An introduction to the prospect of the Chinese RMB as a reserve currency

Paul Gentle

doi:10.21511/bbs.11(1).2016.08

Abstract

On October 1, 2016, the Chinese RMB (yuan) will be included in the SDRs of the International Monetary Fund (IMF). Reserve currencies are select currencies that have special drawing rights (SDRs). This article examines some of the aspects of this impending change of including the Chinese RMB as a select currency. The U.S. dollar is expected to continue to dominate as a select currency, after October 1, 2016, for the foreseeable future. This article has been written so as to provide general economists with some understanding of special drawing rights (SDR) of the International Monetary Fund (IMF) and how the addition of the Chinese RMB will fit in, as of October 1, 2016

Highlights

First British currency and then American currencyIn 1899, the share of the British Pound in known foreign exchange holdings of official institutions had been large
In 2015, the International Monetary Fund (IMF) approved the October 1, 2016 inclusion of the Chinese RMB in the special drawing rights (SDRs)
62 percent of those who are on the Chinese Mainland, view the RMB as being able to supersede the U.S dollar as a reserve currency; whereas, those polled outside Mainland China yielded only 43 percent agreeing that the Chinese RMB would supersede the U.S dollar as a reserve currency

Summary

First British currency and then American currency

In 1899, the share of the British Pound in known foreign exchange holdings of official institutions had been large. The British Pound had a much greater share of known foreign exchange holdings than the American dollar. The holdings were in American dollar value terms: $105.1 million in British Pounds; $ 27.2 million in French Francs; $24.2 million in German Marks; $9.4 million in other currencies (Chinn and Frankel, 2008). The fixed exchange rate lasted only from 1945 to 1971, there is still the use of USA dollars for reserve currency. We can see that in the example of the British Pound giving way to the American Dollar as the main foreign exchange currency. There is some “inertia” that slows that change of any country’s currency being the main currency into another country’s currency being the main one (Chinn and Frankel, 2008)

Chinese RMB

Chinese RMB internationalization

Examples of four illustrations and interpretations

Findings

Summary and conclusion