Abstract
Theoretical research on currency internationalization focuses on supply much more than that on demand. In the last ten years, economic and trade links between China and Latin America underwent a leap-forward development. From the perspective of demand and under the circumstances brought by competitive currency oligopolies and monopolies, the circulation of the RMB in Latin America is influenced by local macroeconomic growth, inflation, exchange rate policies and government management. At the first stage of the internationalization of the RMB, cooperation between China and Latin America is an effective way to expand its influence in Latin America. The research on Latin America is going to provide helpful case support for area selection in terms of the internationalization of the RMB.
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Fred Hirsch, Money International, London: Penguin, 1969.
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In fact, currency cross-region circulation was common before modern national state.
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Zhang Yuyan, Zhang Jingchun, “Nature of Currency and the future selection of RMB-Also on Asian Currency Cooperation”, in “Contemporary Asia-Pacific Studies”, pp. 9–43 Press 2, 2008.
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Benjamin J. Cohen, The Geography of Money, Cornell University Press, 1998, p. 5; C. A. E. Goodhart, “What is the essence of Money?”, Cambridge Journal of Economics, Vol 29, Issue 5, 2005. The latter pointed out that the right size of relative power was the determinant.
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There are four types in market structure, and they are perfect competition, perfect monopoly, monopolistic competition, and oligopoly. The feature of oligopoly market is, rare manufacturers control the market structure of produce and sale of some industry. The less the manufacturers are, the harder to get in or out the business, the stronger interdependence between them. The reasons could be economy size, advanced technology, bigger investment, and government special permission. The typical industries are petroleum, automobile, steel, etc.
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The Perfectly Competitive Market defines the four assumptions including Prices Established, Product Homogeneity, free flow of resources and complete information. Without any of them, the market is imperfectly competitive.
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After World War I, with the gradual rise of the United States, Monroe Doctrine and Pan American Doctrine have become the major guiding ideology. Joined with more than 20 Latin American countries, the US has become the center of Economic Community to construct “the Dollar Bloc”, and the US dollar currency area has been taken into shape.
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Qifted a few characteristics of monopolistic competition, but the barriers block heavily, long-term cost curve remained unchanged approximately.
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See Footnote 14.
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Due to limited data and few literature on studies of settlement currency, the outstanding literatures in recent years are from Goldberg (2005) and Kamps (2006). Goldberg indicated, the Dollar is the leading currency in settling import and export business. Generally speaking, Eurozone countries will impose 1/3 export settlement by the Dollar, and 40% in import, similar situation will occur in UK, which share 26% in export currency settlement and 37% in import. Goldberg, Linda S., and Cedric Tille, ‘Vehicle Currency use in International Trade’. NBER Working Paper 11127. NBER, 2005; MA. Goldberg, Linda S., ‘Trade invoicing in the Accession Countries: Are They Suited to the Euro?’ NBER Working Paper 11653, 2005. Kamps made correction and improvement on the theory of Goldberg and Tille (2005), calculating the market share of various currencies in 42 countries for settlement in import and export, which clearly brought an intuitive understanding on competitiveness. Kamps, A., “The Euro as invoicing Currency in International Trade”, pp. 43–50, ECB Working Paper Series, No. 665, 2006.
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Ye Fang, Du Chaoyun: “Currency Competition under the present international monetary system—Analysis on Dual Oligopoly Model”, in “Shanghai Finance”, Press 4, 2012, pp. 45–49.
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http://www.imf.org/external/np/sta/cofer/eng/index.htm. Calculation based on foreign exchange reserves of identified currencies.
- 22.
It is worth mentioning that reserves in unidentified currencies are not taken into consideration, including the foreign exchange reserves of non-IMF members and unpublished foreign reserves of IMF members. Recent years have seen an increase in the share of reserves in unidentified currencies in the total reserves of developing economies, from 44.4 to 61.3% in 2011.
- 23.
Ye Fang & Du Chaoyun. “Currency Competition under the Current International Currency System—Analysis based on the Duopoly Model”. Shanghai Finance. 4 (2012). In the paper, the Hotelling model is applied to discuss the stability of international currencies. Current studies on RMB internationalization expose that stability is a higher goal to attain.
- 24.
Current studies focus on four aspects. First, the mutual dependence and mutual influence between China’s economy and world economy render RMB internationalization an essential way to protect economic development environment. See Wang Yuanlong. “Study on Several Problems about RMB Internationalization”. Finance & Trade Economics. 7 (2009). Bin, Xia. China’s Development and International Financial Order”. Theoretical Horizon. 1 (2011). Second, it is necessary for the RMB to acquire the power of international currency in order to improve the quality of China’s international financial discourse power. See Zhang Yihao, Pei Ping, & Fang Xianming. “International Financial Discourse Power and China’s Strategy”. World Economics and Politics. 1 (2012). Third, RMB internationalization will effectively address appreciation pressure and high saving rate. See Ma Guangming. “On the Unequal Appreciation Pressure on the Currencies of Developing Countries—Discussion on the Necessity of REM Internationalization”. Economic Review. 4 (2009). Zhang Qunfa. “Dollar Hegemony and REM Internationalization”. Economic Survey. 2 (2008). Fourthly, RMB internationalization is the inevitable choice in order to accommodate to the regional transfer of international production efficiency and get over monetary system mismatch. See Li Xingong. “Regional Transfer of International Production Efficiency and Monetary System Mismatch: RMB Internationalization.” Shanghai Finance. 3 (2009).
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Especially whether currency demanders accept the “landing” of international currency. Relevant discussions will be presented in the later sections.
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C. F. Bergstern, The Dilemma of The Dollar: The Economics and Politics of United States International Monetary Policy, New York University Press, 1975; B. J. Cohen, The Geography of Money, Cornell University Press, 1998; R. A. Mundell, ‘The International Financial System and Outlook for Asia Currency Collaboration’, The Journal of Finance, 2003, 58(4):3–7; G. S. Talvas, “internationalization of currencies: the case of US dollar and its challenger Euro”, International Executive, 39(5) 581–597, 1997.
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A. Swoboda & R. A. Mundell. Monetary Problems of the International Economy. University of Chicago Press, 1969. In the book, it is pointed out traders have the demand for reducing the large amount of various kinds of cash that they are forced to hold, which generates higher transaction costs. Currencies with high mobility and low transaction cost are most likely to become international currencies.
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Karl Brunner and Allan MeltZer, “The Use of Money”, The Ameriean Economie Review, 1971(December), (61), pp. 784–805; Mckinnon, R, ‘Private and official International Money: TheCase for the Dollar’, Essays in intemational Finance, Prineeton University. 1969, Issue 74.
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Chrystal, Alec, K, “Demand for international media of exchange”, The American Economic Review 67(5):840–850, 1984. It analyzed that in the interbank exchange market, the indirect transaction via vehicle currency will produce the least search costs. Thus in the preliminary period of trading, it was the most important currency to act as vehicle currency: Matsuyama, yotakiand Matsui. “Toward a Theory of Intemational Curreney”, Review of Eeonomic Studies, 6(2):283–320, 1993, by utilizing the search models of money, It was discovered several factors to determine the international currency selection, like giant economic scope, the extent of openness, the degree of economic integration, etc.
- 30.
Sun Haixia: “Studies on the condition of currency Internationalization—Three functions of International currency”, Ph.D. Thesis in Fudan University, 2011.
- 31.
See Footnote 30.
- 32.
China’s economic scale had already ranked second in the world in 2010, 3.4 times of that of Brazil which ranked first among Latin American countries. Its percentage of the world economic scale increased from around 2% in early 1990s to 12.2% in 2012 (predicted figures). Based on data from IMF, World Economic Outlook, Oct, 2012. Many economists predicted that with the current growth rate, China will catch up with or exceed the US in terms of economic scale and become the largest economic power in the world. See Brzezinski, Zbigniew. The Grand Chessboard: American Primacy and Its Geostrategic Imperatives. Translated by Hu Angang, and Zou Zhizhuang. Shanghai: Shanghai People’s Publishing House, 1998.
- 33.
Bergstern calls it the independence standard of international currencies. Bergstern, C. F. The Dilemma of the Dollar: The Economics and Politics of United States International Monetary Policy. New York University Press, 1975.
- 34.
China’s total trade is more than five times of that of Mexico, the highest among Latin American countries. According to the data on international balance of payment from the US Department of Commerce in 2012, China has surpassed the US to be the largest trading country in the world. Data is quoted from WTO, Statistics Database Online, Sep, 2012.
- 35.
Chai Yu. “Study on Trade Openness of Latin American Countries”. Journal of Latin American Studies. 4 (2011).
- 36.
Under the framework of the Executives' Meeting of East Asia-Pacific, ABF2 issues local currency bonds in eight countries, with seed money adding up to 2 billion dollars. According to BIS statistics, it reached about 1.5 billion dollars in the middle of 2011. See EMEAP, “Local Currency Bond Markets and the Asian Bond Fund 2 Initiative”, 14 July 2011, BIS. By the end of November 2011, the RMB bonds issued in Hong Kong had exceeded 100 billion yuan; issuers include 78 transnational enterprises and international financial institutions. See “RMB Bonds Issued in Hong Kong Exceeds 100 Billion Yuan.” People.com.cn, December 15, 2011. An HSBC research report believes that RMB deposits in Hong Kong will hit 1 trillion yuan by the end of 2012 and 3.2 trillion yuan by the end of 2015. In the meantime, the proportion of RMB deposits to total deposits in Hong Kong will increase from 9 to 30%. See “RMB Business Slacks, Hong Kong Banks Attract Deposit”. China Business News. August 10, 2012. Factors like changes in RMB appreciation expectation and decline in trade have caused fluctuation in RMB deposits in Hong Kong since the end of 2011. Swift (Society for Worldwide Interbank Financial Telecommunication) points out that RMB has replaced Russian ruble and Danish krone and become the 13th international payment currency in the world. Swift stated that in January 2013, international payment in RMB had increased by 171% year on year and its proportion to total payment reached a record high of 0.63%. The development of offshore RMB trading centers in Hong Kong, Singapore and London has significantly boosted the increase in payment in RMB. See “The Wall Street Journal”, March 12, 2013, http://cn.wsj.com/gb/20130227/frx175541.asp.
- 37.
Some Chinese scholars have probed into the scale of circulation. See Jing, Li, Tao, Guan, & Fan, He. “Cross-border Circulation of RMB and its Influence on China’s Economy”. Management World. 2004 (9). However, the real situation is hard to clarify.
- 38.
Since the RMB cannot be converted freely, NDF allows transactions on RMB forward exchange rate without using RMB for settlement; major convertible international currencies are used for quotation and delivery instead. Since 1996, RMB NDF has been applied in Hong Kong, Singapore, Japan and Taiwan. It was not active at the beginning. However, along with RMB appreciation, the daily turnover surged. Other products include non-deliverable options, non-deliverable swap, etc. Expectations for the appreciation of the RMB exchange rate in terms of these products impose certain pressure on the official exchange rate.
- 39.
According to the RMB Globalization Index launched by Standard Chartered in November 2012, RMB use in the international trade has increased by 50% in 2012. In the face of the waning of global demand, instability of global finance, and lack of RMB appreciation expectation, the RMB Globalization Index still goes up by 50% in 2012. The index covers three markets which dominate the offshore RMB business: Hong Kong, London, and Singapore. It measures business growth in four key areas: deposits (denoting store of wealth), Dim Sum bonds and Certificate of Deposits (as vehicles for capital raising), trade settlement and other international payments (unit of international commerce) and foreign exchange (unit of exchange). See http://www.standardchartered.com/en/news-and-media/news/global/2012-11-14-global-renminbi-index-launched.html.
- 40.
Since 2010, there has been a slight increase in the inflation rate of China, surpassing the medium-income countries, Latin American countries and the world average. This is one of the reactions of the Chinese government’s economic stimulus package. Calculate based on the World Development Indicators (WDI) of the World Bank. Inflation is measured by the annual growth rate of the GDP implicit deflator.
- 41.
Based on the World Development Indicators (WDI) of the World Bank.
- 42.
By the end of 2012, there had been 2494 listed countries in Shenzhen and Shanghai. Investors had opened more than 200 million accounts, with total market value up to 2.18 trillion yuan. Stock value of the capital market in Chinese mainland ranked third in the world and first in Asia. Latest ranking from the World Federation of Exchanges. Jiefang Daily. November 8, 2012.
- 43.
From 2007 to 2011, trading in foreign exchange market in China grew annually by 40.3%. By the end of 2011, trading in foreign exchange market in China hit 14.2 trillion dollars, with an average daily trading of 58.1 billion yuan, four times of that in 2006. Shanghai Securities News. February 15, 2012.
- 44.
According to Edward Shaw’s standards, there are three indicators for financial deepening, namely, financial stocks (reflecting the financial development of a certain point in time), financial flow (reflecting the financial development of a certain period of time), and financial asset price (reflecting the development with various prices in the financial market). Measuring China’s financial deepening in the recent decade with the first indicator, that is, M2 as percentage of GDP, reveals that the percentage of China, the UK and Japan are higher than that of the US who boasts a full-fledged financial market. It shows that people are willing to hold financial assets which feature high mobility instead of physical assets. This is the representation of financial deepening. On the other hand, it also indicates that the capital efficiency of currency is so low that people choose to deposit their money in the banking systems in the face of financial depression and underdeveloped financial market. Capital efficiency can be improved through methods like expanding direct financing, including raising IPO limit, increasing issuance of corporate bonds, expanding local government financing and promote trust finance. See The Economic Observer, January 23, 2011.
- 45.
According to IMF’s standards in classification of capital account transactions, RMB capital accounts with partial, basic and full convertibility amount to 75% of all the capital accounts. For more details, visit IMF websites and see RMB Capital Accounts Equipped with Conditions for convertibility”, Beijing Business Today, November 26, 2012.
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Such as the world military strength rankings of Jane’s Defense Weekly and Global Firepower.
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J. Benjamin Cohen, The Geography of Money, Cornell University Press, 1998, p. 94.
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Cohen, J. Benjamin. The Geography of Money, Cornell University Press, 1998, p. 94.
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For the former: R. Lamdany and J. Dorlhiac, ‘The Dollarization of a Small Economy’, Scandinavian Journal of Economics, 89(1), pp. 91–102, 1987; For the latter: M. Melvin, ‘The Dollarization of Latin America as a Market-Enforced Monetary Reform: Evidence and Implications’, Economic Development and Culture Change, 36, pp. 543–557, 1988.
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Giovanini, Alberto, and Turtelboom, Bart, “Currency Substitution”, NBER4232, Dec 1992. Calvo and Vegh believe that currency substitution is the last stage of dollarization. See G. A. Calvo and C. A. Vegh, “Currency Substitution in Developing Countries: an Introduction”, Revista de AnalisisEconomico, 7(1), pp. 1–38, 1992.
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Luis I. JácomeandÅkeLönnberg, “Implementing Official Dollarization”, WP10106, IMF. For study on Panama, see Moreno-Villalaz, J. L., “Lessons from the Monetary Experience of Panama: A Dollar Economy with Financial Integration,” Cato Journal, Vol. 18, No. 3 (Winter), pp. 421–439, 1999 and Goldfajn, I. and G. Olivares, “Full Dollarization: The Case of Panama,” Economia, Vol 1, No. 2 (spring), pp. 101–155, 2001.
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Duma, Nombulelo, ‘Dollarization in Cambodia: Causes and Policy Implications’, WP11/49, IMF, 2010.
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Galindo, A., L. Leiderman, 2005, “Living with Dollarization and the Route to Dedollarization,” Inter-American Development Bank Working Paper No. 526, New York.; Herrera, L., and R. Valdés, 2005, “De-dollarization, Indexation and Nominalization: the Chilean Experience,” The Journal of Policy Reform, Vol. 8, No. 4, 281–312, December; Kokenyne, A., J. Ley, and R. Veyrune, 2010, “Dedollarization,” IMF Working Paper No. 188, 2010; Reinhart, C., K. Rogoff, and M. Savastano, 2003, “Addicted to Dollars,” NBER Working Paper 10015.
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Reinhart, C., K. Rogoff, and M. Savastano, 2003, “Addicted to Dollars,” NBER Working Paper 10015.
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Andrew Berg, Eduardo Borensztein, ‘Full Dollarization:The Pros and Cons’, Economic Issures 24, IMF, 2000.
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Dollarization may aggravate economic crisis. The prominent currency mismatch further weakens balance sheet effects. In 2002, the currency board of Argentina collapsed which resulted in severe political and economic consequences and undermined the country’s passion for a super-fixed exchange rate regime. It was the same case with Uruguay in the same year. See Morris Goldstern, Managed Floating Plus, IIE, 2002, p. 41.
- 57.
The cost of official dollarization includes but not limited to (i) seigniorage loss; (ii) limited or lack of capacity to provide banks in need with lender-of-last-resort (LOLR) assistance; (iii) failure to buffer impact with exchange rate; (iv) lack of capacity to lower the value of financing commitments denominated in domestic currency by means of large-scale exchange rate devaluation or inflation. On the contrary, official dollarization have the following benefits: (i) domestic inflation gets closer to international inflation; (ii) it dissolves currency risks and lowers domestic interest rate; (iii) stable inflation and lower interest rate give rise to better investment environment; (iv) there is no so-called “original sin”. When currency mismatch on the balance sheet is gone, the national risks will be reduced. See Jácome, Luis I. and Lönnberg, Åke. Implementing Official Dollarization, WP10106, IMF.
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Calvo, Guillermo A, and Vegh, Carlos, Currency substitution in developing countries: an introduction, WP/92/40, IMF.
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Annamaria Kokenyne, Jeremy Leyand Romain Veyrune, Dedollarization, WP/10/188, IMF.
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Robert Rennhackand Masahiro Nozaki, Financial Dollarization in Latin America1, WP/06/7, IMF.
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AndrewSwiston, Official Dollarization as a Monetary Regime: Its Effects on El Salvador, WP/11/129, June 2011; Hinds, M., 1999, Prepared Testimony for U.S. Senate Banking Committee, Hearing on Official Dollarization in Emerging-Market Countries. Available on the internet at: http://banking.senate.gov/99_07hrg/071599/hinds.htm; Hinds, M, 2002, “Why Dollarize? The Case of El Salvador,” Presentation at Summit of the Americas Center, March. Available on the internet at: http://www.americasnet.net/events/Dollarization/presentations/why_dollarizing.pps. At that time, two thirds of Salvador’s export go to the United States, with an annual remittance of 2 billion dollars.
- 62.
In 1904, Panama became the first Latin American country to use dollar as official currency.
- 63.
Morris Goldstern, Managed Floating Plus, IIE, 2002, p. 34.
- 64.
Robert Rennhack and Masahiro Nozaki, Financial Dollarization in Latin America, WP/06/7, IMF.
- 65.
In addition to its geographical sense, here space also refers to market thickness. Only when the market is thick enough can new traders and new transactions be admitted. Here, relevant countries are assumed to have been equipped with the capacity for currency substitution.
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Luis Felipe Jiménez and Sandra Manuelito, Latin America: financial systems and financing of investment. Diagnostics and proposals, CEPAL Review, No. 103, pp. 45–71.
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Chai Yu. Trade Openness of Latin America. Journal of Latin American Studies. No. 4, 2011. Yu Chai & Shengang Li. “Economic Openness of Latin America” (draft), December 2012. This is a subproject of the major CASS project “Economic Trends of Latin America and Path Choice for Sino-Latin American Economic and Trade Cooperation”.
- 68.
World Investment Report 2012, UNCTAD.
- 69.
This figure is quoted from: Osvaldo Rossles. Improve Economic and Trade Relations between Latin America and China. CEPAL Review, Chinese Edition. China Development Press, 2012. p. 34.
- 70.
AmbrogioCesa-Bianchi, M. Hashem Pesaran, Alessandro Rebucci, Xu Teng Teng China’s Emergencein the World Economy and Business Cyclesin Latin America, IDB-WP-266, Inter-American Development Bank, September 2011.
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IMF, De Facto Classification of Exchange Rate Regimes and Monetary Policy Frameworks, Data as of April 31, 2008.
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Augusto de la Torreand Sergio Schmukler, “Coping with Risks Through Mismatches: Domestic and International Financial Contracts for Emerging Economies”, International Finance, 7:3, 349–390, 2004.
- 73.
The six categories are (1) Voice and Accountability, which measure political rights, civil rights and human rights; (2) Political Instability and Violence, which measure the possibility of violence threat on government or a change of government, including terrorism. (3) Government Effectiveness, which measures the competence of bureaucracy and quality of public service. (4) Regulatory Quality, which measures the occurrence rate of policies adverse to the market. (5) Rule of Law, which measures the quality of contract execution, police and the court, including judicial independence and crime rate. (6) Control of Corruption, which measures abuse of power for personal gain, including petty and serious corruption (the privileged stratum captures state power).
- 74.
For example, the United States has become the largest economic entity in the world in about 1870, but it only exceeds the United Kingdom on three indicators in 1920, and becomes a real international currency. Refer to The Economist, March 24, 2013. http://www.economist.com/debate/days/view/752.
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Yu, C. (2019). Internationalization of the RMB in Latin America: An Overview. In: Chai, Y., Yue, Y. (eds) Sino-Latin American Economic and Trade Relations . Research Series on the Chinese Dream and China’s Development Path. Springer, Singapore. https://doi.org/10.1007/978-981-13-3405-4_5
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