1. Top of page
  2. Abstract
  3. 1. Introduction
  4. 2. From a Single to MultiCurrency Reserve System
  5. 3. Empirical Investigation of Reserve Currency Shares
  6. 4. Monetary Cooperation and an Asian Common Currency
  7. 5. Concluding Remarks
  8. References

The global reserve system can be strengthened by increasing the role of alternative currencies. A gradual evolution to a multicurrency system reduces pressure on a single reserve currency issuer from an ever-growing balance-of-payments deficit. It also allows countries to better diversify their foreign exchange holdings. Given the continuing strong economic growth in the China and its growing influence on the world economy, the renminbi will likely emerge as a new international currency. However, this is contingent on the China accepting a more convertible capital account and developing an efficient financial system. Internationalising the renminbi will likely be a gradual and drawn-out process. Simulations show that, with greater convertibility, the renminbi could gradually become an international currency within Asia and beyond – sharing from 3 to 12 per cent of international reserves by 2035.

1. Introduction

  1. Top of page
  2. Abstract
  3. 1. Introduction
  4. 2. From a Single to MultiCurrency Reserve System
  5. 3. Empirical Investigation of Reserve Currency Shares
  6. 4. Monetary Cooperation and an Asian Common Currency
  7. 5. Concluding Remarks
  8. References

The global crisis in 2008 and 2009 revealed inherent weaknesses in the current international monetary system that contributed to global financial instability and a weak world economy. For emerging economies, which depend heavily on international trade and capital flows for growth and development, the failure of the current global reserve system in ensuring sufficient international liquidity caused them to suffer from the spillovers of global shocks.

After the collapse of Lehman Brothers in September 2008, emerging economies were hit hard by the speed and severity of financial shock spillovers from the global economy. As the global credit shortage intensified, economic and financial systems came under increased pressure. Despite the large build-up of foreign exchange reserves over the past decade, severe dollar shortages tested the resilience of emerging market financial systems. With access to international interbank markets limited, the cost of borrowing dollars increased sharply. The combination of the rapid financial shock spillover and deteriorating global economic situation made a slowdown of economic growth in emerging countries inevitable.

The use of a dominant currency such as the US dollar as an international reserve currency heightens the so-called Triffin dilemma (Triffin, 1960). The world's demand for international reserve assets increases with international income and trade. The reserve-issuing country must continue to run balance-of-payments deficits to meet the growing demand, while surplus countries accumulate reserves, seemingly indefinitely (Bergsten, 2009). The outstanding external debt of the reserve-issuing country would rise without limit, causing investors at some point to lose confidence in the value of reserve assets. There is no ready mechanism forcing surplus countries or the reserve issuer to make an adjustment to fix this unsustainable systemic imbalance.

In principle, floating exchange rates and well-functioning international capital markets help reduce the need for reserves. Despite the increasing trend of adopting floating exchange rate systems and capital mobility, the demand for reserves has not declined.1 A sharp rise in the demand for reserves in recent years reflects emerging economies' desire to self-ensure against capital account crises, when they cannot borrow at going interest rates if needed. Furthermore, high capital mobility can be an additional source of disturbance, heightening the need for reserves. During balance-of-payments crises, reserves play an important role in lessening output loss (Becker et al., 2007). Yet, hoarding international reserves – mostly in the form of low-yielding short-term US Treasury securities – is expensive and less efficient in the absence of assertive external debt management policies (Rodrik, 2006).

This paper argues that alternative currencies can play a greater role in strengthening the global reserve system.2 A gradual evolution to a multicurrency system is desirable because it reduces the ever-growing balance-of-payments deficit pressure on a single reserve currency issuer as described by the Triffin dilemma.3 A multicurrency reserve system provides alternatives for countries to diversify their foreign exchange currency holdings. If dollar liabilities increase and confidence declines, for example, central banks can switch to the other reserve currencies.4

This paper focuses on the role an Asian currency can play in the global reserve system and argues that the Chinese renminbi has great potential to become a new international reserve currency. The euro has emerged as a serious rival to the US dollar because its international use has grown rapidly over time (Chinn and Frankel, 2007; Eichengreen, 2007; European Central Bank (ECB), various years). The euro is increasingly being used in trade invoicing, for international debt securities, and as a medium of exchange globally. Once China develops and removes exchange and capital controls, it will become a strong candidate to join the euro as an alternative international reserve currency.

The emergence of Asia – and in particular China – has been one of the most important features reshaping the world economy. The fast-growing economies of developing Asia are providing an important source of global production and demand. Asia's emerging and developing economies maintained an average annual growth rate of 6.8 per cent over 2000–10. In 2010, Asia (including Japan) accounted for about 27 per cent of global GDP, up from a mere 12 per cent in 1960. By comparison, in 2010, the United States contributed 23.1 per cent and the European Union (EU) 25.8 per cent to world GDP (Table 1). In addition, Asia controlled 51.5 per cent of global foreign exchange reserves in 2010, a figure that has grown in tandem with its economic clout. Seven of the world's top 10 reserve holding countries are in Asia – China, Japan, Taiwan, Republic of Korea (Korea), India, Hong Kong Singapore.

Table 1. Comparison of Asia, Europe and the United States: Selected Indicators
 GDP (US$billion), 2010GDP (PPP billion), 2010Foreign Trade (US$billion), 2010Stock Market Capitalization (US$billion), December 2010Government Bond Outstanding (US$billion), December 2010Feign Exchange Turnover by Country (Total = 100%), April 2010Feign Exchange Turnover by Currency (Total = 200%), April 2010Reserve Asset Share (%), December 2010
  1. (i) European Union comprises 27 countries (Austria, Belgium, Bulgaria, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the United Kingdom). (ii) Reserve asset share refers to international reserves as per cent of world total.

  2. Sources: Asian Development Outlook database; Bank for International Settlements, Triennial Survey (2010); CEIC Data Company Ltd.; European Central Bank, available:; Eurostat,; International Monetary Fund, International Financial Statistics online and World Economic Outlook database; author's calculations.

Developing Asia
 Hong Kong, China2242958231,080874.72.42.9
 Taiwan, China4238115267261570.40.54.1
 European Union16,24113,8773,79210,5049,05550.056.27.7
 Euro Area12,1499,8901,4626,2777,1669.539.13.3
 United Kingdom2,2622,0219723,1071,32636.712.90.7
 United States14,58713,0853,24617,13911,83917.984.91.3

Underpinning this remarkable performance has been China's dynamic growth. It is now the world's second largest economy. It is the second largest global trader and holds the largest amount of foreign exchange reserves (see Table 1). In recent years, the Chinese economy accounted for about one-fifth of incremental demand worldwide.

In fact, while the global financial crisis harmed the Chinese economy, there has been a lively debate on the possibility that the crisis could place China at global centre stage. Although its leaders have been quite guarded, many Chinese scholars, policymakers, and particularly the local media, aspire for a world economic and financial order less dominated by the United States – and one where China plays a more influential role. They suggest China should actively involve itself in the process of establishing a new world financial order. One proposal is to strengthen the position of the renminbi in bilateral trade and capital flows as a prelude to its future internationalisation.

In March 2009, the People's Bank of China (PBOC) released a statement by its governor, Zhou Xiaochuan, calling for reform of the international monetary system (Zhou, 2009). Specifically, Zhou promotes the creation of an international reserve currency detached from individual country economic conditions and able to maintain stability in the long run. He advocates wider use of special drawing right (SDRs),5 especially in international trade, commodity pricing, investment and corporate bookkeeping. Zhou argues that a super-sovereign currency will not hold the inherent risks caused by using credit-based national currencies. The Stiglitz Commission (United Nations, 2009) also argued for the creation of a new global reserve system based on the SDR. It suggested its global role should be increased, both through new SDR issues, especially during world recessions, and a bigger role for SDRs in International Monetary Fund (IMF) lending to countries requiring short-term finance. However, a key challenge would be how to make a super-sovereign currency like the SDR commercially viable. The share of SDRs in private markets is negligible. Central banks would hold only a fraction of reserves in SDRs unless deep and liquid SDR markets existed. With no national constituency to back up its intrinsic value, the SDR is an unlikely international reserve candidate (Eichengreen, 2011). Chinese policymakers appear to support a partial or total switch to a multicurrency reserve system, with greater use of SDRs and the gradual internationalisation of the renminbi (Chin and Yong, 2010). Internationalising the renminbi is regarded as beneficial for Chinese banks and firms and as a way of rebalancing the Chinese economy (Gao and Yu, 2009).

The remainder of this paper is organised as follows. The next section discusses characteristics of an international reserve currency and the prospects of a shift to a multicurrency reserve system. Section 'Empirical Investigation of Reserve Currency Shares' investigates empirically the determinants of reserve currency status and predicts the renminbi's share of international reserves in the coming decades. Section 'Monetary Cooperation and an Asian Common Currency' assesses the current monetary cooperation in Asia and explores the possibility of an Asian currency. Concluding remarks follow in Section 'Concluding Remarks'.

2. From a Single to MultiCurrency Reserve System

  1. Top of page
  2. Abstract
  3. 1. Introduction
  4. 2. From a Single to MultiCurrency Reserve System
  5. 3. Empirical Investigation of Reserve Currency Shares
  6. 4. Monetary Cooperation and an Asian Common Currency
  7. 5. Concluding Remarks
  8. References

a. Fall and Rise of International Currencies

The question of using the renminbi as an international currency is directly linked to the future of the US dollar. As the US-originated global financial crisis spread, the debate intensified over whether the US dollar could lose its international pre-eminence as international reserve currency. The consensus for the moment appears to be that the US dollar will remain the dominant international currency for the time being (Posen, 2008; Eichengreen, 2011).

According to the literature, an international currency must satisfy three major criteria. It must be a (i) unit of account; (ii) medium of exchange; and (iii) store of value. These roles have uses for both private and official purposes. Officially, an international currency may be used as the reference currency for determining exchange rates, the vehicle currency for foreign exchange intervention and the currency for holding international reserves. In addition, private entities may use an international currency for invoicing and settlement of trade and financial transactions and for holding international assets.

The dollar remains the dominant reserve currency for the world's central banks and governments. And the US Treasuries market is the most liquid financial market in the world – making Treasuries an attractive investment for holding central bank reserves. The dollar remains the dominant currency for invoicing trade and is used in denominating most foreign debt securities.

Examining the long history of reserve currencies shows a tendency for one currency to dominate, with any change in status often reflecting a shift or rebalancing of economic and political power. The theory of network externalities backs this view of a dominant single international currency at any given point in time. The argument is that there are strong incentives to choose the currency that others use for international transactions as it helps lower transaction costs (Krugman, 1980; Rey, 2001; Mileva and Siegfried, 2007). From the perspective of a central bank, it is best to hold reserves in the most liquid asset market – one where most others invest reserves as well. The concept of network externalities explains why an incumbent international currency has a natural advantage in maintaining the status quo.

The network externalities theory does not mean, however, that currency ranks cannot change. Over time, a dominant currency can lose its hegemony to a competing currency. History supports this view. The British pound sterling was the leading international currency prior to 1914. While historical statistics are scarce and less reliable than those available today, estimates indicate that between 1860 and 1914, about 60 per cent of world trade was invoiced and settled in pounds sterling, as was a similar share of holdings in global foreign exchange reserves (Eichengreen, 2007). The United Kingdom's great imperial power and London's deep and liquid financial markets encouraged the use of the pound in British colonies and beyond. It took decades – until the end of the Second World War – for the US dollar to become the dominant international currency by replacing the sterling atop the currency pyramid. Since then, the dollar has held hegemony as leading international currency.6

As the sterling fell from its pedestal, so too could the US dollar. Its reserve currency status is attributed to the vibrant US economy, financial market liquidity and stability in US monetary policy (Eichengreen, 2011). The United States also has a strong interest in maintaining reserve currency seignorage and prestige. Arguably, there are quantifiable gains to the so-called ‘exorbitant privilege’ of issuing an international currency.7 Nonetheless, the threat to the dollar's dominance is apparent. Current account and fiscal deficits, external indebtedness, overseas military commitments and currency weakness all affected the British pound following the Second World War. Today, similar trends are pressuring those holding US Treasuries to search for alternatives. With the global financial crisis emanating from Wall Street, its attraction for both foreign companies and governments to raise funds would not remain the same as before, despite being the deepest and most liquid financial market in the United States.

For the time being, the dollar remains the dominant currency of choice for international trade. Although the US trade share in the global economy is declining, exporters still choose an invoicing currency that keeps ex post prices of goods similar to competitors' prices and provides hedging benefits (Goldberg and Tille, 2008). Safe-haven demand for the dollar remains unscathed by recent events. Even after Standard and Poor's downgraded the US credit rating in August 2011, the safe-haven instinct of the market was to rush to the dollar. Nonetheless, it is doubtful whether over time central banks and governments will continue to buy and hold US securities in large amounts. The US economy faces unsustainable structural problems. The key question is whether economies with surplus savings will continue to finance US current account and fiscal deficits as confidence in the US financial system weakens. As emerging Asian economies shift away from export-led growth and reduce foreign exchange intervention, it is likely Asian authorities will look elsewhere to invest their accumulated reserves.

The US dollar maintained currency hegemony for 60 years mainly because no alternative asset was as attractive. But times have changed – and continue to change. The eurozone provides as large, as deep and as liquid a market as the United States. The eurozone economy is roughly the same size as the United States and accounts for a larger share of world trade. In the eurozone, for the most part, macroeconomic stability has improved as its members adhere to the stability and growth pact, a rule-based framework for coordinating national fiscal policies, and as the ECB pursues its anti-inflationary monetary policy.

The euro has grown to become an international currency from being a simple consolidation of fragmented national currencies. It has emerged as a useful second reserve currency held by many of the world's central banks (Figure 1). At the end of the 2010, the euro's share of global foreign exchange reserves was 26.0 per cent compared with 61.8 per cent for the US dollar (Table 2).

Table 2. Currency Composition of Foreign Exchange Reserves (%)
 US DollarJapanese YenPound SterlingSwiss FrancEuroDeutsche MarkFrench FrancNetherlands GuilderECUOther Currencies
  1. (i) Data cover only countries that report their currency composition to the International Monetary Fund (IMF).

  2. (ii) There was a large change in 1979–80 from the 1978 figure because of the substitution of European Currency Units (ECUs) for US dollars in the reserves of members of the European Monetary System.

  3. Sources: IMF, Annual Report (various years); Currency Composition of Official Foreign Exchange Reserves (COFER), available:, downloaded 3 July 2012; author's calculations.


Figure 1. Reserves Held by Central Banks as Share of Total – Major Currencies, 1973–2010

Source: IMF Annual Report, Various Years; International Monetary Fund, Currency Composition of Foreign Exchange Reserves Database

Download figure to PowerPoint

As these figures indicate, there is no evidence that the euro is replacing the dollar as the dominant international currency. The share of the euro in foreign exchange market turnover has remained stable, but far below that of the US dollar (Table 3). And while the euro's role in trade invoicing and foreign exchange transactions has been increasing, it is mostly with neighbouring countries. The US dollar continues its pre-eminence in Asian currency trades – it was used on one side of about 93 per cent of transactions in Asian foreign exchange markets in 2010.

Table 3. Currency Composition of Global Foreign Exchange Market Turnover (Percentage Shares of Average Daily Turnover)
  1. (i) Reporting dealers and other financial institutions are used to proxy private transactions in the foreign exchange market. Nonfinancial customers in the Bank for International Settlements data are excluded as they cover government firms, in addition to corporate firms.

  2. (ii) Because two currencies are involved in each transaction, the sum of the percentage shares of individual currencies totals 200% instead of 100%.

  3. Source: Bank for International Settlements, Triennial Survey (various years).

US dollar84.188.591.990.488.286.1
Euro 37.536.536.138.7
Pound sterling9.411.013.417.014.913.3
Swiss franc7.
Canadian dollar3.
Deutsche mark36.331.0
French franc8.05.1
Chinese renminbi0.
Other currencies28.634.324.626.133.031.5
All currencies200.0200.0200.0200.0200.0200.0

As many scholars point out, there can be more than one international currency competing at any given point in time (Eichengreen, 2007; Cohen, 2008). The coexistence of the US dollar and pound sterling as reserve currencies during the interwar period supports the idea that there is room for more than one major reserve currency. While the theory of network externalities emphasises a dominant single international currency, it may hold in trade invoicing or in denominating foreign debt securities. It becomes less valid, however, when it comes to denominating reserves. Several liquid financial markets can exist side by side as risk diversification motivates central banks to accumulate reserves in an array of assets denominated in several currencies. With the euro now providing a deep and liquid financial market, it offers significant benefits for central banks seeking greater diversification.

In the short term, the US dollar and the euro will likely remain the main reserve currencies, and any relative shift between their respective shares will be gradual (Galati and Wooldridge, 2006; Chinn and Frankel, 2007). The biggest threat to the reserve currency status of the euro in the long term is the perceived lack of economic dynamism in the eurozone (Posen, 2008). There is a widespread perception that the eurozone's future economic prospects lag behind those of the United States and Asia. The ongoing debt crisis in the eurozone adds credence to this perception. Also, with its separate national governments, the EU cannot offer a universal euro-denominated financial instrument that can match US Treasury bills. In addition, the future of the euro as the world's next primary reserve currency – replacing a troubled US dollar – has been compounded by the worsening financial crisis in the eurozone recently. The eurozone needs to strengthen coordination to enforce fiscal discipline and harmonise regulation and supervision of the financial system for a well-functioning monetary union.

b. The Rising Renminbi – Towards a Tripolar System

Is there room for a new major international currency to join the US dollar and euro, shifting the current bipolar structure to a tripolar international monetary system?

History tells us that there have often been more than two currencies vying to become dominant international reserve currency. At the end of 1913, pound sterling balances accounted for less than half of total official foreign exchange holdings, while the French franc made up about a third and the German mark about one-sixth (Eichengreen, 2007). In the 1920s and 1930s, it was again three currencies, although the US dollar had replaced the German mark as a reserve currency. During the 1970s and 1980s – after the post-war recovery had transformed Japan into the second largest world economy – the use of the yen internationally accelerated significantly (see Table 2). This led to a brief tripolar period involving the US dollar, the mark and the yen. However, the yen's appeal as international currency eroded quickly as Japan's economic bubble burst at the end of the 1980s. At the end of the 2010, the yen's share of global foreign exchange reserves was merely 3.7 per cent, far below 61.8 per cent for the US dollar and 21.0 per cent for the euro.

An obvious candidate to become a new international currency is the renminbi. With China's growing weight relative to the world economy, it is often argued that the renminbi will become the key currency in Asia and holds promise to become a new international reserve currency over the long run. In the light of China's large and growing influence in the global economy, some say it is only natural to ask when the renminbi will become a reserve currency (see, for example, Li and Liu, 2010).

If it continues to maintain rapid economic growth, China will likely overtake the United States as the world's largest economy within a few decades. Its economy is highly dependent on trade, with both exports and imports expected to continue to grow rapidly. The fact that China exports a diverse mix of manufactured goods to virtually all countries reinforces the renminbi's potential role as an international medium of exchange. And Chinese investments overseas are accelerating, further increasing its influence on the world economy. In addition, China has achieved macroeconomic stability in recent years. Inflation has been low and stable, averaging 2.0 per cent during 2000–10. Its fiscal balance has been healthy, with a deficit averaging 1.7 per cent of GDP over the same period. The government places high priority on macroeconomic stability, and this bodes well for the renminbi as a store of value.

However, internationalising the renminbi has its obvious limitations given China's relatively undeveloped financial system and limited convertibility of its capital account (Prasad and Ye, 2012).8 Over the past decade, there has been important progress in reforming and restructuring the financial system, such as interest rate liberalisation, reforms of governance structure in state owned commercial banks and improvement in financial infrastructure and regulatory system.9 Despite the efforts introduced so far, Chinese financial system's efficiency and transparency lag far behind major international financial centres. The financial system is subject to extensive government guidance and control and dominated by banks. Despite rapid growth in recent years, Chinese capital markets remain relatively underdeveloped. For the renminbi, the main lesson from the yen's failure to become a reserve currency is that open and efficient financial markets are an indispensable precondition for reserve currency status. Like today's China, Japan in the 1970s and 1980s enjoyed rapid growth in output and trade, rising overseas investments, macroeconomic stability and a concomitant growing influence on the world economy. What was missing among the preconditions for internationalisation was the existence of open and efficient financial markets – as Japanese markets lagged the United States and many European markets. The same is true for today's China, only to a much greater extent. It is a critical question whether China can continue to make successful progress of financial liberalisation and opening, so that it can promote successfully not only the renminbi (RMB) internationalisation but, more importantly, stable and sustainable economic growth over the next decades (The World Bank and DRCSC, 2012).

There is a fairly firm consensus that strict capital controls preventing the free flow of funds between China and the rest of the world constrain the use of the renminbi as an international currency. Over the past decade, China has reformed the financial sector and lifted or eased some capital controls. The Qualified Foreign Institutional Investors in 2002 and Qualified Domestic Institutional Investors programmes in 2006 were designed to gradually allow cross-border capital movements. China appears increasingly ready to remove remaining controls. However, it could take years after first introducing greater exchange rate flexibility before the renminbi can become a freely convertible currency for capital account transactions.

Chinese authorities have – and are likely to continue – to proceed cautiously, striving to minimise potential risks from rapid currency internationalisation. Holding reserve currency status carries several benefits – including convenience and seignorage (Hai and Yao, 2010). International reserve currency status can also give political prestige, although causality here runs in both directions. Britain's rise and fall of international currency status have occurred with its rise and fall of political and military pre-eminence. In addition, currency internationalisation facilitates domestic currency denominated borrowing from abroad, which helps dampen the impact of financial shock when a sudden stop in foreign lending occurs. The need to accumulate ‘excessive’ international reserves will also decline. But holding reserve currency also entails costs. Once capital account is completely open and international demand for the renminbi fluctuates, the Chinese monetary authority cannot target a specific level of money stock or interest rate, especially when exchange rate is not allowed to move flexibly. Upward pressure on the renminbi's exchange rate due to stronger demand can be a powerful deterrent against the currency internationalisation. Capital account liberalisation and currency convertibility are expected to lead to strong capital inflows, and, with increased foreign demand for the renminbi as international reserves, the Chinese currency will be appreciated. In the 1970s, the Japanese authority was discouraged from pushing yen internationalisation because it was worried about the possibility that yen internationalisation would lead to currency appreciation and loss of the export competitiveness in the international markets. For China, it is not at all clear whether benefits outweigh costs – and this uncertainty can deter attempts to internationalise the renminbi. However, somewhat surprisingly, China appears more enthusiastic about internationalising the renminbi than Japan did with the yen prior to the 1990s (Cohen, 2008; Frankel, 2011).

Renminbi use in the settlement of cross-border trade is now increasing.10 In June 2010, the Chinese authorities expanded the RMB cross-border trade settlement scheme to 20 Mainland Chinese provinces and cities and allowed Mainland Designated Enterprise exporters in these provinces to settle trade transactions in RMB with any part of the world, while Chinese importers had no restrictions in using RMB to pay overseas vendor. Subsequently, the authorities took steps to remove obstacles in the RMB cross-border settlement of capital account items. The steady stream of liberalisation measures has driven rapid growth in the offshore renminbi market, most evident in the expansion of RMB deposits in Hong Kong, China.11

Hong Kong, being an international financial centre, could become a conduit for promoting the internationalisation of the renminbi in trading and financial transactions. As argued by He and McCauley (2010), the development of offshore markets can help increase the recognition and acceptance of the currency. China is fortunate to have the special administrative region of Hong Kong, giving it the opportunity to develop a renminbi market without disturbing the mainland's domestic financial system. Shanghai will also develop into an international financial centre in the near future.

As the 2008/09 global financial crisis played out, China actively pursued cooperative agreements with its neighbours, particularly in providing mutual liquidity assistance. Between December 2008 and July 2010, the PBOC signed eight bilateral currency swap arrangements with the central banks of Korea Hong Kong, Malaysia, Belarus, Indonesia, Argentina, Iceland and Singapore totalling RMB 800 billion.

In short, the renminbi faces a daunting array of difficult challenges it must overcome before it can become a serious candidate for international reserve currency status. Not surprisingly, the internationalisation of the renminbi to date has been insignificant, although China is taking steps to raise the renminbi profile, at least regionally. Once China actively engages in regional financial and economic cooperation and ensures exchange rate and monetary stability, the renminbi can evolve into a dominant currency for regional trade and financial transactions, for example.12 It will take time before the government removes restrictions on currency conversion by non-residents through the capital account. Building an open and strong renminbi bond market and integrating that with the domestic monetary system will be a big challenge. In China, appropriate monitoring and managing of massive borrowings of local governments is also important for the stability of the monetary system and the internationalisation of the renminbi. It is most likely that the evolution of the renminbi towards reserve currency status will be a gradual, drawn-out process that takes place over several decades – rather than a sudden, quick shift over a few years. The slow, deliberate and gradual emergence of the renminbi as a new reserve currency is consistent with historical patterns.

3. Empirical Investigation of Reserve Currency Shares

  1. Top of page
  2. Abstract
  3. 1. Introduction
  4. 2. From a Single to MultiCurrency Reserve System
  5. 3. Empirical Investigation of Reserve Currency Shares
  6. 4. Monetary Cooperation and an Asian Common Currency
  7. 5. Concluding Remarks
  8. References

This section explains the factors that determine the use of international reserve currencies and applies the estimated relationships to forecast the shares of renminbi in the coming decades. This quantitative assessment is for illustrative purposes and relies unavoidably on a number of simplifying assumptions (see, for example, Truman, 2007).

For the dependent variable, we have constructed currency shares of global reserve holdings using IMF annual data on official foreign exchange reserves.13 According to the literature, there are four major factors that determine the suitability of a currency for international currency status (Chinn and Frankel, 2008).

a. Size of Output and Trade

The relative size of a country's output and trade gives it a distinct advantage in having its currency used internationally. The United States is the largest economy in the world in terms of output. But the combined economic size of the 16 countries in the eurozone has increased to match the United States in output and surpass it in trade volume. China's share in world GDP has also increased rapidly over the past decades, from 3.0 per cent in 1973 to 9.4 per cent in 2010 at market exchange rates. It is now the world's second largest economy in terms of GDP, the world's largest merchandise exporter (10.5 per cent of the world total) and second in merchandise imports (9.2 per cent share).

b. Financial Markets

A country's financial market must be open, unrestricted, deep and developed for its currency to attain international currency status. We use the foreign exchange turnover data from Chinn and Frankel (2008) to measure the size, depth and development of financial centres. Since 1998, foreign exchange turnover in China has been rising. From a daily average of US$211 million, foreign exchange turnover increased to US$19.8 billion in 2010. However, the daily turnover in China still dwarfs those in the more developed and open financial centres of the United Kingdom (US$1.9 trillion) and the United States (US$904 billion). In addition, we use the index of capital account liberalisation generated by Chinn and Ito (2008) to measure the degree of a country's openness to global financial markets. The index ranges from −1.81 to 2.54. While China has maintained a higher index since the early 1990s (−1.13) from only −1.81 in the late 1980s, it remains far below index values of the United States and the eurozone (2.54 and 1.73, respectively), implying China's greater use of restrictive policies.

c. Confidence in the Value of the Currency

A key requirement for an international currency is stability in value. An international currency is more attractive to hold if there is assurance that its future value will not be depleted. We use a country's inflation rate as a confidence measure of currency. In the past 10 years, the mean of China's inflation rate was below that for advanced economies. Its standard deviation, however, is much higher, as the change in consumer prices ranged from −2.0 to 8.7 during the period. In recent years, China has seen gradual rising inflation in both goods and real assets. Increasing price instability works against the renminbi evolving into an international reserve currency.

d. Network Externalities

There is a bias due to inertia in favour of currencies already used as international currencies. Thus, a currency that is more widely used internationally has higher value. This suggests that changes in the determinants of reserve currency status are unlikely to lead to parallel changes in reserve currency share holdings in the short run. In other words, the switch in dominance from one international currency to another will happen only gradually. We include the lagged reserve currency share as an additional variable to account for inertia in capturing network externalities.14

We constructed variables for these determinants for the empirical investigation.15 For all variables, Germany and eurozone data are spliced to come up with a complete series from 1975 to 2010. Following Chinn and Frankel (2008), we estimate the following international reserve currency demand function:16

  • display math(1)

The data set has a feature of panel structure consisting of 216 annual observations for six country groups (United States, eurozone (Germany), Japan, China, UK and Switzerland) from 1975 to 2010. The specification uses the logit transformation of currency share, log (share/(1 − share)), to consider the nonlinear relationship between currency share and its determinants or a ‘tipping point phenomenon’. The non-linear relation indicates that a regime switch can occur in the holding of reserve currency when the use of a new international vehicle currency exceeds a threshold value (Rey, 2001; Terada-Hagiwara, 2011). The threshold value can be a ‘tipping point’, after which demand for the reserve currency accelerates over time. Figure 2 displays the scatter plot between currency shares and GDP shares from the sample of 216 annual observations for six country groups.17 The upper panel of Figure 2 shows that the slope of curve between currency share and GDP share switches in the middle, supporting the non-linear relationship or a ‘tipping point phenomenon’. In the lower panel, the logit transformation of currency share is plotted against currency share.


Figure 2. Scatter Plots of GDP Share and Currency Share, 1973–2010

Notes: (i) Each panel shows a scatter plot between shares in world GDP and world currency reserve holdings by six country groups including United States, Eurozone (Germany), Japan, China, UK and Switzerland from 1975 to 2010. (ii) In the lower panel, the logit transformation of currency share, Log [Share/(1 − Share)], is used to consider the nonlinear relationship between currency share and GDP share. Sources: World Bank, World Development Indicators; IMF Annual Reports, Various Years; International Monetary Fund, Currency Composition of Foreign Exchange Reserves Database

Download figure to PowerPoint

Table 4 presents the regression results for the determination of currency shares. The model is estimated by adopting random-effects panel estimation procedure. Specification (1) excludes renminbi shares in the sample, while specification (2) includes them.

Table 4. Panel Regression Results for the Determination of Currency Shares
Explanatory Variablew/o Chinaw/ China
  1. (i) Estimated using OLS random-effects model.

  2. (ii) *significant at 10%; **significant at 5%; ***significant at 1%.

  3. (iii) Absolute value of z-statistics in brackets.

  4. (iv) Dependent variable: Logit of proportion of currency reserve holdings, logit (share/(1 − share)).

  5. (v) Sample: 1975–2010.

  6. Source: Author's calculations.

GDP share2.2708 (4.91)***1.8109 (4.51)***
Inflation difference−0.8977 (0.99)−0.2947 (0.57)
Foreign exchange turnover0.3341 (1.99)**0.2921 (2.00)**
Index of capital account liberalisation−0.0259 (0.73)0.0485 (2.94)***
Lag of logit currency share0.8716 (34.38)***0.8975 (40.98)***
Constant−0.6291 (3.71)***−0.6656 (4.50)***
Number of currencies56
R 2 0.990.99

The results are similar for the samples without and with renminbi – column (1) versus column (2). The relative size of the home country and the lagged dependent variable are shown to have statistically significantly positive effects on currency shares, with and without the renminbi. Foreign exchange turnover or the relative depth of the home financial centre enters statistically significantly in column (1), but becomes less significant in column (2). Inflation enters negatively in both specifications but is not statistically significant. The estimated coefficient on GDP share is lower in column (2) with the renminbi (1.46) than in column (1) without the renminbi (1.77).

The coefficient of the index of capital account liberalisation is positive and significant only in specification (2). This explains that the renminbi's lowest standing in the rank of an international currency is strongly related to its capital account restrictions.

We can use the estimation result to project the shares of the US dollar, euro and renminbi in the coming decades. First, the change in GDP shares will influence the long-run shares of the currencies. We make projections under two growth scenarios for China: (i) high growth path, in which the historical real GDP growth rate of 9.5 per cent for 1999–2008 (excluding the global crisis period) and real exchange rate appreciation rate of about 3.4 per cent18 are maintained through 2035; and (ii) low growth path, applying a 6.0 per cent real GDP growth rate with the same real exchange rate appreciation rate.19 Lee and Hong (2012) project that, based on the model of conditional convergence, China's GDP growth will decrease to between 5.5 and 6.6 per cent over the next two decades, which is consistently lower than the historical average.

In both scenarios, we assume that the United States, eurozone and the rest of the world maintain nominal GDP growth at historical rates.20 We construct the projected economic sizes for the United States, eurozone and China under the two scenarios. Assuming that China continues on the high growth path, it is forecast to reach 34.6 per cent of world GDP by 2035, surpassing the United States (13.0 per cent) and eurozone (11.8 per cent). Meanwhile, if China follows a low growth path, it will reach 19.3 per cent of world GDP, slightly higher than that of the United States (16 per cent of world GDP) and the eurozone (14.6 per cent).

In Figure 3, we present our currency share projections for the renminbi under the two scenarios. We use the coefficient estimates in column (2) along with our economic size projections to examine how renminbi shares will change as China's share in world GDP increases over time. In this simulation, we assume that China gradually improves its foreign exchange turnover and capital account openness from 2011 to 2020 to reach the averages of the United States.21


Figure 3. Projected Gross Domestic Product (GDP) and Currency Shares of China, 2011–35

Notes: (i) Scenario 1 denotes a high growth path for China; Scenario 2 denotes a low growth path for China. (ii) The high growth path assumes that the historical real GDP growth rate of 9.5 per cent for 1999–2008 and real exchange rate appreciation rate of about 3.4 per cent are maintained through 2035; and the low growth path assume a 6.0 per cent real GDP growth rate. (iii) In both scenarios, we also assume that China will achieve the same daily foreign exchange turnover and capital account openness as in the United States from 2011 to 2020. (iv) The estimates of GDP shares are in current US dollar. Source: Author's Calculations.

Download figure to PowerPoint

Under the moderate growth scenario, the renminbi share is expected to increase marginally to 2.7 per cent by 2035. It could reach up to 12.4 per cent if the Chinese economy grows at its faster historical rate. The estimation results show that once China gains full renminbi convertibility and operates a stable and prudent financial system, the renminbi would eventually become an international currency within the region and beyond – sharing from about 3 to 12 per cent of global central bank reserve holdings in 2035.22 This would exceed that of the yen or pound sterling. But the simulation exercises also demonstrate that, despite the substantial increase in China's GDP share, the renminbi's reserve currency share does not increase in parallel. This reflects the strong influence of network externalities.23 The strong, positive coefficient of the lagged dependent variable (with its value close to one) implies that the renminbi's rise to international currency status would occur only gradually. With a small initial currency share, the increase of the renminbi's share in international reserve currency holdings in response to the GDP share increase is smaller.24 On the other hand, the non-linear relationship implies that with the rise of China's share of GDP and the strong effect of the lagged currency share term, a ‘tipping point’ appears in which the renminbi's reserve currency share immediately jumps to a higher level, after which the increase accelerates over time. As other major currencies stagger, the moment the renminbi becomes an international currency may happen more quickly.

4. Monetary Cooperation and an Asian Common Currency

  1. Top of page
  2. Abstract
  3. 1. Introduction
  4. 2. From a Single to MultiCurrency Reserve System
  5. 3. Empirical Investigation of Reserve Currency Shares
  6. 4. Monetary Cooperation and an Asian Common Currency
  7. 5. Concluding Remarks
  8. References

The failure of yen internationalisation during the 1970s and 1980s provides important lessons for the internationalisation of the renminbi. As mentioned earlier, the lack of open and efficient financial markets – compared with United States and European markets – hindered the yen from completing the internationalisation process. Because Japanese authorities were not eager to internationalise the yen, it failed to take root as a reserve currency. Another important reason was that the yen failed to establish itself as a regional currency first. For historical and geopolitical reasons, most Asian countries were reluctant to use the yen for trade or financial transactions. The emergence of a yen bloc in East Asia would have helped consolidate the region's fragmented currencies and would have boosted the yen's chances of reaching reserve status.

China may face similar problems. Despite its growing economic and financial influence, it is doubtful whether other Asian countries are prepared or willing to submit to regional hegemony. Whether they do or not could depend on how the Chinese political system and regional geopolitics evolve over time.

In East Asia, members of Association of South East Asian Nations (ASEAN)+325 used the 1997/98 Asian financial crisis as an opportunity to bolster regional financial and monetary cooperation. There has been substantial progress in information sharing, economic surveillance, strengthening regional bond markets and reserve pooling. In 2001, ASEAN+3 finance ministers agreed to establish a network of bilateral swap arrangements, known as the Chiang Mai Initiative (CMI), which can provide emergency liquidity lending for troubled members. The global crisis in 2008/09 gave ASEAN+3 new momentum to upgrade its bilateral system of swap agreements into a multilateral pooled fund of US$120 billion. In May 2009, the ASEAN+3 Finance Ministers agreed on the details of CMI multilateralisation (CMIM) including governance structure, voting rights and financial contributions. The CMIM has been in effect since March 2010. China's contribution (including contributions from Hong Kong) is 32 per cent of the US$120 billion or US$38.4 billion.

Nonetheless, monetary cooperation in Asia remains weak. Formal regional institutions are underdeveloped in the region, especially compared with Europe. The successful regional cooperation on the CMIM is a promising first step for future rules-based regional institutions. Enhanced economic cooperation may help for neighbouring countries in accepting the increasing role of the Chinese economy as well as its currency.

Perhaps an option in promoting regional monetary cooperation is building an Asian Monetary System (AMS), in which each currency is pegged to a common basket currency – for example, an Asian Currency Unit (ACU). The value of the ACU could be based on a basket of weighted amounts of ASEAN+3 currencies, with its bilateral exchange rate allowed to fluctuate within a limited band around a central exchange rate. The ACU could become a basis for trade or other financial transactions within the region. Asian governments could issue ACU-denominated bonds. Of course, this is fraught with political considerations on currency weightings and how they should evolve over time. There are plenty of sensitivities between China, Japan, Korea, the 10 ASEAN members and India as well. The AMS would face the sensitive N-1 problem: when N currencies are linked to each other, there are N-1 restrictions and one exchange rate must be determined exogenously. This is how the European Monetary System (EMS) evolved to become a Deutsche mark-led arrangement (Wyploz, 2010).

Moving towards an AMS is likely to require a lengthy period of preparation and negotiation for necessary institutional arrangements in the region. Exchange rate coordination typically requires coordination in other macroeconomic policies such as monetary and fiscal policies, which would be a formidable challenge to Asian countries with diverse economic conditions. Nevertheless, over time, East Asian economies undoubtedly will improve exchange rate and monetary policy coordination. Enhanced regional cooperation in regional liquidity provision, economic surveillance and capital market development might lead to the adoption of an ACU (Kawai, 2010). Eichengreen (2006) argues that that the circulation of ACU as a parallel currency alongside national currencies would be an advantage for East Asian economies. This parallel currency system would not conflict with the gradual emergence of the renminbi as a credible regional currency. Gao and Yu (2009) argue that, no matter whether China's final goal is to create a regional currency or make the renminbi a core international reserve currency, China must pursue the internationalisation of the renminbi, at least in its initial stage.

On the other hand, a currency union in East Asia is unlikely in the immediate future. Barro and Lee (2011) show that, judging from optimum currency area (OCA) criteria – including the symmetry of output and price shocks across countries, commitment to price stability, trade and financial integration, as well as the degree of political proximity – East Asia does not appear to have very favourable economic conditions for a currency union. This is particularly true when compared with the eurozone. They envision, nevertheless, that the prospect for an East Asian currency union will hinge on future developments of economic and political conditions, rather than current environments. However it develops, China – and the renminbi – will play a major role in any new Asian currency arrangement.

5. Concluding Remarks

  1. Top of page
  2. Abstract
  3. 1. Introduction
  4. 2. From a Single to MultiCurrency Reserve System
  5. 3. Empirical Investigation of Reserve Currency Shares
  6. 4. Monetary Cooperation and an Asian Common Currency
  7. 5. Concluding Remarks
  8. References

The world economy is already tripolar – comprising the United States, EU and Asia. And Asia's relative economic and financial weight is set to rise even further in the light of its faster output growth. So, it is somewhat of an anomaly that only two currencies of this tripolar world – the US dollar and the euro – hold reserve currency status. Asia is left out. A more natural reserve currency arrangement in a tripolar world would be for each pole, including Asia, to have its own reserve currency. Given China's continuing strong growth and expanding economic influence globally, the renminbi has great potential to emerge as a new international reserve currency. Nevertheless, internationalising the renminbi has its obvious limitations given China's relatively undeveloped financial system and limited capital account convertibility. Despite important progress in financial reform and opening over the past decades, the Chinese financial system is still far from an open, sound and efficient one. It is a critical question whether China can continue to do financial liberalisation and opening with adequate pace and sequencing.

The global financial crisis and ongoing recovery have hampered the long-term prospects of both the US dollar and the euro as reserve currencies. The crisis has compromised both currencies as safe-haven stores of value. The renminbi is not a significant international currency yet. Our simulation shows that renminbi internationalisation will be a gradual and drawn-out process. Once the currency is more convertible, the renminbi can gradually grow to become an international currency within the region and beyond – sharing from about 3 to 12 per cent of international reserves by 2035. If markets actively seek a new currency for trade, investment and as a store of value, however, the renminbi may rise more quickly as an international currency than many currently anticipate.

Creating a more efficient, stable and equitable global reserve system is a vital priority for emerging economies, which rely heavily on international trade and capital flows. The internationalisation of the renminbi will offer an alternative to the US dollar and euro. The well-functioning multicurrency system with an expanded role for the renminbi can contribute to global financial stability by reducing the negative externalities inherent in self-insurance through large-scale reserve accumulation in nonreserve countries.

  1. 1

    Total foreign exchange reserves, excluding gold, increased from just special drawing right (SDR) 811.3 billion in 1994 to SDR 6.26 trillion at the end of 2010 (International Monetary Fund, 2000, 2011).

  2. 2

    Introduction of alternative insurance arrangements would also be important to strengthen the global reserve system, because it helps to reduce demand for a single reserve currency. These arrangements include bilateral swaps, private sector insurance, regional financing facilities, and capital controls (see Mateos y Lago et al., 2009).

  3. 3

    The Triffin dilemma would remain even in a multi-currency reserve system if the demand for safe reserve assets strained the ability of the issuers to supply sufficient amounts (see Obstfeld, 2011).

  4. 4

    Portfolio shifts between different currencies by central banks can alter exchange rates and bond prices and thus destabilise a multi-currency reserve system. However, central banks would not make frequent, large adjustments to reserve portfolios (Eichengreen, 2011).

  5. 5

    The special drawing right (SDR) was created in 1969 to provide additional liquidity to the global financial system. Its value is based on a basket of four international currencies including the euro, yen, pound sterling and US dollar. During the 2008/09 global crisis, allocations were made to avoid a liquidity shortage: a general SDR allocation was implemented on 28 August 2009, and a special allocation on 9 September 2009, raising the amount of SDRs from SDR 21.4 billion to SDR 204.1 billion.

  6. 6

    Schenk (2010) argues that the transition process was much longer than popular perception because there was collective global interest in the continuation of the preeminent role of the sterling as an international reserve currency.

  7. 7

    Gourinchas and Rey (2007) show that the US earns a significant average excess return on its net foreign asset position and that the excess return can be divided into a composition effect resulting from an asymmetric structure of the external balance sheet of the United States -assets are riskier and less liquid than liabilities – and a return effect – an excess return within class of assets. Habib (2010) shows that the excess return on net foreign assets of the United States was indeed exorbitant, amounting to more than 330 basis points per year between 1981 and 2007 which is accounted for by a positive yield differential from investment income and capital gains.

  8. 8

    Eichengreen (2012) points out that China's current political system can be an obstacle to renminbi internationalisation considering financial development requires rule of law and political stability.

  9. 9

    See The World Bank and Development Research Center of the State Council (DRCSC) (2012, Part II, chapter 3) for the progress and challenges of China's financial system development.

  10. 10

    The first half of 2011, the accumulated business amount of RMB settlement on cross-border trade was 958 billion yuan, 13.3 times more than the previous year. In 2011, RMB trade settlements amounted to about 9 per cent of China's total trade in goods and services.

  11. 11

    Renminbi deposit taking was introduced in Hong Kong on 25 February 2004. From just RMB 895 million in February 2004, renminbi deposits increased to RMB 600 billion in October 2011, which made up more than 8 per cent of total deposits in Hong Kong.

  12. 12

    By the end of 2007, seven of the 14 countries sharing borders with China (Russian Federation, Mongolia, the Democratic People's Republic of Korea, Kazakhstan, Vietnam, Myanmar, and Nepal) had established renminbi settlement accounts with banks in Chinese border trade areas. Currently, about 95 per cent of cross-border trade settlements with Vietnam, Laos, Cambodia and Myanmar are in renminbi.

  13. 13

    IMF data on currency composition of foreign exchange reserves are based on information collected from member central banks. The currency composition has changed gradually over time both due to valuation changes and quantity changes.

  14. 14

    The network effects, though not directly measurable, come from various factors such as trade invoicing, the denomination of foreign debt securities and the choice of currency peg. See the discussion in Section 'From a Single to MultiCurrency Reserve System' and Truman (2007).

  15. 15

    The dataset with the note on the definition and source of the variables are available upon request from the author.

  16. 16

    Since trade and output are highly correlated, we use only output shares in our estimation. When the regression includes the orthogonal component of trade share – the residual from a regression of trade share on output share – this additional trade variable is also statistically significant. This implies that rising China's trade size will also contribute to the international use of renminbi. We have also used exchange rate volatility, measured by standard deviation of the log first difference of the monthly SDR value of each currency. It is not statistically significant in the regression.

  17. 17

    To keep China's zero observations, when making the logit transformations, we added 0.001 across all currencies.

  18. 18

    Real exchange rate appreciation for China is estimated as the difference between the growth in GDP deflator in US dollar terms between China and the US (5.88 − 2.49 = 3.39).

  19. 19

    If real appreciation is positively related to labour productivity growth, the slower GDP growth in China will lead to smaller appreciation. According to the estimates of Rogoff (1996), a 1 per cent increase in real per capita GDP is associated with about a 0.37 per cent real appreciation.

  20. 20

    Real GDP growth rates for the US, eurozone, and the rest of the world are assumed at 2.1, 1.7, and 4.0 per cent, respectively.

  21. 21

    The simulations, which are not reported here, show that without capital account convertibility and financial sector reform, the renminbi's share will be insignificant by 2035 despite the significant portion of China's output in world GDP.

  22. 22

    Emergence of the renminbi as a fully convertible reserve currency will enable China to reduce its (self-insurance) demand for international reserve and switch into a supplier of reserve assets. Accordingly, China's share in global reserves is expected to decline gradually from the current level – about 30 per cent of global reserves, while other central banks will increase holdings of the RMB as a reserve currency.

  23. 23

    The rise of the renminbi to international currency status would occur much faster along with GDP if the network externality effect were not considered. Li and Liu (2010) estimate that the renminbi will account for between 15 and 21 per cent of international reserves in 2020 by using an empirical specification similar to (1) without the lagged dependent variable.

  24. 24

    In the logit specification, the coefficient does not correspond to the marginal effect of the independent variable on currency share. The elasticity can be calculated by using estimates and the values of the variables. The elasticity of currency share to GDP share at the mean values ξ = (∂currency sharGDP share)(GDP share/currency share) are approximated as β1 GDP share (1 − currency share). This implies that the elasticity with respect to GDP share increases with GDP share and decreases with currency share. For China, this ranges from around 0.18 to 0.34 under the low growth scenario; 0.18–0.55 under the high growth scenario, holding all else constant. These imply that a 1 per cent increase in China's shares in world GDP leads to a rise of around 18 to 34 per cent increase in the renminbi's share of global central bank reserve holdings under the low growth scenario and 18 to 55 per cent under the high growth scenario. The long-run elasticity of currency share with respect to any explanatory variable is much higher because of the strong persistence of currency share.

  25. 25

    ASEAN+3 consists of the 10 countries of the Association of South East Asian Nations (ASEAN) plus China, Japan, and Korea.


  1. Top of page
  2. Abstract
  3. 1. Introduction
  4. 2. From a Single to MultiCurrency Reserve System
  5. 3. Empirical Investigation of Reserve Currency Shares
  6. 4. Monetary Cooperation and an Asian Common Currency
  7. 5. Concluding Remarks
  8. References
  • Barro, R. J. and J.-W. Lee (2011), ‘East Asia Currency Union’, in R. J. Barro and J.-W. Lee (eds.), Costs and Benefits of Economic Integration in Asia (New York: Oxford University Press and Asian Development Bank), 1052.
  • Becker, T. I., O. Jeanne, P. Mauro, J. D. Ostry and R. Ranciere (2007), ‘Country Insurance: The Role of Domestic Policies’, Occasional Paper No. 254 (Washington, DC: International Monetary Fund).
  • Bergsten, C. F. (2009), ‘The Dollar and the Deficits: How Washington Can Prevent the Next Crisis’, Foreign Affairs, 88, 6, 2038.
  • Chin, G. and W. Yong (2010), ‘Debating the International Currency System: What's in a Speech?China Security, 6, 1, 320.
  • Chinn, M. and J. A. Frankel (2007), ‘Will the Euro Eventually Surpass the Dollar as Leading International Reserve Currency?’, in R. H. Clarida (ed.), G7 Current Account Imbalances: Sustainability and Adjustment (Chicago, IL: University of Chicago Press), 283335.
  • Chinn, M. and J. A. Frankel (2008), ‘Why the Euro will Rival the Dollar’, International Finance, 11, 1, 4973.
  • Chinn, M. and H. Ito (2008), ‘A New Measure of Financial Openness’, Journal of Comparative Policy Analysis, 10, 3, 30922.
  • Cohen, B. J. (2008), ‘Toward a Leaderless Currency System’, Paper 49 (Santa Barbara, CA: Orfalea Center for Global and International Studies).
  • Eichengreen, B. (2006), ‘The Parallel Currency Approach to Asian Monetary Integration’, American Economic Review, Papers and Proceedings, 96, 2, 43236.
  • Eichengreen, B. (2007), Global Imbalances and the Lessons of Bretton Woods (Cambridge, MA: MIT Press).
  • Eichengreen, B. (2011), Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System (New York: Oxford University Press).
  • Eichengreen, B. (2012), ‘Number One Country, Number One Currency?’, Paper presented at the CEPII-GEP-IFO Conference, 6–7 September.
  • European Central Bank (various years), The International Role of the Euro (Frankfurt am Main: European Central Bank).
  • Frankel, J. (2011), ‘Historical Precedents for the Internationalization of the RMB’, Paper presented at a workshop in Beijing organized by the Council on Foreign Relations and the China Development Research Foundation.
  • Galati, G. and P. Wooldridge (2006), ‘The Euro as a Reserve Currency: a Challenge to the Pre-Eminence of the US dollar?’, Working Papers 218 (Basel: Bank for International Settlements).
  • Gao, H. and Y. Yu (2009), ‘Internationalization of the RMB’, Research Paper (Basel: Bank for International Settlements).
  • Goldberg, L. and C. Tille (2008), ‘Vehicle Currency Use in International Trade’, Journal of International Economics, 76, 2, 17792.
  • Gourinchas, P.-O. and H. Rey (2007), ‘From World Banker to World Venture Capitalist: US External Adjustment and The Exorbitant Privilege’, in R. Clarida (ed.), G-7 Current Account Imbalances: Sustainability and Adjustment (Chicago, IL: University of Chicago Press), 1155.
  • Habib, M. M. (2010), ‘Excess Returns on Net Foreign Assets: the Exorbitant Privilege from a Global Perspective’, Working Papers 1158 (Frankfurt am Main: European Central Bank).
  • Hai, W. and H. Yao (2010), ‘Pros and Cons of International Use of the RMB for China’, in W. Peng and C. Shu (eds.), Currency Internationalisation: Global Experiences and Implications for the Renminbi (London: Palgrave/Macmillan), 13966.
  • He, D. and R. N. McCauley (2010), ‘Offshore Markets for the Domestic Currency: Monetary and Financial Stability Issues’, Working Paper 02/2010 (Hong Kong: Hong Kong Monetary Authority).
  • International Monetary Fund (2000), Annual Report 2000 (Washington, DC: International Monetary Fund).
  • International Monetary Fund (2011), Annual Report 2011 (Washington, DC: International Monetary Fund).
  • Kawai, M. (2010), ‘Quest for a Regional Monetary Framework in East Asia’, Paper presented at the Conference on Diversification of Reserve Currencies and Development of Regional Financial Markets in Asia, Asian Development Bank Institute.
  • Krugman, P. (1980), ‘Vehicle Currencies and the Structure of International Exchange’, Journal of Money, Credit and Banking, 12, 3, 51326.
  • Lee, J.-W. and K. Hong (2012), Economic Growth in Asia: Determinants and Prospects’, Japan and the World Economy, 24, 2, 10113.
  • Li, D. D. and L. Liu (2010), ‘RMB Internationalization: Empirical and Policy Analysis’, in W. Peng and C. Shu (eds.), Currency Internationalisation: Global Experiences and Implications for the Renminbi (London: Palgrave/Macmillan), 16785.
  • Mateos y Lago, I., R. Duttagupta and R. Goyal (2009), ‘The Debate on the International Monetary System’, Staff Position Note SPN/09/26 (Washington, DC: International Monetary Fund).
  • Mileva, E. and N. Siegfried (2007), ‘Oil Market Structure, Network Effects and the Choice of Currency for Oil Invoicing’, ECB Occasional Paper 77. (Frankfurt am Main: European Central Bank).
  • Obstfeld, M. (2011), ‘The International Monetary System: Living with Asymmetry’, Working Paper 17641 (Cambridge, MA: National Bureau of Economic Research, Inc).
  • Posen, A. S. (2008), ‘Why the Euro will Not Rival the Dollar’, International Finance, 11, 1, 75100.
  • Prasad, E. and L. Ye (2012), The Renminbi's Role in the Global Monetary System (Washington DC: The Brookings Institutions).
  • Rey, H. (2001), ‘International Trade and Currency Exchange’, Review of Economic Studies, 68, 2, 44364.
    Direct Link:
  • Rodrik, D. (2006), ‘The Social Cost of Foreign Exchange Reserves’, International Economic Journal, 20, 3, 25366.
  • Rogoff, K. (1996), ‘The Purchasing Power Parity Puzzle’, Journal of Economic Literature, 34, 2, 64768.
  • Schenk, C. R. (2010), The Decline of Sterling: Managing the Retreat of an International Currency 1945–1992 (Cambridge: Cambridge University Press).
  • Terada-Hagiwara, A. (2011), ‘Asian Holdings of US Treasury Securities: Trade Integration as a Threshold’, Journal of the Japanese and International Economics, 25, 3, 32135.
  • The World Bank and Development Research Center of the State Council, the People's Republic of China (2012), China 2030: Building a Modern, Harmonious, and Creative High-Income Society (Washington, DC: The World Bank).
  • Triffin, R. (1960), Gold and the Dollar Crisis: The Future of Convertibility (New Haven, CT: Yale University Press).
  • Truman, E. M. (2007), ‘Comment on Will the Euro Eventually Surpass the Dollar?’, in R. H. Clarida (ed.), G7 Current Account Imbalances: Sustainability and Adjustment (Chicago, IL: University of Chicago Press), 32235.
  • United Nations (2009), Recommendations by the Commission of Experts of the President of the General Assembly on Reforms of the International Monetary and Financial System (Stiglitz Commission). (New York: United Nations).
  • Wyploz, C. (2010), ‘An Asian Monetary Unit?’, Paper presented at the conference on ‘The Future Global Reserve System- An Asian Perspective’, ADB Institute, March 16–18.
  • Zhou, X. (2009), ‘Reform the International Monetary System’, speech, March 23, available at: (accessed 6 June 2013).