The Full Convertibility of Renminbi: Consequences and Influences

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The Full convertibility of Renminbi: Consequences and Influences

Abstract
This paper indicates the issue of full convertibility for the Chinese currency, Renminbi(RMB), and its impact on the economy of China. It does not only point out the sequencing of Renminbi’s full convertibility, expounding the detailed concepts procedure of currency convertibility (current account convertibility and capital/financial account convertibility and full convertibility) but also focus on the necessity and challenges will bring to China based on this subject. A review of historical process toward the full convertibility of Renminbi will be provided. There are still various restrictions on capital account convertibility in China. It still takes some tome before these restrictions can be removed entirely and therefore underlying issues to achieve the full free convertibility of RMB will be discussed. This paper comes to the conclusion that achieving full convertibility of RMB is both inevitable and necessary. In the meanwhile its process is doomed to be a long journey due to China’s specific situation.

Contents

1. Introduction
1.1 Current account and convertibility
1,2 Capital account and convertibility
1.3 Full Currency convertibility
1.4 The RMB’s Full convertibility:
2. Historical process of RMB towards convertibility
2.1 Liberalization of Current Account
2.2 Liberalization of Capital Account transactions
2.3 The ongoing evolution of China’s foreign exchange rate system 2.4 Implications of the RMB exchange rate
2.5 Conclusion
3. The necessity and urgency of achieving full convertibility of RMB 3.1. China is one of the world's largest economies, however its currency is not fully convertible. 3.2. The trend of RMB’s regional convertibility

3.3 Full convertibility of RMB contributes to the integration into the world trading system with China’s entry to WTO. 3.5 Achieving full convertibility of RMB meets calls for Foreign Investment 4. Potential Problems need to be concerned when achieving full convertibility of RMB 4.1 The threat of creating an anti-China climate

4.2 The Threat of Financial Crisis
5. Conditions to achieve the free convertibility of RMB
5.1 The requirement of stable macroeconomic situation
5.2 The requirement of stable microeconomic situation
5.3 The requirement of implementing a market-determined floating exchange rate system 5.4 The requirement of a perfect financial system

6. The impact to China’s foreign exchange rate under RMB’s full convertibility 6.1 The concern of increased exchange rate impact on export industries 6.2 The concern of exposure on of the banks and corporate sector to foreign exchange risks 6.3 The impact to stability of stock market by fluctuation of exchange rate 6.4 The spread of potential exchange rate risk to domestic market from global financial market. 7. The Impact of Renminbi’s Full Convertibility on the macro-economic of China 7.1 Exacerbation of disequilibrium of balance of payment

7.2 The concern over the negative impact on the rapid growth of foreign exchange reserve 7.3 The potential credit risk causing by rapid growth of short-term debt 8. Conclusions

1. Introduction
Like most developing countries, China launched the market-oriented economic system reform. Since 1979, a policy of the opening to the outside world was followed. It was also at that time that China started the progress of Renminbi (China’s home currency, also referred as RMB) towards full convertibility. Actually “full convertibility of Renminbi” means that the owners of RMB can exchange RMB to another currency at a market rate with any purpose without restrictions at anytime. Introduction of currency convertibility is one of the most crucial parts of a country’s economic reforms, especially for those formerly centrally planned economies, an economic system in which the state or workers' councils manage the economy[1]. In such economies the state or government controls all major sectors of...
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