB foreign circulation. Therefore, the author thinks that RMB has entered the early stages of the freely convertible, and the
research and preparation should be strengthened in the involving problems of the internationalization.
Table 1 Proportion of yuan settlement in neighboring countries (regions) trade (2006)
Countries (regions)
Vietnam
Burma
Mongolia
Korea
Russia
Kazakhstan
Nepal
Proportion (%)
96
90
71
79
0.002
0.002
5.43
Table 2 RMB overseas circulation condition
Countries (regions)
RMB Circulation Condition
Hong Kong
From 2004 to 2006, Hong Kong has remitted totally 2.2 billion to mainland; total withdraw
cash and consumption by mainland in Hong Kong add up to 2.06 trillion.
Korea
RMB is called “The Second Dollar”, cash inflow amount is 307 million and 320 million
respectively. RMB settlement amount is 41.49 million in export trade with the proportion of
7.54% in export sales.
Mongolia
50% of Mongolia domestic currency is circulated by RMB. According to preliminary
estimates, 1.3 billion yuan will inflow to Mongolia annually.
Vietnan
Mainly exchange RMB by unrecognized financial sectors, nowadays RMB is the preferred
currency in trade between China and Vietnam. In the end of 2004, 6.4 billion RMB has been
stuck in Vietnam with the proportion of 30% of total RMB amount stuck overseas.
Burma
RMB is called “Little Dollar”, circulated widely as hard currency.
Laos
RMB can replace domestic currency in the Northeast three provinces of Loas, even in
capital area.
Cambodia
RMB is widely used as trading currency and national reserve currency.
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2.3 Meaning of RMB internationalization
When it comes to RMB becoming international currency, we should give priority to the concept of RMB internationalization.
Nowadays, each school sticks to his own argument of RMB internationalization concept without any consensus. Robert Mundell
determined a simple definition of currency internationalization, that is, when currency goes beyond legal circulation area or the
currency scores or multiple is imitated by other areas (Sun Zhaodong, 2010). Hu Jiangyun (2010) holds that RMB experiences a
process from national currency to the currency which can cross borders, circulate overseas, and be internationally recognized with the
function of pricing, international clearing and reserve, but he has not defined RMB current level. From the point of RMB level
progress, this paper will define RMB internationalization to a progress that RMB is evolved from convertible currency in early period
to international currency and conduct empirical analysis of factors which could influence RMB internationalization.
3 Construction and Analysis of Econometric Model
At first we choose endogenous variables of empirical model according to relevant variable which decide international reserve
currency. On this basis, we construct empirical model and make analysis of model estimation and results.
3.1 Selection of model variables
Great numbers of literature have interpreted which factors have decision effect in the process of currency internationalization. There
four factors approved by the majority of researchers including economic scale, stability of monetary value, network externality and
the developed and open financial market. Thus, we can depend on those factors to select variables and handle according to
econometric model and data.
At first, we ensure the variable of economic scale. Since national economic scale is evaluated by domestic output and trade, we can
choose the proportion of domestic GDP making up global GDP for example. Trade variables must focus on foreign trade, as a large
foreign trade exporter, China selects current account balance can even explain practical situation of foreign trade. Secondly, there are
multiple choices of financial market variables, such as scale of bond market and yield rate of financial market can explain different
aspects of financial market development. Allowing for data availability, this article selects fixed-term deposit rate which represents
benchmark yield of financial market. Thirdly, choosing variables of network externality is a trouble. Because substitution variables
are difficult to find, we choose dollar share in international reserve as a substitution variable. The rationality lies on the reverse
correlation between dollar reserve share and China network effect. Finally, the stability of monetary value can be expressed either by
exchange rate or by rate of inflation which determine currency external value and internal value representatively. To some extent,
currency inflation responses to the exchange rate, thus this article chooses currency inflation to evaluate the stability of currency
value.
3.2 Construction and analysis of econometric model
The econometric model in this article use research in Chinn and Ftankel (2005) and Chen and Peng (2007) for reference. We use
fluctuation rate of RMB exchange rate (Open Index, WDI data base) as a variable of RMB internationalization. The greater exchange
rate fluctuates, the more open and international RMB is. However, we have not done logistic transformation correspondingly to RMB
internationalization. Fluctuation rate is not so low that could influence susceptibility, so it is unnecessary to do logistic transformation.
In addition, there is a difference in selecting variables between research in this article and two researchers mentioned above.
Forms of econometric models showing below:
RESERVE  1  2GDP  3CUR  4 DEP  
(1)
RESERVE  1  2GDP  3CUR  4 DEP  5CPI  
(2)
RESERVE   1   2GDP   3CUR   4 DEP   5CPI   6US  
(3)
RESERVE represents RMB fluctuation rate, GDP is the proportion of domestic GDP making up global GDP, CUR is current account
balance in Japan, DEP is RMB one-year deposit rate, CPI is annual inflation rate in China, US is dollar share in international reserve.
The aim for this article estimating three models is to solve possible omissions of explanatory variables by increasing explanatory
variables gradually from model (1) which contains fewer explanatory variables. At the same time, this method can select regression
model which has strong ability to explain. The data in this model is from China State Statistics Bureau, Statistical data base of
International Monetary Fund and WDI data base in the period from 2002 to 2011.
3.3 Model estimation and results analysis
According to the models mentioned above, we estimate model results showing in Table 3.
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2
Seeing each test result from models, R of three models is over 0.9 which illustrates three models can explain well to explained
variables. From D-W inspection, White Hete-ske inspection and ARCH inspection in three models, there is not serial correlation,
heteroscedasticity and ARCH in residual error of regression equation. This inspection regression equation residual illustrates the
setting of regression equation is basic right, thus, the estimated factors in the models are reliable.
Table 3 Results of regression model
Constant
GDP
Cur Balance
Deposit
Model 1
3.822
(2.090 4)
0.32
(2.873 4)
-2.18
(-2.396 6)
0.433 1
(3.088 1)
Model 2
3.704 2
(2.000 3)
0.26
(2.149 2)
-2.81
(-3.875)
0.467 2
(0.122 1)
-0.321 5
(-1.344 3)
0.918 9
2.071
0.31
0.198 2
0.921 3
1.997
0.79
0.032 1
CPI
Model 3
3.673 7
(1.088 6)
0.26
(2.287 7)
-2.76
(-3.554)
0.455 2
(3.045 7)
-0.122 5
(-1.423 2)
0.02
(0.001 8)
0.925 8
1.988
1.031
0.021 5
US Res Share
R-squared
D-W
White Hete-ske
ARCH Test
2
We can see from the three models that after adding the inflation variable into model 1, R in model 2 experiences a modest increase
compared to model 1, which show the explanatory ability in model 2 is stronger than in model 1. After adding the variable of dollar
2
international reserve share, R in model 3 increases. The explanatory ability is stronger after adding new variables. Thus, model 3
is the model which has the best regression effect.
From the estimated result of factors in model 3, sign of the factor is positive which is consistent with that anticipated and in the
bracket is significant statistically which show that it is a positive effect to RMB internationalization when the proportion of China
share increased. Although the factor of current account balance in China is significant on the statistic, the factor is negative which
means an economic entity with serious trade deficit. This is consistent with the fact that trade deficit in America are more serious
than that in Japan, but internationalization level of currency in the former country is higher than that in the latter country. Factor of
RMB fixed-term deposit rate is positive, which is as same as anticipated and significant statistically. These data show that the
increase of RMB return on asset can enhance foreign demands for RMB reserve which also promotes RMB to be more international.
It is negative correlated between inflation rate and RMB internationalization, that is, the higher the inflation rate, the more obstacles
for RMB internationalization. According to the empirical results analyzed above, RMB internationalization is determined by China
economic scale, RMB return of asset, international payment surplus and RMB value stability.
4 Policy Proposals
The complete exchange of RMB in the capital account will face great difficulty in short term, because China’s financial system is
vulnerable, and this is a kind of inevitable, reasonable institutional arrangement in the process of system reform in China. The
implementation of the mild financial repression policy in the process of reform is important experience of the success of China’s
reform, but this kind of financial oppression led to today’s unhealthy financial system. If RMB achieves convertibility in a hurry, a
lot of money may exchange for foreign currency and run abroad, this will cause significant impact on China’s financial system and
even the whole economy, the Chinese government will therefore lose huge seignorage revenues, while it can not collect seigniorage
in the RMB internationalization. Therefore, the short-term steps of RMB internationalization need elaborative research.
Many scholars have made their point of view for the choice of RMB international path. According to the characteristics of the
Chinese economy, Li Daokui (2008) adopts a kind of double track, gradual RMB internationalization steps in the paper. Yang
Changchong (2010) made a detailed analysis for the target of RMB regionalization and considered the necessary conditions for RMB
internationalization. He put forward that we should promote the adjustment of economic growth pattern and the process of opening
the capital account. In terms of the long-term target of the RMB regionalization, for many unsure factors, we should make flexible
adjustment according to the process of RMB regionalization and the domestic or international conditions change which china faces.
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We must take both actions in order to promote the process of RMB internationalization. Firstly, we make step-by-step and gradual
capital account convertibility in China. At the same time, we have to strengthen the efficiency of China's financial system,
encouraging and promoting foreign trade enterprise in RMB and providing switch service. Then in overseas, mainly in Hong Kong,
we develop it into a offshore RMB centre, as Hong Kong is a mature financial market and relatively independent financial cent er, it
firstly becomes a monetize area. This measure will greatly dissolve the pressure on RMB’s appreciating into the mainland.
In all, it is a historic development trend for RMB to become the international currency. But today barriers still exist for RMB as the
international currency totally; this would be a long historical process. In order to remove this obstacle, the foreign and domestic
markets can be fully played. In the domestic market, financial institutions and the operational efficiency of the financial market are
gradually improved, and instantly make the RMB convertible under capital account; on the other hand, In the overseas market, we
should make full use of the advantages of Hong Kong as a international financial capital, expanding RMB bonds market and the size
of the offshore markets, so as to meet the RMB and the euro and the dollar market into a competitive pattern. If conditions are ripe,
the RMB will be the world's major currency, and it will form a three pillars situation with the U.S. dollar and the Euro.
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