Three junctures for the renminbi's internationalization

Abstract

As China’s economy continues to grow in all respects, it is agreed worldwide that the Renminbi (RMB) should play a more important role. Yet how rapid the process of the RMB’s internationalization will be or when China will decide to open her capital account depends on the policy decisions of the Chinese authorities. Allowing the RMB to be internationalized or become fully convertible means that the Chinese authorities would have to hand over, at least partially, their control over the RMB or even over monetary policy, to the market. “Prudence” has always been the policy style of the Chinese authorities, and to reduce the fluctuation of the RMB as it goes international, it is necessary to ensure that the size of the RMB market pool, in terms of both demand and supply, is large enough to absorb any unexpected shocks. To satisfy this condition, this paper foresees that the process of internationalization of the RMB needs to pass through three stages! (junctures). The first would be to establish close trading relationships or free trade agreements, and arrangements for cross-border settlement of transactions in the RMB with emerging economies, especially the other countries in the BRICs group. The second stage would be to diversify the economic growth model from an export-capital formation-led growth to an export-consumption-technology led growth model. The final stage would be the development of a financial market, including both onshore and offshore transactions, that is deep and wide enough to protect against any external shocks.