The Renminbi’s Ascendance in International Finance Eswar Prasad Comments on:

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The Renminbi’s Ascendance in International Finance Eswar Prasad Comments on:
Comments on:
The Renminbi’s Ascendance
in International Finance
Eswar Prasad
2015 Asia Economic Policy Conference
Policy Challenges in a Diverging Global Economy
Federal Reserve Bank of San Francisco, November 19-20, 2015
Stijn Claessens
Senior Adviser, Federal Reserve Board
This presentation represents my own
views and not necessarily those of the
Federal Reserve Board of Governors or
its staff.
Question and Answer of Paper
Q: What is/will be RMB’s role in global
monetary system and government’s role in it?
A: RMB is on track to become important
Will RMB become an international and reserve currency?
Policies are supporting greater role of RMB
Increased use of RMB international, including likely SDR
But there are constraints and risks
Limited financial sector development, liberalization
 Phasing of policies, politics, and dollar dominance
1. Relevance of and praise for paper
Surely a worthwhile topic, also for policy
Know little on what drives a currency to be
international or global. Interesting “case study”
 Many focused on this, financial markets, (international)
policy makers, etc. Many (international) repercussions
Praise and agree with main findings
Careful (historical) review of facts and steps so far
 View consistent with others’ (many here!), but not all
Given success, hard to question China’s approach
Also hard to disagree with world’s
expert on this. Quotes of Prasad:
“Yuan inclusion in SDR good for financial mkt
reforms in China and IMF's legitimacy”
@S_Rabinovitch in The Economist
“The yuan's int'l value will be determined by the
market, but this could help spur reforms in China”
@EswarSPrasad in WSJ Editorial page
“China's RMB stays on track to get into IMF's SDR
basket—a zig-zag path to an outcome that seems
foreordained” @sdonnan in Financial Times
“How China's currency move could elevate RMB's
stature in global finance” @JimZarroli at NPR
2. Comments: Stock-taking vs. View
and Collateral Benefits
Mostly stock-taking, not review of goals or paths
Paper informs on where China/RMB is in number
of important dimensions, given the stated goal(s)
“China/RMB appears on path in most respects”
But would have like to have seen a review of goals
And relies heavy on “collateral benefits” view
Stepping the stones provides benefits, but..
1. Are they really as large as thought (before GFC)?
Experiences of advanced countries make for a rethink?
2. Are all steps consistent with maximize “learning”?
Some more for narrow/private than collateral benefits?
Quibbles on the stock-taking
“Half Full or Half Empty”
Official reserves are large, but..
Openness is increasing, but..
Maybe not good measure of “internationalization”
In vs. outwards, and who can go in/out is selective
Openness vs. control, debt vs. equity (majority)..
Open to flows is not equal to granting full market
access, notably in finance, e.g., foreign banks
 Cash-flow vs. control rights, e.g., A,B,H shares
Exchange rate management freer, but…
Regime still not so transparent (e.g., off-shore)
More Quibbles
Financial development: high or low?
# are large, quality is less so
Fiscal position strong today, but tomorrow..
Financial system is very large, (credit) growth
remains high → contingent liabilities could be large
 FX reserves and Greenspan/Guidotti rule
SDR, yes, will happen, but..
Benefits and did it accelerate reforms in good ways?
Recent policies can make one wonder on path..
Stock market gyrations; Exchange rate devaluation;
Shadow banking system; Interest rate liberalization
 Do not fully fit with overall deliberate strategy
3. Stepping Back
An Attempt at Analytical Framing
Three questions can be/have been pondered
i. Can RMB internationalize, become reserve currency?
ii. Should RMB internationalize? Costs vs. benefits
iii. How to internationalize? What is the (best) path?
“Definitions:” Internationalization: greater use of
RMB. Reserve currency: (large scale) store of value;
unit/medium of account/transactions/invoice
If yes to i and ii, then iii steps, relative or absolute
What matters more? What now? What can wait? How to
balance? What else to do? How to maximize gains?
 Paper could do a review of the literature to date
i. Can RMB int‘nalize/reserve?
List of others vs. Prasad’s
Size, Economic Strength, Share of
World Economy, Trade, etc.
Strong Financial markets
Reliability of Rules
Quality and Predictability of Fiscal
and Monetary Policies
Ability to Respond to Unexpected
Political Cohesion
Network Externalities Persistence,
Mountains, Island, Army…
Angeloni et al, ECB, Eichengreen,
Kawai, Goldberg, Frankel, etc.
Can RMB int‘nalize and reserve?
Other views are more cautious
Most: both will take some time and efforts
Frankel (2011): “long way to go” “policy defy logic of
political economy” “sequence unorthodox”; Eichengreen
(2015): “not in one day” “not without risk” “regional vs.
international/global.” Eichengreen and Kawai (2015): many
steps; Goldberg (2012): reserve currencies have path
dependency, persistence of dollar. Prasad (2014): Dollar trap
Key to Internationalization is policy coherence
Key to Reserve is stability of domestic markets,
esp. gvt bond. Is China’s large, stable enough?
ii. Should RMB internationalize?
Gains and Risks, and for Who?
• Benefits for local financial
markets development and
monetary policy
• More general learning
• Better scope for diversification,
insulation from shocks, less
valuation effects
• Lower cost of funding (debt)
• “Seignorage”
• “Global influence”
• Challenges managing
internal and external
• Spillovers, importing of
global financial cycles,
• Financial instability (“We
are not in Kansas”)
• Hard to reverse policies
(easier to lose than to gain)
Should RMB be a reserve? Also given
costs, others have said “no.” So maybe?
Reserve currency comes with some “costs”
Demand volatility due to “safe haven,” as in GFC
 Demand and need to internalize monetary policy Δs
 Responsibilities: Maintain swap lines. Ship cash.
Have settlement. Help with RMBization. Etc.
Japan, Germany were reluctant to “reservize”
Frankel (2011): “costs outweigh benefits”
 Also optimal timing can be “elusive:” inflation,
exchange rate dynamics, financial stability, etc.
iii. How to internationalize (RMB)?
Other evidence suggests caution
Evidence on what works (caveat China is unique)
Other (capital account liberalization) experiences
suggest can be very complex, more than presented
 Needs overall consistent approach, starting with
domestic financial market development, not just size
 Economic liberalization and political liberalization
Also “Institutional View” of CAL, CFM, MAP
Integrated approach: sequencing, consistency, etc.
 Important to have/keep macroprudential and capital
flow management policies in place (cannot reverse
Recent experiences and thinking
thus suggest some “lessons”
Focus more on risks along path and policies
Recognize irreversibilities, and slow some reforms
 How to prevent a Chile 1979-82? East Asia crisis?
Integration is not just about cross-border flows
Also need committed capital, foreign banks present
 As per experiences of euro, Eastern Europe, others
Build in more explicitly learning
E.g.,: support of ER, allow for (selective) exit do not
encourage learning. How RoR on assets > liabilities?
 Experiment with small, reversible steps first?
4. Theme of Conference: “Policy
Challenges in a Diverging Global Economy”
Divergence and global financial stability
Would rise of RMB make system more less stable?
Yes, means for easier/better global risk-sharing
 But also greater risk of tipping, booms/busts, due to market
failures, externalities, bubbles
Policy implications as regards ROW
What to do, if anything, ex-ante
Greater swaps (but effective?) Better infrastructure?
What else is needed eventually, in Asia?
Full financial integration w/ BU, to avoid financial trilemma
 Interim smart MAP/CFM, instead of ring-fencing
Summary of comments
State of play
Collateral benefits, learning, consistency
Control vs. cash-flow rights. Is the balance right?
Overall goal of full openness
Too optimistic? And following best processes?
Openness vs. market access.
Half full vs. half empty? Many possible quibbles..
Worth to revisit in light of experiences? MAP/CFM
International aspects and repercussions
Many implications, deserving more thought
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