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Globalization of the Yuan: A Tough Question for Regulators

The global financial system and its regulatory environment are now facing an unprecedented difficulty: the unnatural internationalization of the Chinese currency Yuan. In fact, experts and scholars (Chris Brummer included) in the finance and regulation sector are worried about this emerging trend, and they’re assessing the practicability of the methods China is using to push its Renminbi (Yuan) to global dominance. Since China seems to be redrawing the rules of the game, the risks posed to the financial system are also being studied.

For many decades, academicians and market participants have asserted that, while it makes sense to provide financial and monetary policy, the globalization of any currency can happen only when the local financial markets that support it and relevant regulations are comprehensive enough. After a country has fulfilled those conditions and it has a large economy that’s significantly incorporated into the global system, oversea investors may take interest in the currency. But the sort of regulatory overrides China is pursuing to force internationalize the Yuan have not been witnessed before, and they contradict what may be regarded as the basic tenets of the law and macroeconomic theories.

No doubt China is not walking the same path of following regular policy protocols. Rather than lets its regulatory framework to become robust, and the Renminbi to organically grow into international acceptance and use, Chinese authorities are spearheading the promotion, and even control, of the globalization process. The story of the Renminbi is not that of organic maturity, instead, it’s penetration overseas is uniquely supported through market pacts and financial associations that usually advance it via financial environments and organizations that predominantly use the Chinese currency overseas. All through, China’s policy reforms have bordered on easy and free market access as opposed to better regulatory framework and oversight. Consequently, there are concerns over increased use of capital manipulations to manage risks as well as attract competition among players hosting Renminbi markets.

The exceptional Chinese policy characteristics present several critical concerns that affect the stability of global financial and monetary systems. For starters, can a currency internationalization process spearheaded by the government work, and if yes, what risks does the financial system face? Another issue is: at what point is it no longer safe to let market liberalization precede tightening regulation, and what could possibly go wrong if capital controls replaced prudential oversight? The merits and demerits linked with highly-restricted markets of liquidity across international finance should also be looked into.

If the global financial system will be shaken by China’s policy toward pushing its currency Renminbi into broad international acceptances and use, Chris Brummer is among many fiscal and securities policy experts advocating for an urgent solution right now.

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