My Answer Is to Internationalize Yuan and Make It a World Currency

It seems not a long time ago that the USD/CNY exchange rate remained stable and has been around 8 for a long period. The RMB value witnesses a continuously growth and the latest rate reaches 6.2322(13th December, 2012), rising 25% since 2005.

However, from our prospective, appreciation of RMB has negative effects on exportation and employment as it raises the price of export goods and decreases the competitiveness of exporting enterprises. But why we still keep on loosening controls over exchange rates as well as over interest and capital movements?

My answer is to internationalize Yuan and make it a world currency.

As a very important variable in the international financial field, the exchange rate determines both the inner and outer equilibrium of an economy. According to Meade's Conflict theory, an economy can not reach the two goals of creating more jobs and decreasing surplus of foreign trade simultaneously through adjusting the exchange rate. Therefore, the Chinese government has to sacrifice one side of equilibrium in order to reach the other goal. Over the past three decades since the reform and opening up policy was established, we usually justifiably ignore the issue of the balance of international payments and focus on the development of economy, especially on exportations. As a result, by the end of 2005, the amount of foreign exchange reserve of China has accumulated approximately 818.9 billion dollars, mainly as a form of US dollars. By then, we were happy to see the huge increase of export volume, which represented the achievement of industrialization and opening up policy, ignoring the fact that trade surplus may have a negative effect.

Not until 2005 did the foreign exchange system move to a managed floating exchange rate based on market supply and demand with reference to a basket of foreign currencies. It no longer pegged against dollars but began to relax control and began to float. And as a result of long-term surplus, the market recognized the value of Yuan to be severely underestimated and began to push up its value and comparatively push down the value of US dollars. Since then, the USD/CNY exchange rate began to drop and the foreign exchange reserve reaches 3,192 billion dollars by September this year, placing the huge amount of foreign reserve into a big threat to our national wealth. It seems that we have few methods to deal with the huge amount of depreciating foreign exchange reserve. The United States may devalue their currency as long as they wish without many difficulties. As the US QE3 implemented in September, the US dollars is expected to experience further depreciation. To solve the problem for good, we need to internationalize Yuan and try to enhance its position as a world's major currency in international payment.

How can internationalization benefits China?

As far as I have learned from the textbook, relaxing control on foreign exchange management can meet the legitimate demand of foreign currency and to some extent eliminate the risks of exchange-rate to which Chinese firms are exposed. Moreover, free trade of Yuan and, more generally, assets priced by RMB can make imports and exports easier by making payments in RMB, which would