The full convertibility of renminbi consequences

Open Economies Review, 18 2 Financial trilemma in China and a comparative analysis with India". Pacific Economic Review 18 2 University of Chicago Press.

The full convertibility of renminbi consequences

The progress of China towards financial integration and the internationalization of renminbi is a matter of great importance. While the world economy remains financially unstable, accessing the world financial market can be a challenging and perhaps troublesome task for an emerging economy like China, which is also pursuing an ambitious number of policy goals.

Monetary authorities in China have so far dealt prudently with this challenge, while seeking full international status for the renminbi. This goal has been pursued gradually and has entailed testing and experimenting with new financial arrangements.

The goal of achieving capital convertibility in the medium run is envisaged in the 12th Five-Year Plan for — Chinese authorities have displayed interest in enhancing financial openness long before this time frame, however. Transfers among individual accounts have been made possible in Hong Kong, with obvious implications for the local bond market.

The comparison with the eurodollar market is helpful in this respect.

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Monetary authorities always felt uneasy and even disturbed by the unexpected rise of the market for dollar deposits in financial institutions outside the United States eurodollars in the late s, followed by its growth throughout s and later.

They challenged the national credit policies. The impotence of monetary cooperation of the Eleven [The Group of Ten countries plus Switzerland, which joined in ] will be hardly explainable by the historians of the future. Their main frustration was that the growth of eurodollar markets and of other foreign currency deposit markets seriously weakened the monetary power of central banks.

They had less control over the supply side of their domestic money market and over the structure of national interest rates. Finally, wherever capital controls were still in force, The full convertibility of renminbi consequences could be easily circumvented.

Do Chinese authorities run the risk of the same frustration in the future?

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A number of considerations suggest that the answer is no. For example, according to recent projections, the size of renminbi offshore deposits as a percentage of mainland deposits in — is forecast to be considerably smaller than the share of eurodollar deposits as a percentage of US deposits in — It should be added that the eurodollar market in the sixties was far from being controlled as strictly as Chinese authorities seem to be controlling offshore renminbi today.

For example, Hong Kong banks are allowed to extend credit to customers in offshore renminbi, but tight reserve restrictions provide a check on credit growth rates. Hong Kong banks are subject to agreements with the mainland that set the amount of interest payable to deposit.

Capital controls are still binding, according to the literature in recent years. While it is true that pursuing a larger international use of the renminbi will require a greater exchange flexibility and further relaxation of capital controls, the Chinese seem aware of the dangerously high risk to banks posed by a large foreign currency exposure.

Capital convertibility will clearly require a series of actions, including the establishment of a sound financial sector with improved corporate governance in banks and other financial institutions. There should also be a network of well-functioning legal, supervisory, regulatory, and crisis management frameworks, along with deep financial markets with credible indirect monetary controls to manage liquidity.

A fully flexible exchange rate is also a fundamental prerequisite. Building a Modern, Harmonious, and Creative High-Income Society points out that many European countries took nearly 20 years after the collapse of the Bretton Woods system to achieve full capital liberalization.

A prudent approach is needed in order to achieve a safe transition to a more open and efficient financial and exchange rate system. Capital controls have so far protected China from episodes of external turbulence like the Asian financial crisis and the financial turmoil of the past four years.

They nonetheless limit the range of financial choices offered to Chinese savers, who see few options other than to invest their money in the real estate market. Such controls might also hamper the effort to achieve a greater international role for the renminbi, since foreign companies have little incentive to hold a currency that cannot be invested in its country of origin.

The study suggests that if China waits until conditions for interest rate liberalization, currency liberalization and renminbi internationalization to mature, the appropriate time to open up the capital account will never come.

It is unlikely for such an ambitious timetable to be included among the priorities of policymakers in China soon, however, and such a step would be ill-advised. The risk of a rise in non-performing loans and bad assets is too high for an accelerated timetable to make sense at present.

One also wonders if the Chinese banking system is ready to meet the challenges posed by competitive pressure from foreign banks. In this respect one cannot but endorse the suggestion recently expressed in a study by the BIS that allowing a preferential route for offshore renminbi to access the domestic market can be a suitable means to lessen the risks stemming from a greater financial openness.

Caution is needed, however, if these benefits are not to be exceeded by the costs and the potential risk of a premature transition to that new status.Chinese officials have previously said that they want to make the currency fully convertible by More conservative estimates say full convertibility is at least 10 - 15 years away.

But China. The Full convertibility of Renminbi: Consequences and Influences Abstract This paper indicates the issue of full convertibility for the Chinese currency, Renminbi(RMB), and its . The Full Convertibility of Renminbi: Sequencing and Influence}, year = {}} Share.

OpenURL. Abstract. This paper examines the issue of achieving full convertibility for the Chinese currency, Renminbi (RMB), and its impact on the economies of both mainland China and Hong Kong.

It focuses on the sequencing of Renminbi’s full convertibility. Jul 02,  · The consequences could prove just as sweeping for both China and the world. On Friday, Chinese policymakers formally revealed that they would turn a slice of Shenzhen into a new sort of SEZ to experiment in currency convertibility.

The full convertibility of renminbi consequences

China should continue to liberalize its exchange rate regime, open its capital markets, allow full convertibility of the RMB, liberalize interest rates, and use domestic monetary policy to achieve. “As use of the renminbi spreads globally, it could become a safe-haven currency, especially in a world where the renminbi might gain 2 or 3 per cent a year against the dollar, while the Swiss.

The Challenges of Renminbi Internationalization | PIIE