1.3 The compilation method of RMB internationalization index

1.3.1 Indicator system

According to the definition of internationalization of the RMB,we select two major categories of indicators which can reflect international monetary functions of the RMB to construct RMB internationalization index system.These two categories of indicators are consistent with the two categories of international economic transactions defined in the Balance of Payments Manual issued by the International Monetary Fund (IMF).The first category reflects international pricing,clearing and settlement functions of the RMB,specifically including indicators of RMB used in international trade and indicators of RMB used in capital and financial transactions.The second category reflects function of the RMB as international reserve(Figure 1—1 and Table 1—1).

Figure 1—1 Indicator system of RMB internationalization index

Proportion of RMB settlement in world trade=the amount of RMB cross—border trade /total value of world import and export trade；

Proportion of RMB credit in global foreign credit=the amount of RMB overseas credit/the amount of global overseas credit；

Proportion of RMB security in global issuance of international bonds and bills=the issuance of RMB international bonds and bills/the issuance of global international bonds and bills;

Proportion of RMB security in global remaining sum of international bonds and bills=the remaining sum of RMB international bonds and bills/the remaining sum of global international bonds and bills;

Proportion of RMB direct investment in global foreign direct investment=the amount of RMB direct investment/the amount of global direct investment；

Proportion of RMB foreign exchange reserves in global foreign exchange reserves=the remaining sum of RMB official exchange reserves/the remaining sum of global foreign exchange reserves.

Theoretically,currency has three primary functions:as a unit of account,as a medium of exchange,and as a store of value.In international trade,pricing currency is usually the settlement currency,and one of the purposes of compiling RMB internationalization index is to focus on reflecting the actual use of RMB in international economic activities.Therefore,this report will merge the function as a unit of account and as a medium of exchange together.

According to one of the principles in compiling RMB internationalization index,i.e.,emphasizing the circulation and transaction functions of RMB in real economy,the functions of RMB in international trade should be the most important component in evaluating internationalization of the RMB.And we select the proportion of RMB settlement in world trade as the specific indicator.

According to the balance of payments,capital and financial accounts include all transactions between residents and non—residents,which include direct investment,international security and international credit.RMB internationalization indicator system covers indicators from these three aspects.We have designed corresponding indicators based on functions of RMB in these three categories of transactions.And the following are some additional notes about indicators of securities.

International securities includes bond and stock.Because of great risk of information asymmetry in international finance,the scale of international bond market with fixed income is far larger than that of international stock,which has been always in dominant position in international securities market.What's more,the scale of major national stock markets are often quoted in local currency,and they are lack of statistics on non—residents' stock investment. Therefore,by taking financial theories and data availability into consideration,this report will use the international bonds and bills indicator of the Bank for International Settlements （BIS) to reflect international securities transac—tions.According to the classification of BIS,international bonds and bills include:firstly,all bonds dominated in foreign currencies issued by domestic institutions and non—domestic institutions;Secondly,the bonds dominated in domestic currency and issued by foreign institutions in domestic market;Thirdly,the bonds dominated in domestic currency and issued by domestic institutions in domestic market are also seen as international bonds and bills if they are targeted to non—domestic investors.Thus,the international bonds and bills indicator can reflect the internationalization degree of a country's currency in international securities markets very well.

In order to reflect transactions of RMB international bonds more comprehensively and accurately,this report further divides the indicator into two indicators.One is the stock indicator,namely,the remaining sum of outstanding bonds and bills.The other is the flow indicator,namely,the issuance amount of bonds and bills.The reason of doing this is that the stock indicator can objectively reflect the status quo of RMB in international bonds and bills transactions,and the flow indicator can better capture dynamic changes of RMB international bonds and bills.Certainly,accumulation of the flow results in the stock.And the relationship between these two indicators determines that the stock indicator itself involves the information of the flow indicator,thus we give a larger weight to the stock indicator of RMB international bonds and bills transactions.

The international reserve function is the most typical and centralized one among all international monetary functions.Generally,the proportion of a currency in foreign exchange reserves is the most immediate and intelligible indicator to measure its internationalization degree.So far,under the existing international monetary system,IMF only accounts the proportion of the dollar,the euro,the yen,the pound,the Swiss franc and other major currencies in official foreign exchange reserves.Since the scale of the RMB in official foreign exchange reserves is quite small,it is not accounted by IMF separately.In addition,for the sake of governments' own interests,a majority of governments in the world normally do not publish specific currency structure of their official foreign exchange reserves,which leads to great difficulties in collecting data that reflects international reserve function of RMB.In fact,there are already nearly ten countries using RMB as one of their foreign exchange reserve currencies.With gradual improvement of our statistic system and deepening of international cooperation,the data availability of RMB as official reserve is expected to be improved.

1.3.2 The source and processing of data

The detailed introductions of the sources and processing methods of the data are showed in Table 1—2.

The biggest difficulty in compiling the RMB internationalization index comes from limitation of data availability.Firstly,RMB is not a free convertibility currency due to incomplete openness of the capital account,and it is rarely used in international economic activities,thus global proportions of various indicators are negligible,e.g.the proportion of RMB in official foreign exchange reserves,and the proportion of RMB in international assets and liabi—lities of banking industries are both lower than 1%.Consequently,major international financial institutions such as IMF and BIS attribute the data about RMB to “others” or “miscellaneous” rather than treat it as a separate item when classifying indicators according to the international currency structure.In light of this,we can only sum up and estimate some indicators based on existing information and data.Although these estimators are unavoidably different from their true values,we believe the indifference will not have significant influence on RMB international index.Moreover,with deepening of internationa—lization of the RMB,the data availability and quality of these indicators will be improved,and these indicators will be kept in the index system.Secondly,there is no specific statistic on currency structure of some indicators.We carefully looked into websites and databases of several major international institutions(such as IMF,WB,WTO and so on),as well as those of major countries' national bureau of statistics,central banks and trade departments,and found that they generally did not have statistics on currency structure in trade settlement,direct investment,securities investment,bank credit and so on.Despite Japan and the UK governments have released some reports which published the scale of different currencies used in trade,these reports were not released annually,but were results of irregular special surveys,which lacked continuity.Given the objective requirements of the RMB internationalization index,we give up those indicators which can reflect the internationalization degree of the currency but are unavailable,e.g.the global proportion of the scale of stock dominated in domestic currency.This report finally picks up six representative indicators to show the internationalization degree of the currency.

With the reform of international monetary system and the elevation in the level of internationalization of the RMB,our group believes that statistics of future international finance will be improved.Not only the currency structure data will be available,but also the data about RMB will be reported separately.Therefore,in the future,the indicator system of RMB internationa—lization index may contain more indicators and get appropriately adjustment in weights of indicators along with improvement and refinement of statistics of international financial indicators.Certainly,we will try to do some sampling statistics to analyze currency structure of relevant countries' indicators,such as analyzing countries' currency structure in foreign trade by selecting trade settlement data of their banks,so as to improve the accuracy of those estimation indicators.

a.Goldberg,L.S.and G.Tille,2005,Vehicle Currency Use in International Trade,FRB of New York Staff Report No.200.

b.Kamps,A.,2006,The Euro as Invoicing Currency in International Trade,ECB Working Paper Series No.665.

1.3.3 The model of RMB internationalization index

Every indicator in indicator system of RMB internationalization index is a proportion,there is no difference in the order of magnitude,and there is no need to conduct dimensionless processing and we can compile RMB internationalization index through weighting the indicators directly:

It represents RMB internationalization index at time t,Xjt represents the value of variable Xj at time t,and Wj represents the weight of variable Xj.

Since each indicator represents proportion in global amount,the index produced on this basis has both horizontal comparability and dynamic comparability,and meets compilation principles of RMB international index.

1.3.4 The implication of RMB internationalization index

The implication of RMB internationalization index should be interpreted as follows.If RMB is the world's only international currency,the value of the indicators of the two categories and their subsets which reflect functions of currency should equal 100,and RMB internationalization index is also 100.On the contrary,if RMB was completely out of use in any international economic activities,the value of each indicator should equal 0,and RMB internationalization index is also 0.If the value of RMB internationalization index becomes bigger,it means RMB plays an increasingly important role in international economy,and its level of internationalization is increasingly high.

Certainly,the international monetary system shows a trend of diversification,and international status of the dollar is on the wane.Except for those currencies competing with the dollar,such as the euro,the yen,the pound,and the Swiss franc,some emerging market currencies,such as the Russian ruble and the Brazil reais,are also enlarging their usage in international eco—nomy.Therefore,according to the compilation method and the interpretation of RMB internationalization index in this report,it is impossible for any currency's international index to reach 100.The dollar cannot reach at present,and neither can the RMB in the future.