Globalization of the Yuan: A Tough Question for Regulators
The methods China is using to force its Yuan into international acceptance and application is a problem that the international financial system and regulators have to grapple with. In fact, experts and scholars (Chris Brummer included) in the finance and regulation sector are worried about this emerging trend, and they’re assessing the practicability of the methods China is using to push its Renminbi (Yuan) to global dominance. Since China seems to be redrawing the rules of the game, the risks posed to the financial system are also being studied.
For many of years, scholars and market stakeholders have reasoned that, although it’s useful to have fiscal and monetary policy, the internationalization of any currency is only viable after domestic financial markets that prop it have sufficient depth and under adequate regulation. Once those conditions are met, foreign investors may embrace the currency, provided that the country has a sufficiently strong economy that boasts deep integration into the international economy. Yet, the reforms China is trying to force into the system toward globalizing its currency is unique to history and violates what you may hold as the prerequisites of the law and macroeconomic doctrines.
No doubt China is not walking the same path of following regular policy protocols. Rather than lets its regulatory framework to become robust, and the Renminbi to organically grow into international acceptance and use, Chinese authorities are spearheading the promotion, and even control, of the globalization process. The story of the Renminbi is not that of organic maturity, instead, it’s penetration overseas is uniquely supported through market pacts and financial associations that usually advance it via financial environments and organizations that predominantly use the Chinese currency overseas. All this time, the authorities have pushed policy reforms that focus on market access and liberalization instead of improvements of prudential and supervisory oversight. Consequently, there are concerns over increased use of capital manipulations to manage risks as well as attract competition among players hosting Renminbi markets.
The exceptional Chinese policy characteristics present several critical concerns that affect the stability of global financial and monetary systems. Number one is: what’s the viability of a currency globalization process that’s led by the government, and does it pose specific risks to the financial system? Number two: to what extent is it safe to have market liberalization coming before regulatory reform, and are there risks in substituting prudential checks with capital controls? The merits and demerits linked with highly-restricted markets of liquidity across international finance should also be looked into.
If the global financial system will be shaken by China’s policy toward pushing its currency Renminbi into broad international acceptances and use, Chris Brummer is among many fiscal and securities policy experts advocating for an urgent solution right now.