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This book collects expert opinions, research, and risk assessments from within the Chinese financial policy establishment on prospects for the internationalization of the renminbi as a reserve currency around the world. As China's economy diversifies in the acquisition of global assets, the renminbi may partially displace the dollar or yen as a reserve currency, with unpredictable and profound potential consequences. This book, presenting for the first time in English, the Chinese perspective on the internationalization of the Chinese currency will be of great value to central bankers, financiers, and students of international finance.



Chapter 1. Internationalization Index of Renminbi

In 2015, with global economic recovery tortuous and financial market dynamic, Chinese economy moved into a new normal. In spite of current domestic and international economic stress from an increasingly stronger dollar, renminbi (RMB) depreciation, and capital outflow, the internationalization of renminbi is still gaining momentum. Great achievements were made. Cross-border RMB policies under capital account were enforced, the first phase of Cross-border Interbank Payment System (CIPS) launched, and “the Belt and Road” initiative carried out. Especially in November RMB was approved to be included into the special drawing rights (SDR) basket, a milestone of the internationalization of RMB. In the past five years, due to the wider use of RMB in international trade, financial transaction, and international reserves, RMB’s internationalization has been moving on smoothly, with RII growing by more than ten times.

Chapter 2. Status Quo of Renminbi Internationalization

In 2015, RMB’s internationalization speeded up its process. During the past years, the amount of RMB used as a settlement currency for trades increased significantly on a larger scale, and the offshore market was booming. Meanwhile, international financial cooperation was deepening, and the RMB exchange rate regime reform was promoted steadily. Under the new normal of economy, structural adjustment and institutional reform were pushed forward in an orderly manner, and market-oriented reform of capital pricing further cleared institutional obstacles for RMB’s internationalization. On November 30, 2015, the IMF announced that the RMB would be included in the SDR, which started a new journey of RMB’s internationalization.

Chapter 3. Event of the Year: The RMB’s Inclusion into the SDR Basket

On November 30, 2015, the IMF Executive Board completed its regular five-year review of the basket of SDR currencies. A key focus of the 2015 review was whether the RMB met the existing criteria to be included in the basket. The Board decided that the RMB met all existing criteria, recognized it as a freely usable currency, and included it in the SDR basket as a fifth currency, along with the US dollar, the euro, the Japanese yen, and the Great Britain pound. The new SDR basket would take effect on October 1, 2016, to provide sufficient lead time for the IMF, its members, and other SDR users to adjust to the changes.

Chapter 4. Macro-Financial Risks of RMB Internationalization

As the internationalization of RMB enters a new era, the participation of China’s economy and financial market in the global market has deepened, which poses even higher requirements for macro-financial management of China’s monetary authority. As RMB’s share in international trade, international financial trade, and foreign country’s forex reserves increased from zero to a high level, the cross-border capital flow of China starts to show brand-new features. Therefore, the monetary authority must reconsider the choice of macro-financial targets and at the same time pay attention to how cross-border capital flow and policy adjustment trigger domestic financial risks, so as to prevent and solve destructive and systemic financial crises. Classical theories of the open economy tell us that with the internationalization of a currency, the issuing country will have to make a new choice between three macro-financial policies. As has been evidenced by Germany’s and Japan’s policy experience, improper policy choice will worsen domestic financial risks through a complicated trigger mechanism of cross-border capital flow; so apparently mistakes in macro-financial management will only divert currency internationalization to a path toward failure.

Chapter 5. RMB Exchange Rate: Regimes and Policy Issues

The PBOC announced a decision to implement a market-based determination mechanism of the official fixing rate of RMB against US dollars in order to enhance the marketing and standard value of RMB on August 11, 2015. In the following three days, the official fixing rate of RMB against US dollar fell 4%. The release of the de-value pressure stimulates panic. In the expectation of de-valuation, the exchange rate volatility has increased and gap between the onshore and offshore exchange rate has further widened. The central bank faces greater difficulty in exchange rate regulation.

Chapter 6. The Price Linkage and Risk Conduction of RMB Underlying Asset

China’s market-oriented reform of interest rate was basically completed in 2015; by then the market-oriented reform of RMB had also made a breakthrough. More and more funds were allocated across markets under the command of market and price lever, and the price linkage and risk conduction mechanism began to form. So it is necessary to fully understand the development of finance under this new situation and accurately grasp the regularity and characteristics of cross-market financial risk conduction, so as to provide theoretical basis for strengthening the prudent macro-management and preventing systemic risk in the process of opening capital account.

Chapter 7. Bank Internationalization and Risk Prevention

With the growing RMB internationalization and increasingly open economy, China’s banking industry is undergoing significant changes in its external operating environment: it will meet a huge opportunity for international expansion that will further promote its two dimensions: customers and products. The overseas business scale and income sources will be consequently increased. With the rising proportion of overseas operations, assets, and income, banks will face a more complex market environment and regulations. Risk exposure, in both quantity and structure, will be greatly adjusted; banks will be required to strengthen the risk management to prevent impacts inflicted by various risks.

Chapter 8. Supply-Side Structural Reforms Consolidate the Economic Foundation of RMB’s Internationalization

Theoretical research and practices have shown that a strong economic strength is the basis of a country’s currency internationalization; the key for the success of RMB internationalization lies in the pivotal international presence of China’s economy. However, it is currently faced with arduous structural adjustment tasks and complex international economic environment constraints. New problems and new risks have put continual pressure on sustained economic growth. How can we break the bottleneck of China’s economic sustainable development? The supply-side structural reform is the only way. Only by reconstructing the basis of Chinese economy’s sustained and efficient development through supply-side reforms will the internationalization of the RMB be able to proceed in a more firmly and longer manner.

Chapter 9. The Prevention of Systematic Risks and the Framework for Macro-Prudential Policies

In December 2015, RMB joined the SDR basket. Marking international recognition to a greater extent, this event is a milestone in RMB internationalization. Accelerating the marketization of exchange rates and liberalization of capital accounts, it also forces China’s financial system to open up further.

Chapter 10. Conclusions and Proposals

Incorporating RMB into the SDR basket represents a milestone in RMB internationalization. Jointly driven by five impetuses, RMB Internationalization Index (RII) jumped to 3.6, an increase of over ten times over five years. At this new stage, China needs to step up macro-financial regulation to avoid the waxing and waning of RMB internationalization.


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