Renminbi Rising?

China's latest round of reforms arrives at a critical moment in the debate about the renminbi’s internationalization. Should the renminbi join the US dollar and the euro as an international vehicle currency, and can Shanghai subsequently become a first-tier international financial center?

SHANGHAI – China is increasingly debating whether or not the renminbi should be internationalized, possibly joining the US dollar and the euro as an international vehicle currency (IVC) – that is, a currency that other countries use to denominate the prices of their traded goods and international loans. Related to this is a debate about whether Shanghai can become a first-tier international financial center (1-IFC) like London and New York.

Financial history can help to answer these questions. First, a city can become a 1-IFC only if its national currency is an IVC. But, as London’s status shows, a longtime 1-IFC can retain its position in the international financial system even if its currency is no longer an IVC.

Second, the transaction cost of using a foreign currency as a medium of exchange is inversely proportional to the extent to which that currency is used globally. Similar economies of scale characterize foreign investors’ use of a particular international financial center. As a result, there cannot be more than three or four IVCs and 1-IFCs.

https://prosyn.org/H1eSnU6