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RMB Internationalization is a Double-Edged Sword

To People’s Bank of China,

Data shows that if we take the U.S. dollar’s degree of internationalization as the standard 100, then the degree of internationalization of the Euro would be nearly 40 and the Japanese Yen 28. But the RMB is only 2.

Although the RMB is one of the world’s five major currencies in terms of money supply, it’s the only one of the five that’s not an international currency. It cannot be freely converted, nor achieve higher financial assets trading efficiency. This doesn’t match China’s current global economic status.

In the meantime, two potential risks of the internationalization of the RMB loom: The weakening effectiveness of macro-control tools and the impact on financial markets brought by free capital flows - especially the stability of the RMB exchange rate.

The bank believes that reform of the interest rate, exchange rate and capital projects convertibility need to be coordinated. In this process, we suggest you bring the “exchange rate and the international balance of payments policy” into the system of monetary policy.

Currently, the data shows that there are record cross-border capital flows taking place. Some of the fluctuations in cross-border capital flow happened under the framework of the internationalization of the RMB. Therefore, the bank should pay close attention to the impact on capital flows brought by changes in the international situation.

In addition, it is recommended that you enhance the two-way floating exchange rate of the RMB and continue to reduce the frequency of intervention in the foreign exchange market. At the same time, the bank should support the use of the RMB in cross-border trade and investment to steadily broaden the RMB outflow and return channels.

Ouyang Xiaohong (欧阳晓红)
Original article: [Chinese]

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