The former head of the Chinese central bank says that the future success of efforts to internationalise the renminbi will depend upon the the adoption of more market-oriented policies.
Speaking at the 2nd China Financial 40 Forum (第二届中国金融四十人伊春论坛) on 11 August, Zhou Xiaochuan (周小川) said that internationalisation of the renminbi will be determined by the market, which favours policy stability as well as more open financial markets that permit free usage of the currency.
Zhou said policymakers need to invest greater effort in the two key areas of developing floating exchange rate mechanisms and ensuring that the renminbi is a freely usable currency.
While progress in the internationalisation of the renminbi has been closely tied to policy developments, Zhou said that an even more important factor has been the opportunities brought by shifts in the global financial sector following the 2008 Great Financial Crisis, which shook the US dollar’s position as reserve currency and created trade finance and settlement issues.
Following the recovery of the US economy these issues have gradually eased, yet new circumstances have arisen in which financial sanctions have emerged as a commonly adopted means of resolving international disputes.
According to Zhou the frequent use of financial sanctions could significantly impact the US dollar’s position as international reserve currency, as well as its status and role as a payment and settlement medium.
Zhou further points out that the most important factor behind the internationalisation of the renminbi has been a trend towards diversification of reserve currencies.
“Volatility in internationalisation of the renminbi isn’t unusual , as it isn’t a linear progression, and will sometimes proceed faster and other times slower,” said Zhou.
“Looking at things over the long-term, and from the perspective of China’s economy and China’s international position, there are [sound] prospects for renminbi internationalisation.”