The Internationalization of Renminbi - Essay Example

The potential impacts of the floating of RMB (Chinese Renminbi) on Australian companies (exporters, importers). Name: Course Professor’s name University name City, State The Chinese currency has surpassed ahead of Japanese Yen and euro to become the second widely used currently in the international trade and finance. Another key milestone for this currency is in Chinas bid to open up its Renminbi currency. Companies used RMB for 8.7 percent in the year 2013 up from 4.4 per cent, according to Swift financial services firm. This puts the currency above the euro and yen, although it’s still lagging behind the US dollar at 81% share [Eic14]. According to [Deu04], in order support rapid adoption, the Chinese government has embarked on an effort of making it easier for quick conversion in and out of RMB, thus competing against the US dollar as a global exchange currency. To the observers of the Chinese economy, internalization of Renminbi is a sort of “Rorschach test”. According to them, this internationalization is like a logical corollary of determining the rebalance within the production of goods and services[Err15]. To some of the policy makers, this is a conscious attempt by the Chinese government to exert its financial strength to create some leverage internationally and more specifically within the Asia- pacific region. To drive the internationalization of Renminbi, no single motivation is sufficient, but a combination of a number of factors. This has been brought about by the realization that financial development goes hand in hand with internationalization of currency and hence currency independency. It is in line with this view, that we have a general dissatisfaction by China in to the dollar domination in the international markets. From an international economic point of view, there is a clear observation that a totally internationalized currency is able to provide a platform for China to expand banks and other financial institutions globally[Gai14]. Australia is increasingly focusing its trading relations with Asia- pacific region and in particular China. At the moment, china has become Australian biggest source of imports and the biggest destination of its variety exports. The only contradiction is although Australia’s financial and trade interaction reflect a fact that China is the biggest trading nation in the world and will most likely become the largest global economy, its financial system is largely underdeveloped[HeD12]. This is however likely to change due to China solve resolve to internationalise its currency thereby requiring opening up its capital market, bettering its governance policy, and freeing the exchange rate and interest rates[Plu08]. When all this is ultimately achieved, it is evident that some countries and financial institutions are likely to benefit as compared to others, as a result of this developments[Hoo13]. In the case of Australia, its close knit trading ties with China, its prudent expertise in financial management, its sectors of interest to China and its perpetual need for overseas capital to assist financing investment all explain considerable scope for creating a much closer and mutually valuable ties between both countries[Lar11]. At the moment, there is so transactions invoiced and settled in RMB, when it comes to trade between Australia and china. This has been attributed to the fact that majority of the commodity exports from Australia are typically priced and invoiced in US$. Although there has been varying opinions over the issue, there appears to be a general consensus that within a decade there is a likelihood of experiencing considerable Australia exports to China invented and settled in Renminbi[HSB13]. One thing unique about china, is the huge and growing pools of domestic market saving in both official and private sector. If and when the capital controls are removed, there will be a significant and increasing proportion of the capital savings available for offshore investment[Pra01]. A portion of this by way of investment mandates g apportioned to offshore kitty. Although the financial management sector in Australia, possesses the skills, capacity and platforms to benefit from the above potential investment, there is a considerable uncertainty in the Australian market regarding the manner Australian government treats offshore investors through a domiciled investment vehicles[Eic14]. This gives the Chinese investors and government officials to feel that their investment is not well appreciated and thus discriminated against. It is therefore evident that prior to it becoming an international currency, RMB will have to cross a number of hurdles, minimum of which will be a free float. Up until the year 2005, RMB was ideally pegged on the US dollar. Since then it has been operating under a managed floating exchange rate. During this period, the Public bank of China has been regulating and limiting price movements of RMB against US dollar. This makes trading with RMB completely different to any free- floating currencies such as the euro, us dollar and Australian dollar. This is compounded further by the fact that traders can be trust more the financial information they receive from the markets in making decision as compared to cases where the central is determining the valuations of the currency. According to [HeD12], the ability of a trader to conveniently exchange RMB to Australian dollars has a material impact on the margins of the exporters as well as local importers. For instance when deals area carried out in RMB, Chinese importers are always willing to offer discount of up to 5 per cent[Peo12]. This is because in that case, the Chinese are not expected to build insurance in case RMB drops against the US dollar. Also the Australian importers can make up to 7 percent when they directly swap the two currencies [Lar11]. Exporters can also benefit when contracts between the Chinese importers and Australian exporters are dominated with RMB. This is likely to lower costs on the China side, and thereby make local products to be less competitive. Such continued relaxation of the existing restrictions on Renminbi, is likely to make it easier doing business across the two nations [Par12]. In conclusion, as China continues to liberalise the financial and capital account and transitioning to floating exchange rate regime, most of savings will be invested by private sector rather than via the state owned enterprises. This will in turn provide substantial potential source of funding for Australian investment. Works Cited Eic14: , (Eichengreen, 2014), Deu04: , (Deutsche Bank, 2004), Err15: , (Errico & massara,, 2015), Gai14: , (Gai, , et al., 2014), HeD12: , (He & Zhang, 2012), Plu08: , (Plumper, 2008), Hoo13: , (Hooley, 2013), Lar11: , (Larum, 2011), HSB13: , (HSBC , 2013), Pra01: , (Prasad, 2001), Eic14: , (Eichengreen, 2014), HeD12: , (He & Zhang, 2012), Peo12: , (People’s Bank of china, , 2012), Lar11: , (Larum, 2011), Par12: , (Parkinson,, 2012), Rey, helene (2013), “The Global Credit Cycle,” unpublished manuscript, London Business School, presented at the Monetary Symposium of the Federal Reserve Bank of Kansas City, Jackson hole, Wyoming (August). Rogoff, Kenneth (1984), “on the Effects of Sterilized Intervention: An Analysis of Weekly Data,” Journal of Monetary Economics 14, pp.133-150. Seade, Jesus (2012), “hong Kong as an International Financial Centre for China and the World,, Lingnan University. Read More