Edited by Koichi Hamada, Beate Reszat and Ulrich Volz
Chapter 14: Institutional and Structural Problems of China’s Foreign Exchange Market and the RMB’s Role in East Asia
Zhang Jikang and Liang Yuanyuan1 INTRODUCTION 14.1 One big question mark with respect to East Asian monetary integration is the Chinese currency’s potential role in this process. In the 1980s and 1990s, the Japanese government tried to promote the yen as the key regional currency. But the “yen bloc”, as it was often referred to, never came into being, despite the yen’s status as one of the leading international currencies as well as the existence of highly developed and liquid financial markets in Japan.2 Today, after years of deflation and economic weakness in Japan, the prospects of a yen bloc have diminished even further. The failure to establish the yen as the regional anchor currency in East Asia is also a result of noneconomic factors—that is, the other East Asian countries are not willing to accept a Japanese leadership role in East Asia for political and historical reasons. This puts the spotlight on the Chinese renminbi (RMB). Several authors have predicted a growing orientation of East Asian countries’ exchange rate policies toward that of China (see, for example, Ho et al. 2005; and Hefeker and Nabor 2005). But there are many uncertainties surrounding the RMB’s prospects of becoming the leading currency in the region, such as whether China will be able to sustain her economic growth path and maintain political stability, and whether China will be able to develop deep and liquid primary and secondary financial markets. In this chapter, we focus on another aspect that is crucial for...
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