Macro-Financial Risks of RMB Internationalization

Abstract

As the internationalization of RMB enters a new era, the participation of China’s economy and financial market in the global market has deepened, which poses even higher requirements for macro-financial management of China’s monetary authority. As RMB’s share in international trade, international financial trade, and foreign country’s forex reserves increased from zero to a high level, the cross-border capital flow of China starts to show brand-new features. Therefore, the monetary authority must reconsider the choice of macro-financial targets and at the same time pay attention to how cross-border capital flow and policy adjustment trigger domestic financial risks, so as to prevent and solve destructive and systemic financial crises. Classical theories of the open economy tell us that with the internationalization of a currency, the issuing country will have to make a new choice between three macro-financial policies. As has been evidenced by Germany’s and Japan’s policy experience, improper policy choice will worsen domestic financial risks through a complicated trigger mechanism of cross-border capital flow; so apparently mistakes in macro-financial management will only divert currency internationalization to a path toward failure.