The Full Convertibility of Renminbi:
Consequences & Influences
Student: Lin Ju (Arenas)
Lecturer: Ms Cram/Mr Blum (HVA)
Coach: Mr Schoorl (HVA)
Business Study (Premaster)
To assure that readers can understand the overall structure of this thesis proposal, it will be divided in 7 chapters (Based on the “6 Chapters Topic outline”, but one more which is Chapter 7, a draft working plan. Thesis is provided by UK thesis basehttp://www.ukthesis.org/Furthermore, there is a small adjustment, so to make the frame of this paper more logical and reasonable. I have put Chapter 5 from the “6 Chapters Topic outline” which are answers to my questions or the defense of my statement in my conclusion part, chapter 6).
Proposal Topic Outline (6 Chapters)
Chapter 1 Chapter 1
Chapter 2 Chapter 2
Chapter 3 None
Chapter 4 Chapter 3
Chapter 5 Chapter 4
Chapter 6 Chapter 5 & 6
Chapter 7 None
Firstly, chapter 1 will give an introduction of the subject to offer an overall impression. Secondly, chapter 2 will show you what am I going to do therefore the thesis statements and related questioned will be raised. Then chapter 3 can answer the question why chose this subject. The motivation and personal experience or involvement will support this chapter. Fourthly, chapters 4 and 5 will indicate how I am going to do it. Among these chapters, theories, research method, sources and etc will be mentioned respectively. Furthermore, chapter 6 will focus on stating what I expect to find meaning answers so far to questions and conclusion will be given after writing previous chapters. Finally, a working plan as well as a timeline strategy will be offered during chapter 7.
Chapter 1: Introduction
Like most developing countries, China has also adopted a multiple exchange mechanism after launching the market-oriented economic system reform. Since 1979, a policy regarding the opening to the outside world published officially. It was also at that time that China started the progress of Renminbi (China’s home currency, also referred as RMB)’s full convertibility. Actually “full convertibility of Renminbi means that the holders of RMB can exchange owned RMB to another currency at a market rate with any purpose without restrictions at anytime. Introduction of currency convertibility is one of the most crucial part of a country’s economic reforms, especially for those formerly centrally planned economies which is an economic system in which the state or workers' councils manage the economy (The New Palgrave: A Dictionary of Economics, v. 3, pp. 879-80.). In such economies the state or government controls all major sectors of the economy and formulates all decisions about the use of resources and the distribution of output (Construction Economics 2004, p. 288).#p#分页标题#e#
To talk about one currency’s convertibility often implies how open an economic situation is as the concept of convertibility of one currency covers the unrestricted use of a country’s currency for international currencies allowing it to be exchanged for foreign currency to make a transaction.
International transaction can be interpreted by a balance of payments which can be break into various components. Those that receive most attention are the current account and the financial account (sometimes referred to the capital account) (International Financial Management. Jeff Madura, Roland Fox,p.38).Therefore the liberalization of current account and capital account are two stages which are concentrated on for the whole course of RMB’s full convertibility. The first level of adopting liberalization under the current account has been established in China since 1996. The second is adopting capital account liberalization, which is currently going on.
Furthermore, adapting the Thesis is provided by UK thesis basehttp://www.ukthesis.org/convertibility of a currency will involve economic coordination in a very broad range of area, including macro-economy balances, and the level and flexibility of price, interest rate and exchange rate (HKIMR Working Paper, April 2002). Thus achieving full convertibility can bring China a lot of opportunity and benefit such as the encouragement of foreign investment, increasing the export etc. On the other hand, someone also argues that the full convertibility will affect the exchange rate therefore having an impact on the economy.
However, China’s currency has been the world’s attention these years. Personally I am quite interested in those hot topics (such as the appreciation of RMB, can RMB take over US dollar’s position etc.) which based on my country’s currency so I pick up one of them (the full convertibility of RMB) through the brainstorm.
Moreover this paper will review the historical process of RMB’s convertibility during the past as well as an analysis about the pros and cons of this subject. Then we will focus on the impacts of the RMB convertibility to the economy. Finally, the challenge and the opportunity will be concluded from the paper.
From my perspective professors and classmates from schools will be the potential audiences mostly or the colleagues from the placement company who are interested in this topic.
Chapter 2: Thesis Statement and related questions
(What am I going to do)
As already introduced in Chapter 1, the convertibility of Renminbi is the main topic of this paper. “The full convertibility of RMB” is the core statement and together with the central question “What is the consequences and influences after achieving the full convertibility of Renminbi?” will be mostly discussed through the following chapters. Further more, there are still a few related questions that will be answered as well.#p#分页标题#e#
Firstly, as mentioned during Chapter 1, the first level which is adopting liberalization under the current account has been established in China since 1996 so what is the exact historical process of the full convertibility of RMB can be quite an interesting question.
Secondly, to talk about Renminbi’s full convertibility can indicate how open the China’s economy is. Without any doubt, achieving the full convertibility will bring China a lot of opportunity and benefits. However, what are the exact opportunities and advantages after achieving the full convertibility of RMB?
Thirdly, on the other hand the full convertibility will affect the exchange rate and therefore it will influence the economy. As a result, it is necessary to understand the challenges and disadvantages of RMB’s complete convertibility.
*Potentially for future research ,the topic “Is there any possibility that RMB will be another international currency just like US dollar and Euro after accomplishing the full convertibility of Renminbi?” will be quite meaningful.
Chapter 3: Motivation and Personal experience
(Why choosing this subject)
Motivation to write a thesis about this subject:
Interest: China’s currency has been the world’s attention these years. Personally I am quite interested in those hot topics (such as the appreciation of Renminbi, can Renminbi take over US dollar’s position etc.) which regarding with my countries currency so I pick up one of them (full convertibility of Renminbi) through the brainstorm.
Value: I strongly believe that the subject which I chose for the thesis could be valuable not only for my gain of knowledge but also could be beneficial for my placement. The achievement of Renminbi’s full convertibility may help diversified organization like GE expand its market share through efficient investment.
Success: Thesis writing, as my final part of my education I am dedicated and motivated to finalize this session through all I have learnt during these 3 years. It will be a milestone if I am able to contribute a lot to the subject: The full convertibility of Renminbi.
Relationship to my placement:
I finished my internship at General Electric – Equipment Service Europe at the end of October, 2009. Basically I worked in the accounting department as a trainee. As known, the General Electric Company or GE is a multinational American technology and services conglomerate incorporated in the State of New York. The business which worked for is the one of the world’s most diverse financial service companies. It provides financial solutions for the leasing of assets in industries as diverse as car fleets, IT, office equipment, construction, transportation, aircraft etc. However, it is a multinational business based company so transactions of doing business have to deal with different currency off course. My study of full convertibility of Renminbi offer important information for GE to consider potential investment in China which owns a large proportion of world market share. Furthermore, as I mentioned before, the analysis with respect to the impact that Renminbi’s full convertibility bring to the foreign exchange rate from my thesis will be useful for GE to gain a competitive advantage in the further.#p#分页标题#e#
There is a very good example to indicate my personal experience with the subject of my thesis. Three years ago, before I came to Holland, my parents and I went to the bank to exchange Renminbi into Euro to transfer the study fee to HES. The officers of International business department in the bank told us that everyone can exchange for 50 thousand US dollar maximally and in excess of this amount should report to central bank why you need such a large amount. From that time, I had a feeling that it was quite not convenient with this restriction.
Chapter 4: Theories
(How I am going to do it)
The Renminbi literally "people's currency") (sign: ¥; code: CNY) is the currency of the People's Republic of China (PRC) whose principal unit is the Yuan.
The Renminbi is issued by the People's Bank of China, the monetary authority of the PRC. The ISO 4217 abbreviation is CNY, although it is also commonly abbreviated as "RMB". The Latinized symbol is ¥.
* The quality of being exchangeable (especially the ability to convert currency into gold or other currencies without restriction)
* Convertibility is the quality of paper money substitutes which entitles the holder to redeem them on demand into money proper.
* Furthermore, the paper also gives its own understanding:
Convertibility refers to the capacity of a currency freely against other currencies or goods.
Full convertibility of RMB:
The Yuan holders can exchange owned Renminbi to other currency at a market rate with any purpose without restrictions at anytime. Now the situation is that everyone in China can exchange.
Two stages of full convertibility (please go to chapter 5)
There are two stages of the full convertibility for a currency: the liberalization of current account and the liberalization of capital account.
In economics, the current account is one of the two primary components of the balance of payments, the other being the capital account (Current Account: The feature of current account transaction is that they are international payments for goods and services between nationals and non-nationals. Capital account: Key component are direct foreign investment, portfolio investment, and other capital investment.). In other words, the course of achieving full convertibility of Renminbi has to meet both of these two levels. The first level of adopting liberalization under current account has been established in China. The second is adopting capital account liberalization, which is currently going on.
Chapter 5: Research and Sources
(How I am going to do it)
An Inductive research method (Using known facts or data to produce general principles.) will be applied. Furthermore, statistics analysis and scientific method can be used to analyze the data in the future as lectures were given last semester. #p#分页标题#e#
(Please also go to chapter 4)
More Data and information will be collected in the following categorizes.
A. China currency: Trade, Revaluation, Exchange Rate ( Dror Poleg, April 9 )
B. Currency convertibility and linkage between Chinese Official and SWAP market exchange Rate ( Contemporary Economic Policy, July 1, 2001)
C. China takes steps towards full convertibility of the Yuan (By Luis Arce 7 May 2009)
D. RMB adapted to WTO Needs ( China’s Daly, April 14,2000)
E. In Step to Enhance Currency, China Allows Its Use in Some Foreign Payments (By KEITH BRADSHER Published: July 6, 2009)
F. Currency Convertibility, Cost of Capital Control and Capital Account Liberalization in China (© Journal of Chinese Political Science, vol. 10, no. 1, April 2005)
A. Chinese Yuan (Renminbi) – Derivative Thesis is provided by UK thesis basehttp://www.ukthesis.org/Products (Author: Peter G.Zhgang Published by World Scientific Publishing Co.Pte.Ltd. ISBN: 981-238-927-X)
B. China’s Financial Markets: An Insider’s Guide to How the Markets Work (Authors: SalihN.Neftci, Michelle Yuan, Menager-Xu Published by Elservier.Inc ISBN: 978-0-12-088580-0)
C. Study on the Renminbi Capital Account Liberalization (Author: Yao Li Published by Chinese Academy of Social Sciences, Institute of Finance)
To indicate “how am I going to do it ”, Chapter 4 and 5 have already indicated sources, theories and research method which is able to tackle the problem in this paper.
Chapter 6: Answers to questions and Conclusion
Answers to questions:
After collecting information and researching through sources, here are some points can be given to conclude the progress so far.
What is the exact historical process of the full convertibility of RMB?
There are two stages of the full convertibility for RMB: the liberalization of current account and the liberalization of capital account.
In economics, the current account is one of the two primary components of the balance of payments, the other being the capital account (Current Account: The feature of current account transaction is that they are international payments for goods and services between nationals and non-nationals. Capital account: Key components are direct foreign investment, portfolio investment, and other capital investment.). In other words, the course of achieving full convertibility of Renminbi has to meet both of these two levels. The first level of adopting liberalization under current account has been established in China. The second is adopting capital account liberalization, which is currently going on.#p#分页标题#e#
What are exact opportunities or advantages after achieving the full convertibility of RMB?
Firstly, achieving the full convertibility of RMB contributes to meeting basic requirements of IMF (International Monetary Fund) and WTO (World Trade Organization). Secondly, it is a way of attracting of foreign investment as it builds a more open and fair market economy as well as a financial environment for equal competition. Thirdly, RMB’s full convertibility is conducive to enhance the stability of nation’s currency, Renminbi. Finally, foreign direct investment is not the only way to courage investment after we joined WTO, banks , securities , insurances and etc are more and more involved. As a result, it is a good opportunity to test and update our external exchange management system.
What are exact challenges and disadvantages of RMB’s complete convertibility?
Firstly, it will weaken the control over currency therefore currency exchange rate fluctuations may have a greatly impact on the economy. Secondly, theoretically, of course, an open capital account helps a outside of China's capital flows, but also facilitates the flow of foreign capital to China. Secondly. as long as the foreign portfolio investment capital entering China, although many companies are given new opportunities, it is intensifying competition in the financial market. Furthermore, there is concern that it will create bank runs (banks failures) under the liberalization of capital account.
*For future research: Is there any possibility that RMB will be another international currency just like US dollar and Euro after accomplishing the full convertibility of Renminbi?
It is undoubtedly true that Renminbi will keep a relatively stable situation against other currency. However, the full convertibility of RMB is not the only element to make RMB act as the international currency because other crucial elements such as the powerful economic forces can not be ignored as well. To conclude this point of view, Renminbi does not have the ability to take the place of US dollar and Euro in the short term even achieving the full convertibility.
This paper will center on the main statement “Towards the full convertibility of RMB” to discuss the related issues such as the advantages and disadvantages of achieving the full convertibility etc. In addition, the background of relevant knowledge and information (chapter 4, 5 and 6) will be explained in more detail to get further understanding of this subject. Meanwhile, personally I think that RMB still does not have the strength to become the international currency however more research have to be fulfilled regarding my concern.Chapter 7 Working Plans
Draft working contents of the subject:
1.1 The Concept of Convertibility
1.2 Implications of Currency Convertibility
1.3 The advantage and disadvantage of full convertibility
2. A review of historical process toward on the full convertibility of Renminbi#p#分页标题#e#
3. Giving a review of China’s Foreign Exchange Situation and Trade
4. The impact that Renminbi’s full convertibility can may bring to China’s Foreign Exchange and Trade
5. The conditions
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