Abstract
China has made several important steps to liberalise its domestic financial markets and to open up its capital markets internationally in order to promote the renminbi as an international currency. To make the renminbi a convertible, freely floating international currency is a pre-requisite for the renminbi to challenge the dollar as an international currency. The chapter shows, however, that the very benign liquidity conditions in the US, combined with very large foreign currency denominated assets, constitute an insurmountable impediment for the floating and the internationalisation of the renminbi. With exchange-rate stability being seen as an important determinant of macroeconomic stability and growth in China (and East Asia), domestic-wage increases are proposed in order to reduce the appreciation pressure on the Chinese currency.
The paper is based upon joint research with Ronald McKinnon, published as McKinnon and Schnabl 2014. I thank Kristina Spantig and Hannes Böhm for excellent research assistance.
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Notes
- 1.
Schobert and Yu (2014) show, based upon a comparison between Germany in the 1970s and current China, that reserve requirement policies are an important macroprudential tool in the face of buoyant capital inflows.
- 2.
The current account balance is, per definition, equal to the gap between aggregated saving and investment. If aggregated saving is larger (smaller) than aggregated investment, the current account is positive (negative).
- 3.
From January 2014 into June 2014, the renminbi started to depreciate against the dollar, in what was seen as a move by the People’s Bank of China to deter speculators. The depreciation of the renminbi against the dollar could, however, also be due to slowing growth dynamics.
- 4.
The open interest rate parity is an equilibrium condition in international capital markets assuming the absence of transaction costs and risk. The domestic interest rate id is equal to the foreign interest rate if adjusted for exchange rate changes ê (id = if + ê). At the end of an investment period, both investment in home currency and in foreign currencies have the same yield in terms of domestic currency.
- 5.
Local governments have been restricted by law to issue own bonds. Recently, this restriction was loosened.
- 6.
Concerning a negative risk premium, see Goyal and McKinnon (2003).
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Schnabl, G. (2015). Externally Imposed Financial Repression, Conflicted Internationalisation of the Renminbi and External Balancing via Wage Adjustment. In: Rövekamp, F., Bälz, M., Hilpert, H. (eds) Central Banking and Financial Stability in East Asia. Financial and Monetary Policy Studies, vol 40. Springer, Cham. https://doi.org/10.1007/978-3-319-17380-1_7
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