Jayant Menon: The paper begins with a useful review of the existing literature on the roles of an international currency and the benefits and costs of being an international currency, both in theory and in practice. The paper presents data to illustrate the rapid increase in the scale of Renminbi (RMB) use and holdings outside of China. Zhang and Tao attribute this increase to a number of market driven factors, namely: (i) increased trade between China and Southeast Asian countries; (ii) the continuous appreciation of the RMB since 2005, which has encouraged foreign exporters to settle their trade in RMB; (iii) the rise in currency swap agreements with China in the wake of the 2008–09 global financial crisis; and (iv) the increasing role of Hong Kong—which conducts business in RMB—as a major financial center in the region.
The paper then discusses the main benefits and costs of RMB internationalization. On...