By Chi Lo (auth.)

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Extra info for The Renminbi Rises: Myths, Hypes and Realities of RMB Internationalisation and Reforms in the Post-Crisis World

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But this situation may change in the longer term, notably with its current account turning into a deficit. So it would make a lot of sense for China to start holding part of its foreign assets in RMB for portfolio management purposes in the short term, while preparing to become a debtor nation with RMB liabilities in the long term. To be a debtor in your own currency has tremendous advantages. Just look at the United States, which has become the world’s too-big-to-fail nation. Since its foreign debts are denominated in USD, its foreign creditors have no choice but to keep funding the US deficits at very low cost and put blind faith in its sustainability despite its broken finances.

There is no historical precedent for the Chinese government taking the lead in internationalising its currency (McCauley 2011). Its recent move to do so has been prompted by both international trade and financial management initiatives. Reducing currency risk is the most obvious trade-related motive to internationalise the yuan. Using the USD for trade exposes the Chinese producers, financial institutions and official sector to currency risk. Chinese exporters typically incur production costs in RMB, but receive payments in USD.

One, though imperfect, estimate for over-invoicing is the difference between China’s import values and the export values of its corresponding trading partners. In principle, after allowing for the small foreign exchange rate differences used in the different official reporting systems, they should be the same. 9), suggesting a rising incentive of capital outflow. This seems to run contrary to the perception of rising hot money flowing into China, until recently. Note the two sets of data do not necessarily contradict each other, because they correspond to two different incentives (or two disjoint sets, technically): one is local capital wanting to get out of China (the over-invoicing problem), and the other is foreign capital wanting to come into China (the hot money inflow issue).

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