What Are The Pros And Cons Of Rmb Internalization

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RMB internalization looks to be a global trend. Please analyze the pros and cons of internationalized RMB for the economy of Mainland China by reviewing the history of British Pound, US Dollar, Japanese Yen and Euro as international currencies.

Over the past few years, some financial reports estimated that Renminbi will become the third major global settlement currency (together with the US dollar and the Euro). In fact, RMB internalization contributes both positive and adverse effects to the economy of Mainland China.

We would first look at the pros of RMB internalization. The first advantage is the revenue of seigniorage. Seigniorage can be treated as the revenue of the government when the value of the currency is higher than the cost producing
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That is, China has to face the transitional risks. Since the market of China is opened to the world as RMB internalization, the economy of China is highly correlated to the economy of the world. Thus, anything happened in the global financial market will have influence on the economy of China, especially the exchange rate market. If there is a difference between the nominal exchange rate and the real exchange rate, then there will be an arbitrage opportunity. This will stimulate the short-term speculative capital from the global investors to the exchange rate market and therefore have an adverse effect to the stability of Chinese economy. More, since the demand of RMB increases, it will be inevitable that a certain degree of exchange rate appreciation of RMB will…show more content…
The second disadvantages of RMB internalization is that it will increase the difficulty of regulate and monitor the cash flow of RMB in the global financial markets. Since it is quite hard to have a management and monitoring system for the RMB in the offshore market, and thus increase the difficulty of central bank to regulate the cash flow of RMB. Also, RMB may also be associated with some illegal activities such as, smuggling, drug trafficking and so on. It not only affects the stability of Chinese economy, and also increases the difficult to fight against the counterfeiting and money laundering.

Overall, it can be seen that RMB internalization has both pros and cons to the economy of China. However, it seems that RMB internalization is a global trend. Therefore, if the Chinese government aims to minimize the adverse effects of RMB internalization, it would be better to develop a good regulation system for RMB in both local and offshore market so that the stability of Chinese economy can be

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