RMB globalization highlights balance between stability and reform
- By Sun Lijian
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E-mail Shanghai Daily, June 26, 2015
While the idea of building a financial infrastructure conducive to the yuan’s globalization holds some sway, Chinese authorities continue to insist on “risk controllability” as the primary prerequisite for financial deregulation and institutional reforms.
Only when cross-border use of the yuan and cash flows are stable and secure can the currency avoid the same tragic fate that befell the yen and the euro, both of which suffered severe setbacks in their internationalization processes.
However, the priority given to risk control is precisely where market observers think China should improve, and it is giving ammunition to the US, which is opposed to a stronger yuan because of its debilitating impact on the dollar.
The contrast between efficiency, favored by the market, and stability, emphasized by the government, has never been starker amid an anemic global economy and excessive liquidity in the financial market.
True, China’s financial regulators can push through parallel reforms in liberalizing the capital market and freeing up the capital account, so as to strengthen their risk control ability, but as long as these two reforms remain separate, risk assessment can only be inadequate and inaccurate. In short, the yuan’s foothold in overseas markets will be flimsy if the two major reforms proceed independently of each other.
The fragility of China’s financial system constrains the innovation ability and blunts the competitive edge of Chinese companies. Therefore, the ongoing financial reform spearheaded by established big players, like the Big Four state-owned banks, will be limited in its effects.
Driving Chinese financial reform by creating a more open capital market and introducing formidable foreign competitors is thus a painful yet much-anticipated option. The snag is, in the case of delayed financial reforms as well as sluggish investments in the real economy, the market will certainly be distorted in favor of those speculators bent on making arbitrage gains.
Policy implications
Here are some policy suggestions.
First, while there is little disagreement on boosting the yuan’s international clout, consensus on how to realize this ambition is increasingly elusive. The key is to use China’s dollar reserves efficiently and lay an overseas groundwork for the yuan’s involvement in global trade and investment.
Secondly, evaluation of the yuan’s global heft cannot depend solely on the amount of yuan payments done abroad; rather, it should rely more on building a healthy financial infrastructure at home.
Thirdly, we ought to address timely the twin conundrums of industrial upgrading and financial distortions, so as to speed up the capital account liberalization before the next market boom arrives.
The author is executive dean of the School of Economics at Fudan University. The views are his own. Shanghai Daily staff writer Ni Tao translated his article from Chinese.
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