The Dollar Trap: How the U. Princeton: Princeton University Press, Van Noije, P. China: capital flight or renminbi internationalization? Review of Keynesian Economics, forthcoming. Zhou, X. Reform the international monetary system. BIS Review, 41, 23 March Before you download your free e-book, please consider donating to support open access publishing. E-IR is an independent non-profit publisher run by an all volunteer team. Your donations allow us to invest in new open access titles and pay our bandwidth bills to ensure we keep our existing titles free to view.
Any amount, in any currency, is appreciated. Many thanks! Donations are voluntary and not required to download the e-book - your link to download is below. References Kissinger, H. On China. New York: Penguim Books, What Next for Renminbi Internationalization?
About The Author s. Please Consider Donating Before you download your free e-book, please consider donating to support open access publishing. But, with these recommendations come a caveat: Capital controls and full convertibility should be relaxed only after the financial system becomes mature and well-regulated.
Otherwise, the unchecked flows of hot money could destablize financial and banking systems, leading to financial crisis. Fundamentally, internationalization of the RMB should be regarded as a consequence of financial development rather than a goal to be pursued independently. Besides financial market reform such as further marketization and better regulation of the financial market, other measures to increase the credibility of the Chinese government will further enhance the attractiveness of the RMB as a global currency of choice.
For most Asia-Pacific countries, China is already their largest trading partner. If the RMB indeed becomes a major currency for trade invoicing, trade settlement, investment, and central bank reserves, their currencies would very likely be increasingly pegged to the RMB. Lai has been a consultant to the World Bank; a visiting scholar with Boston University, Kobe University, and the University of Munich; a visiting fellow twice with Princeton University; and a visiting research fellow with the Hong Kong Institute for Monetary Research.
He received his B. To complete the subscription process, please click the link in the email we just sent you. Toggle navigation. As generally observed, the Jiangsu Circular has further loosened regulation on RMB-denominated funds that a Jiangsu FTZ-based company receives from its foreign shareholders through foreign direct investment FDI or borrows from offshore lenders.
Accordingly, such repatriated offshore RMB is regulated in the same less stringent way as foreign currency-denominated fund on capital account. Alongside deregulation on the use of repatriated offshore RMB, there is another remarkable policy aiming to finance offshore market players.
Such RMB loans must be spent in purchasing products offered by Chinese companies. This policy could help to prevent or at least slow down manufacturing plants moving out of China and buy China more time to upgrade its supply chains. The Shanghai Circular rolls out 50 measures with a view of testing a number of reforms in financial industries in the Lingang New Area.
Cash inflows and outflows would directly offset each other without being subject to the requirements for currency conversion. The multinational only needs to apply to its bank for currency conversion for the excessive amount if any after offsetting the opposite cash flows.
Eligible firms in the Lingang New Area especially, eg, those in the sectors of semiconductors, artificial intelligence, aerospace and aviation and new energy could find it easier to settle payments with repatriated offshore RMB.
To be specific, where RMB is raised abroad and repatriated to an eligible firm in the Lingang New Area, such firm may make payments for its daily operations with the repatriated RMB by solely presenting its bank with a wire instruction, rather than a full set of contracts, invoices, wire instructions and so forth in relation to the underlying transaction as currently required for RMB settlements outside the area.
In the long term, the Lingang New Area will make an effort to advocate free capital outflows and inflows, full RMB convertibility and the integration of foreign currency accounts and RMB accounts for the same person.
Carving out a greater role for the renminbi in the global marketplace will require Chinese leaders to more aggressively pursue reforms and make difficult tradeoffs between the benefits of currency internationalization and the costs of loosening economic controls. Strict capital controls hinder the development of Chinese financial markets and restrict the movement of renminbi across the world. Liberalizing capital controls would allow for greater capital flows into and out of China, but it would also expose the Chinese economy and the renminbi to greater volatility.
This is especially true given that the Chinese financial system remains underdeveloped. To forestall economic volatility, Beijing has favored a very gradual loosening of capital controls, often at the expense of greater renminbi internationalization.
After China devalued the renminbi in August , it was also compelled to tighten restrictions to avoid a rapid outflow of capital in anticipation of an even greater depreciation. The move was successful at staunching capital flight, but it greatly reduced international confidence in the renminbi, as well as the prospects for further liberalization. Cross-border settlement of renminbi fell sharply as a result, from an all-time high of RMB 2. Political concerns pose additional obstacles to renminbi internationalization.
As the global center for renminbi clearing, Hong Kong plays a critical role in renminbi internationalization. Sustained political unrest within the Asian financial powerhouse could have a sizable effect on the global standing of the renminbi.
Establishing an international financial center elsewhere could help alleviate these risks. While Chinese officials claim the FTZ has made advances toward transforming the city into a financial hub, concerns about the health of the Chinese financial system remain serious obstacles to long-term success.
It is also difficult to displace established currency leaders. The dollar — and to a lesser extent the euro — are already deeply ingrained within the existing international trade and monetary systems. As a relative newcomer to the international scene, the renminbi will have to gain the confidence of investors, businesses, and governments before it can expand its international standing.
In the wake of the Asian financial crisis, Tokyo began to actively promote the internationalization of the yen, especially within Asia. The campaign ultimately failed, due largely to economic and financial stagnation within Japan and the overwhelming dominance of the dollar in Asia. Some signs suggest the renminbi may succeed where the yen failed. Conversely, a majority of central bank reserve managers anticipate that the renminbi will account for 10—20 percent of global reserves by , a noteworthy rise from its current standing of just under 2 percent.
As recently as , Chinese officials acknowledged that there were more than 50 BRI-linked economies in which the proportion of renminbi usage in cross-border transactions was below 5 percent. Stronger economic ties between China and BRI countries could propel the renminbi to become the currency of choice for many BRI economies.
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