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Message from ADB's President Contributors Acknowledgements Executive Summary and Recommendations Jeffrey D. Sachs, Masahiro Kawai, Jong-Wha Lee, and Wing Thye Woo Paper Summaries (full papers downloadable) International Monetary Advisory Group Global Financial Crisis, its Impact on India and the Policy Response Nirupam Bajpai To What Extent Should Capital Flows be Regulated? Maria Socorro Gochoco-Bautista The Case for a Further Global Coordinated Fiscal Stimulus Willem Buiter Managing a Multiple Reserve Currency World Barry Eichengreen From the Chiang Mai Initiative to an Asian Monetary Fund Masahiro Kawai An Asian Currency Unit for Asian Monetary Integration Masahiro Kawai The International Monetary System at a Crossroad Felipe Larrain B. Towards a New Global Reserve System Joseph Stiglitz A Realistic Vision of Asian Economic Integration Wing Thye Woo An Asian Monetary Unit? Charles Wyplosz Will US fiscal Deficits Undermine the Role of the Dollar as Global Reserve Currency? If So, Should US Fiscal Policy be geared to Preserving the International Role of the Dollar? Yongding Yu International Monetary Working Group International Reserves and Swap Lines: the Recent Experience Joshua Aizenman, Donghyun Park and Yothin Jinjarak The Future of the Global Reserve System Daniel Gros, Cinzia Alcidi, Anton Brender, and Florence Pisani Renminbi Policy and the Global Currency System Yiping Huang Will the Renminbi Emerge as an International Reserve Currency? Jong-Wha Lee Asia's Sovereign Wealth Funds and Reform of the Global Reserve System Donghyun Park and Andrew Rozanov Reforming International Monetary System Kanhaiya Singh Designing a Regional Surveillance Mechanism for East Asia: Lessons from IMF Surveillance Shinji Takagi

15. Will the Renminbi Emerge as an International Reserve Currency?

Jong-Wha Lee

This paper argues that the world needs a greater role for alternative currencies in order to strengthen the global reserve system. A gradual evolution to a multi-currency system is desirable because it reduces the ever-growing balance of payments deficit pressure on a single reserve currency issuer and provides alternatives for countries to diversify their foreign exchange currency holdings.

This paper focuses on the role of an Asian currency in the global reserve system. Given the continuing strong growth of the People’s Republic of China (PRC) and its expanding influence in the world economy, it is quite natural that the renminbi emerges as a new international currency. This is however, contingent on PRC authorities' acceptance of a more convertible capital account and development of an efficient financial system.

The current global financial crisis has 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. But simulations show that once the currency were to become more convertible, the renminbi can gradually grow to become an international currency within the region and beyond—sharing from about 3% to 12% of international reserves by 2035. As other major currencies stagger, however, the renminbi may rise more quickly as an international currency than many anticipate.

Creating a more efficient, stable, and equitable global reserve system is a vital priority for emerging economies, which depend heavily on international trade and capital flows for their growth and development. The internationalization of the renminbi will offer an alternative to the US dollar and the euro. The well-functioning multi-currency system with an expanded role for the renminbi as an international currency can play an important part in maintaining global financial stability and sustained growth.