Rmb internationalization london

Specifically, this decision aimed at correcting the discrepancy between the reference rate exchange rate also known as the daily fixing or the central parity and the market spot rate. In December the PBC announced that the RMB exchange rate would henceforth reference a basket of currencies in an attempt to de-emphasize the de facto link to the U. The third set of measures that have supported the growing international use of the RMB accompanying capital account liberalization and reforms to strengthen macro-financial stability has focused on cross-border payments.

Since then, clearing banks have been opened in major cities and international financial centers across the world, including most recently in New York. In addition, they have access to the onshore interbank lending and bond market, and the foreign exchange market. This vehicle provides a streamlined platform for clearing and settling cross-border RMB payments, and will eventually also provide access to offshore participants and thereby support wider international use of the currency.

Bilateral swap lines provide a liquidity backstop to counterpart central banks. The PBC notes that the purposes of each bilateral currency swap arrangement include promoting bilateral trade and direct investment for economic development of the two countries, supporting domestic financial market stability, and other purposes agreed upon by both parties.

Although the purpose of foreign exchange intervention is not explicitly included, a counterpart can convert RMB into other currencies in the offshore market and use the funds for purposes it deems appropriate. With this decision the RMB joined the U. This was a recognition of the progress made not only with RMB internationalization, but also in reforming the Chinese economy.

Many see in the lack of diversification of global reserve currencies a source of weakness and vulnerabilities for the IMS IMF , b ; Zhou However, others argue that the dominance of a few currencies has served the IMS well, for instance by providing reliable and high-quality safe haven assets in times of financial stress.

Proponents of the more critical view about the current IMS argue that the drawbacks associated with the lack of reserve currency diversification are evident, in, among other things, 1 the liquidity shortages of U. For the proponents of these views, a more diversified system with multiple reserve currencies could ease some of the tensions arising in the current IMS.

Such a system would spread the advantages enjoyed by few reserve-issuing countries across competing currencies, strengthen incentives for fiscal discipline in reserve-currency-issuing countries, and mitigate systemic vulnerabilities arising from global spillovers and spillbacks of shocks or policy decisions in reserve currency issuers.

Thus, a multiple-currency system could facilitate the adjustment of global imbalances and help diversify risks. However, proponents of the more supportive view of the current IMS express doubts about whether a multiple-currency system would be more robust.

For instance, they consider that the financial turmoil in —09 was not just a problem of flight to quality, but rather a flight away from a number of credit markets such as the interbank market that would have occurred, independently of the number of currencies in the system. Policy spillovers from reserve currency issuers and the difficulties in managing volatile capital flows in non-reserve-issuing countries are seen mostly as a consequence of poor policies across the world rather than a systemic failure.

Moreover, in the context of unconventional monetary policies, any negative spillovers are more than compensated by the positive impact of these policies on domestic and therefore global growth. Skeptics of a multicurrency system also question whether a larger number of reserve currencies would reduce the extent of spillovers and spillbacks, or help improve global risk sharing and enhance the resilience of the current IMS.

In their view, a system of multiple reserve currencies could fragment global financial markets and liquidity, and increase global trade and settlement costs, thus undermining the stability and efficiency of the IMS. Therefore, a multiple-currency system could be less efficient and more unstable, as the close substitutability of reserve currencies could result in higher financial volatility.

Irrespective of these views, the increasingly multipolar structure of the global economy—of which China and the RMB internationalization are at center stage—and the ongoing structural shifts, such as the rapid expansion and increasing interconnectedness of global trade and financial markets, could provide conditions for a more diversified system of reserve currencies in the future. In this context, it is important to mitigate risks that could arise under such a system.

For sure, the potential for instability highlights the importance of sound and stable policies, especially in reserve-currency-issuing countries. It may also require international coordination to facilitate a smooth transition to a more diversified reserve currency system, including efforts to dampen any accompanying volatility in foreign exchange markets, and ensuring that the global financial safety net is large and broad enough to mitigate potential spillover effects on bystanders IMF c.

In this respect, as we discussed in the previous section, bilateral swap lines similar to the ones put in place between China and other countries provide an important liquidity backstop to counterpart central banks. The internationalization of the RMB has advanced substantially over the past decade. While the internationalization of the RMB has been supported through broad reforms, all of which will help move China onto a sustainable growth path, the internationalization of the currency is ultimately market driven.

Even as RMB use and trading is increasing, it still has a long road ahead before it becomes an international funding currency and acquires the attributes associated with a global reserve currency.

Progress in these areas will ultimately determine its broader role in the international monetary and financial system. This annex provides background on currency trading. The analysis relies on high-frequency trading data one-second basis provided by the Electronic Broking Services EBS , a leading platform for spot interdealer trading for most of the currencies in our analysis.

EBS reports the best bid and ask quotes, volume indicators, and the direction of trade. All quotes in the database are transactable, and therefore represent the prevalent spot exchange rate. Moreover, since all dealers on the platform are prescreened for credit and bilateral credit lines and are monitored continuously, counterparty risk is negligible when analyzing the data set.

These features of the EBS data set make it ideal for an accurate estimation and analysis of liquidity in the foreign exchange market. Although we present results for a large number of currencies, the focus is on the relative characteristics of the CHN. This sample was extended to October 6, , for the analysis in Box 9. Since the information for each exchange rate is irregularly spaced and to ensure comparability across currencies, the data are processed to construct second-by-second data and volume series, and then aggregated into minute-by-minute data.

For every minute, the transaction price of a deal is used to construct one-minute log returns. Observations between 10 p. Fridays and 10 p. Sundays Greenwich Mean Time are excluded, since only minimal activity is observed during these nonstandard hours. The data are filtered to eliminate any observation that does not reflect the market activity from the ultra-high-frequency data. This information is then used to construct quantity-and price-based liquidity indicators, which capture the extent of currency trading and the costs of executing trades that is, bid-ask spreads and effective trading costs , and gauge the resilience of a currency price impact and return reversal.

Returns in turn are multiplied by 10, to obtain basis points as the unit of measurement. It is not a currency, but a potential claim on the holdings of freely usable currencies of participants in the SDR Department currently all IMF members.

Allocations are not targeted based on need or any other consideration, but aim to supplement existing reserve assets. These characteristics imply that it is neither a direct liability of any single economy nor accumulated through a balance of payments surplus. The SDR can be held on the balance sheets of participant countries in the SDR Department or used unconditionally to obtain a freely usable currency to meet a balance-of-payments need or for other reserves management purposes.

SDRs are primarily exchanged for freely usable currencies through voluntary exchanges between members, typically mediated by the IMF through the system of Voluntary Trading Arrangements. The designation mechanism remains as a backstop by ensuring that participants with a balance-of-payments need can exchange on demand their SDRs with participants with a strong external position such participants cannot be obligated to increase their holdings of O-SDRs to more than twice their cumulative allocation , but this mechanism has not been used since Since the O-SDR has been valued based on a basket of currencies, which currently includes the U.

The recent inclusion of the RMB reflects its rising international use and trading. The SDR carries an interest rate determined by the yields on three-month Treasury bills of the component currencies, making its return comparable to that of an asset of the highest credit quality.

The SDR mechanism is self-financing and levies charges on allocations, which are then used to pay interest on SDR holdings. If the SDR holdings of a participant are equal to its allocation, the charges are equal to the interest received.

Conversely, if it holds fewer O-SDRs than allocated, it pays interest on the shortfall. In its initial analysis, the IMF has highlighted that M-SDRs reduce foreign exchange and interest rate risk relative to single-currency instruments, but there are some drawbacks and challenges IMF a. However, the SDR represents only one of many possible sets of portfolio weights, and issuers or investors could use existing instruments to replicate their preferred weights at a relatively low cost.

There are also challenges to market development, including settling and clearing of M-SDR transactions, dealing with potential basket redefinition, and fostering secondary market trading in order to generate liquidity and market depth. Taking advantage of the potential benefits of the M-SDR the Chinese authorities have been supporting the issuance of M-SDR bonds, which they also expect will support the process of global reserve diversification and the stability of the IMS.

These bonds, which are tradable in the Chinese interbank market, had an initial offering for SDR million and a maturity of three years, and are payable in yuan upon maturity. This offering is the first in the past 35 years in the world and is expected to be the first step to set an M-SDR bond market in China.

In addition, the Chinese authorities have been supporting the SDR as a unit of account for economic statistics, financial statements, and pricing of transactions. This should help reduce valuation changes caused by large fluctuations in major currencies IMF a. In this manner the Chinese add to the handful of instances in which the SDR is used as a unit of account.

Data are published in SDR terms in the International Financial Statistics, a number of international and regional institutions use the SDR as a unit of account for their balance sheets, and the lending of some multilateral development banks is denominated in SDRs. The SDR is also used to price some transactions with a multinational character—Suez Canal fees and damages, such as lost baggage claims, incurred by air carriers under the Montreal Convention.

Chinn , Menzie. Eichengreen , Barry. Oxford : Oxford University Press. Reforming the International Monetary System. Centre for Economic Policy Research. Frankel , Jeffrey. He , Dong , and Robert N. Jordan , Thomas. Katzenstein , Suzanne. Kenan , Peter B. Currency Internationalization—An Overview. Princeton, NJ : Princeton University.

Krugman , Paul. Bilson and R. Chicago : University of Chicago Press. Landau , Jean-Pierre. Law , Daniel. International Monetary Fund , Washington , forthcoming. Mancini , L. Ranaldo , and J. McCauley , Robert. McGuire , Patrick , and Goetz von Peter. Dollar Shortage in Banking. Zhou , Xiaochuan. We are greatly indebted to IMF staff involved in the review.

Raphael Lam, and Mark Milford for their comments and encouragement to prepare the chapter. When non-U. On the contrary, they concentrate transactions in international financial centers such as the eurodollar market in London. It is for this reason that many consider that without offshore markets the U. See He and McCauley This provides a better picture of official reserves holdings of RMB. Yields are important determinants of internationalization.

Evidence shows that one of the most important factors in explaining the growth of the euromarket was the dollar yield McCauley Order flow refers to signed volume. Trades can be signed depending on whether the deal is initiated by the buyer or the seller. The dealer posting the quote is the passive side of the trade. All Rights Reserved.

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