China’s central bank devalued its currency last week, sending major stock markets in Asia and Europe down, and sparking fears of additional exchange rate devaluations in other countries. It is the largest devaluation in China’s system in over 20 years. When reading news and analysis of this event, you might see both terms—“renminbi” and “yuan”—used interchangeably. There is essentially no difference. The renminbi is the official currency of the People’s Republic of China, and translates to “people’s money.” Its international symbol is CNY (or CNH in Hong Kong; but abbreviated RMB, with the symbol ¥).
The yuan is the name of the unit in which renminbi transactions are denominated, but also refers to the currency generally. Thus, a person might pay for a meal using a 20 yuan banknote, and get some yuan and jiao (a tenth of a yuan) in change (the jiao is further divided into 10 fen). But it is all renminbi. This is similar to the pound sterling, which is the name of the British currency, while the price of a pint of beer in a London pub would be stated just in pounds.
International role of the renminbi
In terms of size and dynamism, the economy of the People’s Republic of China (PRC) stands out among the emerging markets. It has already become the world’s second-largest economy and is now one of the largest contributors to global growth. If the PRC continues on its present growth track, it may soon takeover from the United States as the world’s largest economy.
These developments have led to intense speculation that the renminbi will soon become one of the major international currencies.
“Renminbi Internationalization,” a new book published jointly by Brookings Institution Press and the Asian Development Bank examines the issues in-depth. Through an examination of the monetary and financial issues associated with the currency’s internationalization, the book emphasizes the many reasons the international community should welcome the emergence of the People’s Republic of China (PRC) as a source of global liquidity. However, making the renminbi a global currency will require rebalancing the Chinese economy, developing the country’s financial markets and opening them to the rest of the world, and moving to a more flexible exchange rate.
Eventually, the internationalization of the renminbi will enable the PRC to be an alternative supplier of safe assets to the rest of the world in which firms, households, and central banks can park their savings, where they will later be available in case of a need for more liquid funding. The editors of “Renminbi Internationalization,” Barry Eichengreen and Masahiro Kawai, write:
“The world welcomes the PRC’s emergence as a source of global liquidity…For more than half a century, the U.S. dollar has been the source of that liquidity, with U.S. Treasury obligations constituting the single largest and most liquid financial market in the world…. Other sources of international liquidity will have to be developed to supplement the United States and its dollar. The PRC and its RMB are obvious candidates. Thus, the future of globalization may well turn on the success of the PRC’s efforts to internationalize the RMB.”
“Renminbi Internationalization” is a worthy read for anyone who wants to know more about the complex issues surrounding one of the major international and regional financial developments of our time.
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