Internationalization of Currency: A review of Number One Country, Number One Currency? By B. Eichengreen

Internationalization of Currency: A review of Number One Country, Number One Currency? By B. Eichengreen

The People’s Republic of China has made public its intention to internationalize its currency, the Renminbi (RMB) also known as the Yuan, by the year 2020. This has caught the attention of economic scholars from all spheres who are now giving their opinion on what it will take for RMB to attain an international currency status. Barry Eichengreen, a professor of economics and political science at the University of California, explores China’s journey towards providing the world with an international and a reserve currency. In his article entitled Number One Country, Number One Currency? Eichengreen seeks answers to the question of whether being a large economy will qualify China to have the leading currency (2013). He evaluates the handles that RMB needs to overcome before it can attain the international acceptability that is presently enjoyed by the United States’ dollar.

Eichengreen defines an international currency as a monetary tool that is broadly used in cross-border transactions. An international currency is outstands other monetary tools in that it is the most used currency in international investment and transactions such as import and export transactions. It is also held as foreign assets by principal banks across the word. The extent to which different central banks use a given currency as their denominations of the foreign reserves determines the currencies international acceptability. This, as Eichengreen explains, is the case because central banks will not hold a currency that is not demanded by importers and exporters. He further notes that the decision by a central bank to choose a reserve currency is influenced by both the political and economic factors at local and international levels.

The American dollar has, for a long time, served as the fundamental international and reserve currency. According to Eichengreen, two-thirds of all cross-border transactions that involves a currency other than the home countries’ are dominated by the dollar. Further, the dollar is the approved currency of denomination in over 46% of the global debt securities and is involved in close to 85% of all foreign exchange trades. However, Eichengreen notes that the US accounts for less than 20% of the global Gross Domestic Product (GDP). Among the reasons as to why the American Dollar has remained the widely used international currency includes; its relative stability, incumbency, the liquidity of the American financial markets as well as an absence of a currency of its caliber.

What motivates the Chinese policy maker’s determination to make RMB an international currency? Eichengreen elaborates that investor from a country whose currency is internationalized enjoys the convenience and low cost that is assured in exchanging own currency in cross-border businesses. Chinese policy makers are, therefore, looking forward to offering their home investors with the trade advantage that is enjoyed by the American banks and firms. They are also looking forward to providing the world with an alternative to the dollar, even as they strategize to outgrow the US in terms of the economy by 2020.

What are the Chines policy makers doing to internationalize the RMB? Eichengreen describes the three phased plan and the extent at which each phase has been accomplished 2013. With the base year of 2010, the first phase would take three years within which China intends to increase its cross-border businesses that are traded in RMB. In this first phase, Chinese banks will be induced to expand offshore activities which are settled in RMB. The second phase unfolds in 3 to 5 years, within which China anticipates to have an increased loaning in RMB. The final phase that would see RMB attain an international standard unfolds in 5 to 10 years. It involves the removal of trade limitations that hinders foreigners from investing in Chinese stocks and bond issues.

Four years since China declared its intention to transform Shanghai into an international monetary center in 2010; Eichengreen complements the various strides have been achieved. Initially, the Chinese government had accredited selected Chinese firms to foster the cross-border settlement agenda. Recently, however, the permit has been extended to exporters to use RMB in cross-border settlements. The government has also authorized various foreign private investors as well as offshore financial bodies to invest the China’s national interbank bond market. In addition, local investors in China are placing RMB-dominated bonds in foreign countries such as Hong Kong.

Despite the government’s effort to expand the offshore trade’s settlements in RMB, Eichengreen notes that the expansion is regional rather than national. For instance, over 80% of the offshore trades that is settled in Hong Kong. Eichengreen further elaborates that most of the transactions between Hong Kong and China involves the Hong Kong based companies with their subsidiaries in China. In addition, most of the institutions that are authorized to invest in RMB-dominated stocks in China are Hong Kong based. Finally, Eichenngreen found that the value of RMB-based stocks in offshore markets remain relatively insignificant while the overall China’s trade settlements in RMB accounts to less than 10% of the country’s trade.

Although the current development in RMB internationalization may not be appealing, Echengreen predicts that RMB will have attained a consequential international currency status by 2020. The use of RMB in cross-border business will have increased significantly; however, Eichengreen does not foresee it rising to the level of a dollar. This notwithstanding, Eichengreen suggests various areas that the Chines policy makers ought to address. Firstly, he suggests that China needs to enhance its liquid financial market and reinforce self-reliance in its banks. This will solve the challenge of having a large economy with a minimally developed financial market, as it is the case for China. It also needs to liberalize its capital account while still addressing other factors that slows the growth of its entire economy. Factors such as the one-child policy that regulates the rate of population growth could, according to Eichengreen result in economic crises due to decreased labor productivity. Lastly, Eichengreen suggests that China needs to address its political stability since investors are not attracted to an unstable political environment.

The Number One Country, Number One Currency? Is an insightful article that does not only analyze China’s currency internationalization plan, but also give a fact-supported projection of the plan’s viability. Eichengreen has narrowed down the idea of international and reserve currency, illustrating when a currency can be said to be international. Although his line of argument is challengeable, Eichengreen has used research based statistics to develop his point. Nonetheless, what are the weakness and strengths of his twelve pages report on the possibility of RMB internationalization?

To begin with, Echengreen can be applauded for tackling such a relevant idea in the international market. His projection is not only useful to the Chines policy makers, but also to their rivals such as the United States. Chinese policy makers may review his analysis so as to weigh their progress as well as gain insights about what needs to be done. On the other hand, other competing economies would be interested to find out how their rival economy is fairing. The US, for instance, is keen to safeguard the dollar’s position as the international currency and would like it if the world’s largest economy, China, is also using the dollar as its reserve.

In addition to addressing a relevant topic, Eichengreen can be applauded in his effort to keep his readers captivated throughout the article. Firstly, he uses a question for an article title, which arouses the reader to find out how the number one country relates to the top currency. He further provides a basic introduction that guides the reader on what his stance is. Eichengreen’s article is extensive in its coverage and presents his thoughts in a clear organized structure. It systematically unfolds why the United States has remained an international currency and how China intends to internationalize its currency. It clearly outlines what China has managed to achieve while questioning its points of weakness. Further, statics are provided to support the facts, for instance, it is clear China has only managed to use Renmnibi in a mere 10% of its trade-related transaction.  On reading the article, one does not have to consult any other source for completeness of information since it exhausts its scope.

Although Eichengreen has exhaustively given his reasons as to why he think RMB may not attain an international and reserve currency status by 2020, he seems biased in his arguments. For example, he expounds much on how China has failed while only mentioning on what they have done right. A good example is how he only states that China has permitted various institutions to trade in China’s domestic interbank bond, but does not illustrate the possible effect that the permit has in increasing RMB’s usage. While it may be true that China’s progress is not indicative of the ability of RMB to become an international currency, the fact that it is among the widely used currency across borders cannot be ignored. Although it is not as widely used as the dollar, it is more prominent than how Eichengreen depicts it. An economist is expected to be impartial in his analysis. However, Eichengreen’s impartiality in Number One Country, Number One Currency? Is challengeable, based on how he has failed to appreciate the positive arguments in support of RMB’s internationalization.

Despite the lack impartiality noted in his analysis, Echengreen’s article is educative on the subject matter. It fulfills the author’s purpose of developing his opinion on the subject of China’s RMB internationalization. He explains what he thinks and why he thinks so; however, others may not agree with his position since economic the projection is not a unilateral course.


Eichengreen, B. (2013). Number One Country, Number One Currency? 1. The World Economy, 36(4), 363-374. doi: 10.1111/twec.12037