Setting the Stage for RMB Internationalisation - Liberalizing the Capital Account and Strengthening the Domestic Bond Market

Internationalizing the Renminbi pertains to the new era of China’s reform, starting at the 19th Congress of the Communist Party. It is not a technical reform, but a political one. The objective is threefold: to match China’s autonomy in economic policy, to further Asian integration, and to safeguard worldwide multilateralism against by the rise of protectionist forces. The challenge has been aggravated by the protectionist policies pursued by the US, degrading ipso facto the functions assumed by the dollar in the international payment system. China’s authorities have drawn lessons from the Asian crisis of 1997-98 and the systemic crisis of 2008-09. They are now searching for a second-best option in advocating a multilateral international payment system based on the SDR. The process of currency internationalization is linked to the modernization of domestic capital markets. Studying the progress in both dimensions makes the first two parts of the paper We ask the following questions. In the first part: which steps has China taken, and should take in the future, to complete the gradual process of currency internationalization currently under way? In the second part: how can China build the deep and resilient bond market required to attract international investors? A shorter third part examines why emerging market countries are incentivized to issue their government debt in their own currencies to attract foreign investors in the lingering context of ultra-low interest rates in the main convertible currencies. The status of a freely usable currency, already reached by the Renminbi in its prudent internationalization, together with a reform of the huge domestic bond market, should make China able to attract foreign saving. This is compatible with the Belt and Road Initiative, which is bound to mobilize massive capital exports in the form of long-term loans.