The Renminbi’s Journey to the World

The key objective of China’s capital controls is to prevent non-residents from holding domestic RMB-denominated assets that are unrelated to trade and long-term capital flows. But RMB internationalization encourages non-residents to hold more RMBs and RMB-denominated assets. As a result of RMB internationalization, RMB deposits held by Hong Kong residents have reached RMB370 billion ($57 billion), and the amount may reach RMB1 trillion by the end of the year.

One might wonder what difference there is between hot money and RMB deposits held by non-residents. The answer depends on why non-residents hold these deposits. The attraction of the RMB should come from China’s strong economic fundamentals and faith in its economy. If it comes from expectations of RMB appreciation, the success of RMB internationalization can be easily reversed and will cause more problems for China’s monetary authority to solve in the future.

Fortunately, China’s monetary authority has already noticed the subtlety of the distinction between legitimate demand for RMB-denominated assets and hot money. This means that the pace of RMB internationalization could become more measured than international investors have expected.

While internationalization of the RMB is necessary (and inevitable), it should be guided by market principles and pursued in a cautious manner. To get the sequence of policy adjustments right is vital. In any case, the RMB’s path to becoming a truly international currency promises to be a bumpy one.

Yu Yongding, currently President of the China Society of World Economics, is a former member of the monetary policy committee of the Peoples' Bank of China and former Director of the Chinese Academy of Sciences Institute of World Economics and Politics.

Copyright: Project Syndicate, 2011.www.project-syndicate.org

©RIPRODUZIONE RISERVATA