Thursday, October 28, 2010

Currency strategy of China: renminbi convertibility

'One Currency, Two Systems’: China’s Renminbi Strategy
Paola Subacchi
Chattam House Briefing Paper, October 2010

Download Paper here

* As the rhetoric on 'currency wars' heats up, escalating tensions between the United States and China are casting a shadow over the world economy.

* The Chinese leadership is unlikely to yield to US pressures, but is aware that it needs to move eventually to a more flexible exchange rate regime and a fully convertible currency. It has therefore embarked on a gradual process to develop the renminbi (RMB) as an international currency and ultimately as one of the world's key reserve currencies. Understanding this process is critical to grasp the current debate on the international monetary system and to gauge how it will evolve.

* Beijing's biggest policy challenge is to achieve currency internationalization under controlled convertibility. It is pursuing a two-track strategy: boosting cross-border usage of the RMB in trade settlements and making the RMB attractive by building an offshore market in Hong Kong for RMB-denominated assets.

* What China is trying to do is unprecedented. It is the first emerging country to seek to establish a truly international currency when there is no link, even residual, between the reserve currency and gold.

* Despite the enormous challenges there is ample scope for policy experimentation. Success will depend on a combination of well-designed policies and market forces, and on the role that China is playing, and aspires to play, in Asia.

This briefing paper forms part of the project on The Changing Balance of Financial Markets and International Financial Centres >>

1 comment:

  1. Despite the renminbi not technically be convertible, all of the businessmen I talk to in Beijing say they are able to get their profits out of China and this is not currently a big concern of theirs.

    Is this really a big issue, or is it only a big issue if you are talking about 10's of millions of dollars?


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