The Effect of Rmb Internationalization

Effects on China

Advantages: Enterprises in China Enterprises in China may benefit a lot from the internationalization of the Renminbi. First of all, the cost of currency exchange can be saved and the risk of the exchange rate of using other currencies can be reduced if the Renminbi becomes a trade settlement. Also, RMB as an investment currency, if foreign assets increased demand of it, China can reduce the interest rates of RMB assets, thereby reducing their financing costs, and further, companies can go overseas to issue RMB-denominated bonds, thereby expanding the scope of financing and address the problem of currency mismatch.

Furthermore, Domestic firms can use the RMB to invest abroad, to achieve Chinese enterprise's "going out" strategy, integrating into the global economy. The people’s Republic of China China may have quite a lot of advantages from it too. First, it may enhance the international status of China through the internationalization of the Renminbi by increasing China's voice in the international community and the influence of China in international economy, as the internationalization of its currency may promote the expansion of China’s financial service sector.

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Also, China may collect ‘ seigniorage from the rest of world, which ‘ seigniorage’ defined as the margin between the denomination of the notes and the cost of issuing the notes obtained by the note issuer, if RMB get commodity pricing, which can use it to buy the worldwide resources and avoid U. S. dollar liquidity constraints, that leads to expansion of seigniorage revenue. More, China has accumulated foreign exchange reserves to ease the pressure, reduce the risk of reserve assets shrink, reducing the dependence of other countries (mainly U. S. ). China's foreign exchange reserves, mostly are U. S. overnment bonds, which makes China and U. S. in a delicate state. After global financial crisis, the Chinese foreign exchange reserves shrink every moment, but China is not found in other better investment options, holding dollar debt is the best choice for China at this moment. Financial organizations The financial organization may also take advantage of RMB internationalization. First, the import and export trade companies for RMB provide clearing services and financing for foreign importers to provide support to the RMB business so as to expand the scope of commercial banks and to increase the profits of commercial banks.

Furthermore, The existence of economies of scope to improve the competitiveness of financial institutions, and the increased use of offshore yuan to improve market liquidity, more importantly, the central bank can protect the lender of last resort to provide liquidity for financial institutions to protect, Chinese financial institutions to reduce foreign exchange liquidity risk, which together with the economies of scope to improve the overseas Chinese financial institutions to conduct renminbi business competitiveness.

Also, RMB overseas demand also contributed to the innovation of financial instruments and the development of the renminbi derivatives market. Last but not the least, it may benefit from increasing the influence of China's financial markets and promote the international financial center, like Shanghai, as well as an offshore financial center, Hong Kong, the development of renminbi, the Chinese financial markets and further integrate into the international financial markets. Disadvantages PRC government

The PRC government, however, still has to face some challenges in order to achieve RMB internationalization. First of all, as China’s capital markets are still too shallow, any significant changes in cross-border capital flows may easily lead to large fluctuations in China’s asset prices. Overseas demand challenges the RMB of China's monetary policy, while people who hold the RMB assets may cause the increase of cross-border capital flows and exchange rate fluctuations, and thus affects the stability of China's financial system.

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