The internationalization of China’s currency, the renminbi (“RMB”), is arising in ways that depart considerably from historical precedent. Instead of waiting for international markets for its currency to evolve organically, the Chinese government has undertaken a quasi-mercantilist strategy designed to promote the currency and its own national RMB-based infrastructure. This strategy has emphasized tightly managed capital account deregulation over prudential reforms and robust market supervision, and incentivizes foreign jurisdictions to compete for RMB-based transactions.
In this IIEL Issue Brief, Renminbi Internationalization and Systemic Risk (click here for a free copy), IIEL Faculty Director and Williams Research Professor Chris Brummer argues that China’s strategy introduces novel systemic risks to the global financial system, including a potentially inadequate provision of renminbi liquidity, a regulatory race to the bottom between offshore RMB-hubs, and significant transmission belts of financial risk to even non-renminbi markets. To mitigate these risks, he argues for a policy recipe of stronger Mainland macroprudential oversight, transparent countercyclical capital account reforms and credible commitments on the part of the government to refrain from competitive currency devaluations.
This IIEL Brief is a condensed version of a larger analysis Professor Brummer makes in his working paper The Renminbi and Systemic Risk.
IIEL’s inaugural Issue Brief, on Shadow Banking by Amias Gerety, then-Acting Assistant Secretary for Financial Institutions, U.S. Department of the Treasury, is available here.
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