Challenges of Internaonalisaon from the Perspecve of the Chinese Currency Tamás Gerőcs This paper examines the spread of the internaonal use of the renminbi (yuan), with parcular focus on, the mulpolarisaon of the internaonal monetary system. Addionally, the study addresses the queson of how the spread of a new currency in internaonal financial markets influences the external financing opportunies of small open economies (e.g. Hungary). The author sets out two possible scenarios in relaon to the spread of the Chinese renminbi (yuan) and, in terms of the development of the enre internaonal financial system, he points out that over the next years it will be of crucial importance which model the Chinese economic policy will move toward, and if there is a road that leads from the one to the other. Journal of Economic Literature (JEL) codes: G28, G15, H12, H63, N25 Keywords: renminbi (yuan), hegemony, mulpolarity, internaonal financial system, converbility The quasi-monopoly of the US dollar as an internaonal reserve currency is being eroded as the United States is losing its economic weight, and as Campanella (2014) notes, there has been a protracted mul- polarisaon process in the internaonal monetary system, whereby in parallel with the relave weakening of the US dollar in internaonal financial flows and financial selements, alternave currencies are becoming increasingly widespread: in line with the regionalisaon of the world economy, a financial regionalisaon can also be observed (Gerőcs 2016; Feenstra 1998). The ongoing changes in the world economy will largely determine the direcon for the development of the internaonal monetary system. In this paper, I seek the answer to how the spread of the internaonal use of the Chinese currency, the renminbi (yuan), 1 has repercussions for the development of the internaonal monetary system in the midst of these global economic processes. 2 The converbility of the renminbi, i.e. its free use in internaonal transacons, has been ongoing since 1996, although capital account liberalisaon, a part of the balance of internaonal payments, is sll not fully achieved. 3 In addion, converbility and internaonalisaon are two separate, and only parally overlapping processes. There are different views in the literature as to what extent an only “parally converble” currency can take over global currency funcons, since based on previous experience, Gerőcs Tamás an Junior Research Fellow at the Instute of World Economics of the Centre for Economic and Regional Studies of the Hungarian Academy of Sciences. E-mail: gerocs.tamas@krtk.mta.hu. The manuscript was received on 21 November 2016. 1 The official name of the Chinese currency is renminbi, and the yuan is its primary unit. 2 The economic size of the People's Republic of China caught up with that of the United States by 2015, based on the GDP volume calculated by the IMF at purchasing power parity, and it has been the world's largest exporter of goods since 2009 (Medeiros da Silva 2016:2). 3 By converbility, I mean the right of the holder of a country’s currency to freely convert it into another converble currency at a market rate, at any me. However, converbility has several degrees: full converbility covers all components of the balance of payments, including current and capital account items. Converbility is considered to be limited, if it is restricted to current account transacons. Furthermore, a disncon can be drawn between external and internal converbility, meaning that limitaon refers exclusively to resident or non-resident currency holders. Central bank converbility occurs when free exchange only applies among central banks in full (Ausch 1969:144). 1