Cover Editorial, EO print edition issue no. 418
Translated by Rui Bingyou
Original article: [Chinese]

On May 3, thirteen Asian countries announced the joint establishment of a regional foreign currency resere pool worth 120 billion US dollars. China would contribute 32%, Japan 32%, and Korea 16%. The remainder would be guaranteed by members of the Association of Southeast Asian Nations (ASEAN).

Many commentators immediately interpreted the announcement as another step forward for the RMB's internationalization. While we agree that China's involvement in the fund will play a role in this process, we will not go so far as to call it a step forward for the RMB's internationlization.

The fund will only serve to ease contractions in liquidity, such as those seen in the aftermath of the financial crisis. This kind of coordination is certainly the result of integration in the region, but not an effort of currency integration.

Since the G-20 summit, there has been a crescendo in chatter about the RMB's internationalization, and those hoping for it seem to place it just around the corner. But in spite of this, there has been a lack of consensus over the nature of the currency's future role and how it should ascend to it.

We believe that to rationally look at the RMB's internationalization, we must focus on these core issues--and not the establishment of the reserve fund.

There are three pillars to the RMB's internationalization. First, it must see wide circulation outside of China. Second, financial products denominated in the RMB must be adopted by international instutitions and central banks. Third, to a certain extent, it must be used to settle accounts in international trade.

Recent currency swap agreements between China and other countries advance the establishment of the first pillar.

The RMB's internationalization is feasibile and is, in a way, a necessity. China's economy is opening up more and more to the outside, with imports, exports, and foreign direct investment all substantial segments of China's GDP last year. China is especially linked to Asia, and sees large circulation in nearby countries, and is freely exchanged in some developed countries. Some nearby governments have even elected it to serve as their reserve currency.

With the support of the Asian markets, the RMB will become a common currency for the region and go a long way towards stabilizing monetary relations in the region, ultimately raising its status. Pushing this trend is also one of subjective need.

But the process of building up all three pillars is not something that China can force through. It must first patiently complete the necessary groundwork for such a transition, and when opportunities present themselves, seize them.

The RMB is still not exchangeable under the capital account, and it cannot be freely converted. These exchange rate mechanisms are still in the process of reform, and ultimately, whether or not the RMB internationalizes relies more on its progress and reform of China's financial system.