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Will History Repeat Itself? Lessons for the Yuan

Will History Repeat Itself? Lessons for the Yuan

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For many observers, internationalization is the yuan’s manifest destiny and a by-product of the remarkable economic success of the People’s Republic of China (PRC). But is such confidence warranted? Recent history has seen the emergence of other currencies that were also expected, at least for a while, to attain wide, growing cross-border use. These included the deutsche mark (DM), the Japanese yen, and the euro (successor to the DM). Yet in the end, their internationalization reached an upper limit, short of expectations. Will history repeat itself? Or will the yuan prove exceptional, as the currency that finally managed to keep ascending where others faltered? The aim of this paper is to see what lessons may be drawn from these earlier experiences for the anticipated internationalization of the yuan.
For many observers, internationalization is the yuan’s manifest destiny and a by-product of the remarkable economic success of the People’s Republic of China (PRC). But is such confidence warranted? Recent history has seen the emergence of other currencies that were also expected, at least for a while, to attain wide, growing cross-border use. These included the deutsche mark (DM), the Japanese yen, and the euro (successor to the DM). Yet in the end, their internationalization reached an upper limit, short of expectations. Will history repeat itself? Or will the yuan prove exceptional, as the currency that finally managed to keep ascending where others faltered? The aim of this paper is to see what lessons may be drawn from these earlier experiences for the anticipated internationalization of the yuan.

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Published by: Asian Development Bank Institute on Jan 17, 2014
Copyright:Traditional Copyright: All rights reserved

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07/04/2014

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ADBI Working Paper Series
Will History Repeat Itself? Lessons for the Yuan
Benjamin J. Cohen
 No. 453 January 2014
 
Asian Development Bank Institute
 
 
The Working Paper series is a continuation of the formerly named Discussion Paper series; the numbering of the papers continued without interruption or change. ADBI’s working papers reflect initial ideas on a topic and are posted online for discussion. ADBI encourages readers to post their comments on the main page for each working paper (given in the citation below). Some working papers may develop into other forms of publication. Suggested citation: Cohen, B. 2014. Will History Repeat Itself? Lessons for the Yuan. ADBI Working Paper 453. Tokyo: Asian Development Bank Institute. Available: http://www.adbi.org/working-paper/2014/01/17/6111.will.history.repeat.itself.lessons.rmb/ Please contact the author for information about this paper. Email: bjcohen@polsci.ucsb.edu Benjamin J. Cohen is professor, Department of Political Science, University of California, Santa Barbara. The views expressed in this paper are the views of the author and do not necessarily reflect the views or policies of ADBI, the ADB, its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with ADB official terms.  Asian Development Bank Institute Kasumigaseki Building 8F 3-2-5 Kasumigaseki, Chiyoda-ku Tokyo 100-6008, Japan Tel: +81-3-3593-5500 Fax: +81-3-3593-5571 URL: www.adbi.org E-mail: info@adbi.org © 2014 Asian Development Bank Institute
 
 ADBI Working Paper 453 Cohen
Abstract
For many observers, internationalization is the yuan’s manifest destiny—an irresistible by-product of the remarkable economic success of the People’s Republic of China (PRC). But is such confidence warranted? Recent history has seen the emergence of other currencies that were also expected, at least for a while, to attain wide, growing cross-border use. These included the deutsche mark (DM), the Japanese yen, and the euro (successor to the DM). Yet in the end their internationalization reached an upper limit, short of expectations. Will history repeat itself? Or will the yuan prove exceptional, the currency that finally managed to keep ascending where others faltered? The aim of this paper is to see what lessons may be drawn from these earlier experiences for the anticipated internationalization of the yuan. Much can be learned from their stories—first, about what may drive the internationalization of a currency, and second, about what may ultimately set a limit to the process. The main message of the analysis is that the challenge of internationalization is formidable, involving demanding conditions. Can Beijing sustain its record of price stability and effective policy management? Can the country succeed in shifting its industrial and trade structure toward exports of more advanced differentiated products? Can the yuan’s convertibility be broadened? Can domestic financial markets be adequately developed? Can the country’s political institutions be trusted? Can geopolitical tensions be avoided? Contrary to predictions of the yuan’s “inevitable” rise, success in all these respects is by no means guaranteed.
JEL Classification:
 F31, F33, F41
 

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