The Internationalisation Path of the Renminbi
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The Internationalisation Path of the Renminbi

Shahin Vallée
Bruegel, 2012
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8

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Economic researcher Shahin Vallée makes a case for the “internationalization” of China’s renminbi (RMB) and explains how it could become a major world currency, albeit through nontraditional channels. While the Chinese government is taking steps to liberalize the currency – such as using offshore markets, establishing pilot programs and issuing sovereign RMB debt – other challenges await the RMB if it is ever to rival the US dollar and the euro. These issues include whether China will engage more fully in the international financial community by becoming a de facto lender of last resort, loosening financial restrictions, and launching broad economic and legal reforms. Vallée carefully points out the issues that hobble the RMB’s road to internationalization and shows how China could bring it to world-class levels in 30 years. The pivotal decisions still lie in the hands of Chinese officials for whom political stability trumps all other cards. getAbstract sees this working paper as a useful tool for currency watchdogs, traders or anyone with an eye on China’s fast-changing financial picture.

Summary

A Cautious China

The global status of China’s currency, the renminbi (RMB), is not commensurate with the country’s economic power. Since the 2008 financial crisis – which convinced China that a US dollar-dominated “unipolar” system was not in its best interests – Chinese officials have moved more briskly toward “internationalizing” the RMB, that is, facilitating the currency’s use by businesses, investors, foreign exchange traders and central bankers. Through a number of recent edicts and deregulations, China has signaled increasing willingness to liberalize its fiscal sector.

Countries like the US attain real benefits from issuing reserve currencies, including lower transaction costs and greater flexibility. The question is whether China is ready and willing to take the necessary practical steps to make the RMB into a global reserve currency. It might not be ready for a few reasons. A rush toward internationalization could be risky. Rapid, uncontrollable flows of money in and out of China could disrupt its markets and threaten its economic stability.

“Conventional wisdom” says the RMB is not likely to achieve reserve status “until China...liberalizes its financial...

About the Author

Shahin Vallée is an economic adviser to European Council President Herman Van Rompuy.

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