C. Boyden Gray Fellow on Global Growth and Finance Chris Brummer writes for the International Financial Law Review on the implications of the Chinese currency’s entrance into international markets: 

After four unprecedented months of decline earlier this year, the RMB is once again on the upswing. Its rise has unleased waves of relief for fund managers across the world who had bet that it would rise against other world currencies. But the RMB’s appreciation should not be entirely surprising. Even at a gradual pace of growth, the sheet size of the Chinese economy is driving forward the popularity of the currency as an investment vehicle, instrument of trade, and even reserve. SWIFT [Society for Worldwide Interbank Financial Telecommunication] has indicated that since the government opned the current account in 2009, the RMB has climbed to seventh place in the ranking of global payment currencies, up from 35th in 2011. This year, the government is on track to redeominate a staggering 25% of its trade in RMB in 2014 alone. And even beyond east Asia, as economist Arvind Subramanian has reported, the RMB serves as a reference currency for an increasingly diverse set of countries including Chile, India, Israel, South Africa, and Turkey. 

Consequently, the occasional debate on whether the RMB will become an international currency is, for all practical purposes, a sideshow to the more serious deliberations concerning just how internationalisation will proceed (and of course, how fast). And from this persepective, the question of the currency’s future is as much a macroprudential one as it is a macroeconomic one. 

Read the full article here.

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