A New Measure of Currency Internationalization: from the Perspective of Cross-border Financial Investments


WU Shuyu, LI Daokui

Abstract: This paper investigates the internationalization levels of main sovereign currencies in the world by measuring the amount of non-residents’ holding of assets denominated in a sovereign currency. According to our calculations, RMB had overtaken the Japanese yen as the top five investment currencies in the world in 2013, following the US dollar, euro, British sterling and Swiss franc. In 2013, the shares of the top five investment currencies in the global financial system are 34.2%, 33.0%, 7.5%, 3.1% and 3.0% respectively. Besides providing a new measure of currency internationalization, this paper also explore how the international level of a currency is affected by different macroeconomic variables, and the main findings are that the investment returns of these currencies are not significant factors, while the macroeconomic fundamentals of the issuing country, for example the width and depth of the financial market, the economic scales and the exchange rate volatility, are significantly correlated with the currency internationalization levels. The research results have several policy implications for the internationalization of the RMB. China needs to expand the pool of RMB denominated assets and enhance the depth of the financial market in order to suit for the expanding appetites of the international investors. Besides, establishing cross-border financial firewalls and crisis response mechanism is also important in a more open capital market.


Published online by Economic Perspectives.