Renminbi may follow own script in internationalization

China, then, has set out on the long road to internationalizing the renminbi. But what are the pros and cons of taking the leap? The primary quantifiable advantage is the ability to enhance seigniorage revenue－the profit made from the difference between the face value of money and its production costs. In addition, renminbi tradability is likely to increase the volume of international financial transactions that are cleared in China, creating more skilled employment at home and higher financial services tax revenues.

Other key advantages are less tangible but equally important. Chinese firms would benefit from lower exchange commissions when carrying out business overseas. And the Chinese government seems certain to benefit from greater soft power. Economists have estimated that the United States derived a compounding windfall of $953 trillion between 1946 and 2002 purely as a result of the fact that the dollar was the main global reserve currency during that period.

Economists further suggest that should the renminbi become a regional reserve currency in East and Southeast Asia over the next decade, the Chinese economy could rake in a windfall of 744 trillion yuan, not to mention the boost to China's geostrategic clout in multilateral organizations such as the World Trade Organization and G20.

On the other side of the coin, so to speak, the most obvious downside to renminbi internationalization is the potential weakening of macroeconomic levers that have so far stimulated Chinese exports, for example, the managed-band exchange rate regime. Internationalization would also pose the risk of Chinese nationals transferring assets overseas on short notice and allow for hot money－speculative capital that can move between markets rapidly－to more easily penetrate the domestic economy and inflate another property bubble.

China's financial markets are not sufficiently open at present to allow comprehensive renminbi internationalization. Notably, Chinese nationals and firms still cannot independently purchase financial assets denominated in foreign currency. They are only able to invest in the renminbi in a select number of government-accredited foreign financial institutions or buy foreign securities only via a select number of State-controlled financial institutions.

But many of the other preconditions for internationalization have largely been met: by some measures, China has overtaken the US as the world's largest economy; infla tionary pressures are low; greater currentaccount convertibility is now permitted; and, as we have seen, governments overseas have issued renminbi-denominated sovereign bonds.

The global financial crisis of 2008 and the subsequent eurozone crisis, which has never gone away, have made speculation of imminent renminbi internationalization all the louder. And the viability of the Japanese yen－once mooted to supplant the greenback－has been tarnished since Japan's "lost decade" of the 1990s.