Lost in Internationalization: Rise of the Renminbi, Macroprudential Policy, and Global Impacts

Abstract

The internationalization of China’s Renminbi will be a game changer to the global finance and politics, and its success thus far has been evidenced by the International Monetary Fund (IMF)’s recent move to include the currency in its SDR basket. This scheme provides a unique opportunity to reflect on the very nature of law and finance and calls into question the conventional understanding of how financial institutions function: Why has authoritarian China, with its peculiar market settings, been able to make rapid progress in internationalizing its currency? This article applies the theory of macroprudential policy to examine the scheme’s viability, timeline, and impacts. It argues that currency internationalization does not only depend on market forces but also requires strong state-led actions at critical junctures to reset the institutional equilibrium.

China has taken advantage of its extra-large economy by carrying out fragmented but coherent institutional engineering, and adopting an institutional bridging approach for amplifying the effects. However, systemic risks inherent in China’s banking system have been triggered by the project’s international success due to its aggressive timeline and procyclical nature. In this regard, this scheme has wrongly pitched itself as an international project rather a domestic one. As a responsible issuer of a major international currency, China has to re-align the project to focus on domestic institutions macroprudentially, with special caution paid to any attempt to pursue the prestige normally conferred upon such issuers, including extraterritoriality and export of institutional designs overseas.

Keywords: currency war, RMB, internationalization, China, macroprudential policy, renminbi, banking reform, extraterritorality, currency sway, SDR, IMF