【Lawrence J. Lau】RMB Internationalization Reconstructing the International Financial Architecture)
Internationalization of the Renminbi means different things to different people. In this study, the various possible roles of the Renminbi in the international financial order of the future are discussed, based on three independent but inter-related ideas. First, the use of own currencies for the clearing and settlement of international transactions between two trading partner countries reduces both transactions costs and exchange rate risks. Thus exporters, importers and direct investors of all countries and regions prefer to use their own respective currencies for the invoicing, clearing and settlement of their international transactions if possible. Second, stable relative exchange rates encourage and facilitate cross-border trade, direct investment and portfolio investment as much as or much more so than free trade agreements and investment treaties. Thus, all exporters, importers, direct investors and long-term portfolio investors also prefer relatively stable exchange rates with their trading partners and investee countries and regions. Volatility of relative exchange rates discourage trade, direct investment and long-term portfolio investment. Third, while long-term capital flows potentially benefit both the investor and the investee countries and regions, short-term capital flows not only do not confer much benefit to either the originating country or region or the destination country or region, but also disrupt the foreign exchange markets. They are often the source of significant volatility of relative exchange rates. Worse still, when they are actually used to finance investment in the destination countries and regions, they often result in both currency mis-match and maturity mis-match, which are potent causes of financial crises down the road. In this study, the possible roles of the Renminbi in an international financial order of the future that takes into account the three ideas above are outlined and discussed.