One Currency, Two Markets: China's Attempt to Internationalize the Renminbi

347 Pages·2021·3.264 MB·English

by  Edwin L.-C. Lai

One Currency, Two Markets
Thisbookisforanyonewhoisinterestedintheeconomicanalysisof
thefutureoftheinternationalmonetarysystemandtheUSD,andthe
risingimportanceoftheRMB.Itpointsouttheunsustainabilityofthe
dollar standard in the long run, that China has unique incentives to
internationalizeitscurrency,andhowHongKongplaysanimportant
role. It explains the real reasons for China to internationalize its
currency, including using external commitments to force financial
sector reforms (“daobi” in Chinese). It applies economic theories
accessible to laymen to establish that financial development and
openness are crucial for RMB internationalization to succeed,
and that greater exchange rate volatility is inevitable due to the
“open-economytrilemma”.Employingthe“gravitymodel,”thebook
predicts quantitatively that, by2030, the RMBcan be a distant third
payment currency after the USD and the euro but surpassing the
Britishpoundsterling.
 .-.  is Professor of Economics at HKUST. He has been
Senior Research Economist and Adviser at the Federal Reserve Bank
of Dallas, a consultant with the World Bank, and a visiting fellow at
Princeton University. He is an associate editor of Review of
International Economics and has published numerous papers in
leadingeconomicsjournals.

One Currency, Two
Markets
’
China s Attempt to Internationalize
the Renminbi
   
.- .
HongKongUniversityofScienceandTechnology
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Informationonthistitle:www.cambridge.org/9781108491686
DOI:10.1017/9781108647236
©EdwinLun-CheungLai2021
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Names:Lai,EdwinL.-C.,author.
Title:Onecurrency,twomarkets:China’sattempttointernationalizethe
renminbi/EdwinL.-C.Lai,HongKongUniversityofScienceandTechnology.
Description:Cambridge,UnitedKingdom;NewYork,NY:CambridgeUniversity
Press,2021.|Includesbibliographicalreferencesandindex.
Identifiers:LCCN2021000172(print)|LCCN2021000173(ebook)|
ISBN9781108491686(hardback)|ISBN9781108740586(paperback)|
ISBN9781108647236(epub)
Subjects:LCSH:Renminbi.|Money–China.|Foreignexchange–China.|
Capitalmarket–China.|Finance–China.
Classification:LCCHG1285.L352021(print)|LCCHG1285(ebook)|DDC332.4/
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Tothememoryofmyparents,ShuxinandYi

Contents
ListofFigures pageviii
ListofTables xi
ListofBoxes xiii
Preface xv
Acknowledgments xxi
AShortSummaryofThisBook xxiv
ListofAbbreviations xxxiv
1 Introduction 1
2 China’s Aversion to aFloatingExchange Rate 22
3 Why Does ChinaWantto InternationalizetheRMB? 37
4 China’s Strategy ofInternationalizing the RMB 58
5 The Importance of Capital AccountLiberalization 95
6 The Importance of Financial Sector Reform 138
7 The Importance of the Offshore RMBMarket 194
8 The Potential of the RMBas a Payment Currency 241
9 The Prospects of RMB Internationalization 269
References 287
FurtherReading 299
Index 301
vii
Figures
0.1 Asummaryofthetheoreticalframeworkof
thisbook pagexxxii
1.1 HistoricalCNY/USDexchangerate(yuanper
dollar),2013–2019 2
1.2 MonthlyRMBdepositsinHongKonginbillionUSD,
2004–2019(excludingcertificatesofdeposit) 3
1.3 Sharesofcurrenciesinthetotalamountofallocated
foreignexchangereservesacrosstheglobeby2019Q2 7
1.4 Averagebid–askspreadofselectedcurrencypairs,
2013–2017 12
1.5 China’sforeignexchangereserves,1994–2018 16
2.1 HistoricalCNY/USDexchangerate,1981–2018 23
2.2 ShareofprocessingexportsinChina’stotalexports,
1993–2018 24
2.3 China’scurrentaccountbalance,1982–2018 25
2.4 Foreignexchangereserves(excludinggold)ofselected
countries,1980–2018 30
2.5 ExchangeratevolatilityagainsttheUSD,1996–2019 34
3.1 ExcessreturnofChineseoverseasassetsoverits
overseasliabilities,2005–2017 45
3.2 ExcessreturnofUSoverseasassetsoveritsoverseas
liabilities,2005–2017 46
4.1 Top15offshoreRMBeconomies(intermsofpayment)
byweightasofJune2018 66
4.2 OffshoreRMBdepositsbyregionasof2019Q2
(excludingcertificatesofdeposits) 68
4.3 OutstandingRMBbondsissuedinHongKongby
typeofissuerasoftheendofOctober2015 70
4.4 RMBfinancingactivitiesinHongKong,2010–2016 71
viii
   ix
4.5 AmountofRMBbondsissuedinHongKong,
2010–2017 72
4.6 AmountofglobalCNHbondsissued,2007–2018 72
4.7 Cross-borderRMBtradesettlement,2012–2019
(quarterly) 75
4.8 AllocationofRQFIIquotasasofendof2106(in
billionyuan) 83
4.9 Proportionofglobalinternationaldebtsecurities
outstandingdenominatedinRMBandUSDasof
mid-2019 89
4.10 ProportionofglobaltradeofgoodssettledinRMB,
2012–2019 91
4.11 TheRMBGlobalizationIndex,2013–2019 91
5.1 Chinn–ItoIndexnormalizedtotherangebetween
0and1,1997–2017 98
5.2 Grossinternationalinvestmentpositionasa
percentageofGDP(defactomeasureofcapital
accountopenness),1996–2019 102
Box5.1A Theopen-economytrilemma 118
Appendix5.1 Monthlygrosscapitalflowandexchange
ratevolatility 133
Appendix5.2 Monthlygrosscapitalflowandexchangerate
volatility(3-monthmovingaverage) 134
Appendix5.3 Monthlygrosscapitalflowandexchangerate
volatility(5-monthmovingaverage) 135
6.1 IMFFinancialDevelopmentIndex,1996–2018 141
6.2 PBCbenchmarkone-yeardepositandlendingrates
from1998to2019 152
6.3 Lendingrateliberalizationtimeline 153
6.4 One-yearactualaveragelendingrate,benchmark
lendingrate,loanprimerateandmedium-term
lendingfacilityrate,2010–2020 155
6.5 Actualaveragedepositrateandthebenchmark
depositrate(1-year) 157