Renminbi Internationalization: Progress, Prospect and Comparison

Abstract

Using principal component analyses, this paper constructs two internationalization indices for the renminbi (RMB) and 32 other major currencies. We find that the RMB`s currency internationalization degree index (CIDI) is still low, and far behind the 4 most important international currencies. In 2009, it was ranked 18th among all important international currencies. However, in terms of the currency internationalization prospect index (CIPI), the RMB has remained the world`s fifth highest since 2006. Although it is still far behind the US dollar and the euro, surpassing the ranking of the yen and the pound is possible in the near future. The dramatic difference in the ranking between the CIDI and the CIPI is a result of China`s tight capital account control, the usage continuity of international currency due to network externalities, and the narrow foreign exchange and imperfect financial markets. Hence, to a large degree, the RMB`s potential as an international currency depends on China`s capital account liberalization.