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Gaining CurrencyThe Rise of the Renminbi$
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Eswar S. Prasad

Print publication date: 2016

Print ISBN-13: 9780190631055

Published to Oxford Scholarship Online: October 2016

DOI: 10.1093/acprof:oso/9780190631055.001.0001

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Reserve Currency

Reserve Currency

(p.120) Chapter 6. Reserve Currency
Gaining Currency

Eswar S. Prasad

Oxford University Press

This chapter describes the RMB’s progress toward becoming a reserve currency. Although China does not have a fully open capital account or a flexible exchange rate, the RMB has already become a de facto reserve currency. Moreover, the IMF has recognized the RMB as an official reserve currency by including it in the institution’s SDR basket with effect from October 1, 2016. Many central banks are already holding or planning to hold RMB-denominated assets in their foreign exchange reserve portfolios. The PBC has signed bilateral local currency swap arrangements with 34 other central banks, which will also promote the RMB’s use as a reserve currency. However, the inadequate development of China’s financial markets, especially the limited amount of fixed-income (debt) securities available to foreign investors, could restrain the RMB’s rise as a reserve currency.

Keywords:   Seigniorage, inflation tax, exorbitant privilege, Triffin dilemma, IMF Special Drawing Rights (SDRs), bilateral currency swap arrangements, swap lines

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