A Summary Of A Safe Approach to Convertibility for the RMB
Introduction
1. Capital account convertibility for the renminbi is an important subject matter in the further development of the international monetary system, which has not been functioning in a manner conducive to achieving global financial stability. The currency of an economy that is likely, within twenty years, to become the largest in the world has a role to play in the international monetary system, both as a medium of exchange or as a store of wealth. The road to capital account convertibility for the renminbi has, however, not been clearly mapped out, understandably perhaps in view of the risks to monetary and financial stability this would pose to China at a time when financial authorities of developed as well as developing economies are finding it difficult to harness the increasing potency of international capital. This paper examines the subject matter,
1 The author wishes to thank Ms Vivian Wong and Ms Ceara Hui of the Institute of Global Economics and
Finance at the Chinese University of Hong Kong for their assistance in background research.
2
makes the important distinction between full convertibility and free convertibility, and recommends a strategy for achieving capital account convertibility for the renminbi.
The Policy Intention
2. Although currently not a sharp focus of international or domestic attention, China seems committed to moving gradually towards capital account convertibility for the renminbi. Current pre-occupations on the monetary and financial fronts are to curb inflation and dampen inflation expectation, shift monetary policy stance from ¡°suitably easy¡± to ¡°stable¡±, control effectively ¡°the liquidity gate¡±, refine further the mechanism for the determination of the exchange rate and interest rate liberalization. 2 These are pressing issues and, understandably, are given much higher priority. But the commitment to capital account convertibility is clear, as articulated in a detailed description on the
1. Capital account convertibility for the renminbi is an important subject matter in the further development of the international monetary system, which has not been functioning in a manner conducive to achieving global financial stability. The currency of an economy that is likely, within twenty years, to become the largest in the world has a role to play in the international monetary system, both as a medium of exchange or as a store of wealth. The road to capital account convertibility for the renminbi has, however, not been clearly mapped out, understandably perhaps in view of the risks to monetary and financial stability this would pose to China at a time when financial authorities of developed as well as developing economies are finding it difficult to harness the increasing potency of international capital. This paper examines the subject matter,
1 The author wishes to thank Ms Vivian Wong and Ms Ceara Hui of the Institute of Global Economics and
Finance at the Chinese University of Hong Kong for their assistance in background research.
2
makes the important distinction between full convertibility and free convertibility, and recommends a strategy for achieving capital account convertibility for the renminbi.
The Policy Intention
2. Although currently not a sharp focus of international or domestic attention, China seems committed to moving gradually towards capital account convertibility for the renminbi. Current pre-occupations on the monetary and financial fronts are to curb inflation and dampen inflation expectation, shift monetary policy stance from ¡°suitably easy¡± to ¡°stable¡±, control effectively ¡°the liquidity gate¡±, refine further the mechanism for the determination of the exchange rate and interest rate liberalization. 2 These are pressing issues and, understandably, are given much higher priority. But the commitment to capital account convertibility is clear, as articulated in a detailed description on the