The Internationalisation of the Renminbi as an Investing and a Funding Currency: Analytics and Prospects

HKIMR Working Paper No.01/2015

36 Pages Posted: 17 Jan 2015

See all articles by Dong He

Dong He

International Monetary Fund (IMF) - Monetary and Exchange Affairs Department

Paul Luk

Hong Kong Institute for Monetary and Financial Research

Wenlang Zhang

Independent

Date Written: January 16, 2015

Abstract

The use of international currencies in the global financial system is not symmetric: while a few currencies have been primarily used as investing currencies, a few others have mostly served as funding currencies; only a handful have a better balance functioning as both investing and funding currencies. This paper develops a three-currency model to study the determinants of the demand for assets and liabilities denominated in an international currency, and attempts to shed light on the prospects for the renminbi as a budding international currency. We show that interest rate differentials would be only one of the factors shaping the renminbi’s position, while other factors, including the correlation between foreign countries’ economic growth and their bilateral exchange rates against the renminbi, and the correlation between exchange rates of the renminbi with other international currencies, would also be important. A broad interpretation of these findings is that the renminbi will likely be very attractive to investors from high-income economies and fund-raisers from emerging market economies.

Suggested Citation

He, Dong and Luk, Paul and Zhang, Wenlang, The Internationalisation of the Renminbi as an Investing and a Funding Currency: Analytics and Prospects (January 16, 2015). HKIMR Working Paper No.01/2015, Available at SSRN: https://ssrn.com/abstract=2550713 or http://dx.doi.org/10.2139/ssrn.2550713

Dong He

International Monetary Fund (IMF) - Monetary and Exchange Affairs Department ( email )

700 19th Street NW
Washington, DC 20431
United States
(202) 623-4062 (Phone)
(202) 589-4062 (Fax)

Paul Luk

Hong Kong Institute for Monetary and Financial Research ( email )

Hong Kong

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