Zhou Xiaochuan Weighs in on Internationalisation of the Renminbi at 2020 Financial Street Forum

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Zhou Xiaochuan, the former head of the Chinese central bank, has voiced his opinions on the near-term prospects for the internationalisation of the renminbi at the 2020 Financial Street Forum in Beijing on 21 October.

While the renminbi has recently seen a strong performance, Zhou said that as a short-term trend this should not be overemphasised, as the currency has received support from China becoming the first major economy to recover from the COVID-19 pandemic.

Purchases of Chinese assets have shifted in the wake of China’s implementation of a floating exchange system and fluctuations in the renminbi to the US dollar, but “this is not the most key factor in internationalisation of the renminbi.”

Zhou instead points to several other factors as being of “true benefit” to internationalisation of the renminbi, including:

  1. China “firmly pursuing the path of external opening of the real economy against a marked background of protectionism on a global scale” and the expansion of opening measures, including the establishment of free trade ports and zones. “The openness of the currency should serve the opening of the real economy, so upon achieving a highly open economy, the currency also inevitably accompanies this trend.”
  2. Domestic financial markets gradually breaking through various barriers and forms of protectionism, via measures such as Shanghai-Hong Kong Connect, Shenzhen-Hong Kong Connect and Bond Connect.
  3. Less concern in relation to the breaking of key symbolic or psychological thresholds, such as the Chinese yuan’s 7 barrier against the dollar, and Chinese foreign reserves breaking through USD$3 trillion.

Zhou said that further internationalisation of the renminbi would require “clear thinking…greater determination to greatly raise the free usage of the renminbi, and to minimise to the greatest extent possible capital account controls.

“This will involve reforms in terms of research, ways of thinking and the policy system.”

Zhou raised several other considerations in relation to renminbi internationalisation against the current economic background:

  1. “Cost-benefit analysis is required when advancing internationalisation of the renminbi and capital account convertibility, clarifying what needs to be handled and what can be dispensed with…there is no need for excessively controlling guidance, and [we] cannot create a psychology of mistrust or even fear when it comes to market pricing.”
  2. “The outside opinion is generally that under the current international economic order capital flows can create shock for developing countries. For this reason there will always be discussion and even dispute when deciding which control measures to retain. In actuality however, when it comes to capital flows, aside from economic and currency value factors, what’s even more important is confidence, as this can greatly reduce irregular flows.”
  3. “During the process moving towards an open economy, we must assess the results of forex regulation.”

Zhou also said that further capital account convertibility does not necessarily mean “100% liberalisation,” given that all countries have anti-money laundering and anti-terrorism requirements, and many financial transactions and forms of remittance are subject to restrictions.

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