8 - The Potential of the RMB as a Payment Currency

Summary

In Chapter 8, I carry out a quantitative study of the determinants of RMB internationalization, focusing on assessing the potential of the RMB as an international payment currency. I present an econometric study to demonstrate that financial development and capital account openness are distinctly more important than the GDP of China in determining the share of the RMB in international payments. I carry out a regression analysis to identify the determinants of bilateral inter-country payments flows by currency. Then, I use the model to predict the future share of the RMB in global payments. I find that, in the best-case scenario, the RMB can possibly become the (distant) third payment currency (behind the USD and euro) by 2025. However, despite China’s large expected economic size, it would be hard for the RMB to come even close to the status of the euro as a payment currency because it would be hard for China to attain the required levels of financial development and capital account openness, given the underdevelopment of China’s institutions. I also carry out a very simple exercise to estimate the impacts of the Belt and Road Initiative on the payment share of the RMB and its share in denominating international debt securities.