Research On The Transmission Mechanism And Regulatory Strategy Of Systemic Risk From The Perspective Of Currency Internationalization

The strategy of RMB internationalization and systemic risk regulation are the very important strategic fields in the present China’s economy and finance. To study on the effective control of systemic risk in promoting RMB internationalization steadily has great theoretical and practical significance. However, systemic risk and currency internationalization are two independent theories, and there is still a lack of detailed discussion on the connotation between them. Although some literature has studied the risk of currency internationalization, the theoretical connotation of risk has not been detailed. In addition, the study of currency internationalization lacked systematism and dynamics. The methods of study excessive focus on the macro theory and experience analysis, but lack the micro foundation and empirical econometric analysis.Cause of the current defects, this article follows the logical process from simple to complex, from general to particular. It involves three steps:Firstly, building the unified analytical framework by combing their related theories, establishing theoretical relationship between systemic risk and currency internationalization by risk transmission mechanism. Secondly, progressive discussing the general theoretical rules, empirical basis and Chinese special rules of systemic risk transmission mechanism from the perspective of currency internationalization. Lastly, studying the methods of evaluating and management about China’s systemic risk based on the general and particular rules of systemic risk transmission mechanism.As the opening, chapter one provides information of the problem setting, literature review and study protocol, which presents the study approaches and analytical framework from overall perspective. Chapter two explores the general rules of systemic risk transmission mechanism under the background of currency internationalization by the theoretical deduction. The first section combs the concepts, forms, causes and transmission mechanisms of systemic risk. We find this risk mean some kind of shocks are transmitted in the enterprises and financial institutions by the interaction mechanism and trigger a chain reaction that increases the possibility of economic and financial instability. It includes currency risk, bank risk, economic growth risk and sovereign debt risk and is deducted according to "shock→transmission→systemic crisis". And shocks transmission channels and interaction mechanism constitute the risk transmission mechanism. The second section reviews meanings, conditions and proceedings of currency internationalization. We find currency internationalization describes the process which a currency becomes international currency and goes through four stages:Trade currency, investment currency, reserve currency and anchor currency. Moreover, the conditions of currency internationalization probably cause shock of the risk. The third section discusses the deductive process of systemic risk in the four different stages of currency internationalization. The study indicates:The distortion of exchange rate is the main source of systemic risk, the impact of trade currency and investment currency is exogenous, the impact of reserve currency and anchor currency is endogenous. Besides, along with the development of currency internationalization, systemic risk transmission channels are more ways and effecting is more complex, the forms of crisis are more plentiful and the harm of it is stronger.Chapter three seeks the empirical evidence for theory conclusions of the systemic risk transmission mechanism by analysis of international experience and panel data model. The first section systematically reviews the experience of domestic economic imbalances and financial turbulence in the process of internationalization of the pound, dollar, yen and euro. By analysis of their relationships, this study indicates that the experience of internationalization of the pound and dollar under the Bretton Woods Arrangement accord with the transmission mechanism of systemic risk of reserve and anchor currency; the experience of internationalization of the euro and the dollar under the Jamaica System accord with the transmission mechanism of systemic risk of anchor currency; the experience of internationalization of the yen accord with the transmission mechanism of systemic risk of trade currency. The second section establishes panel data model to analyze the relationship between internationalization of the pound, dollar, yen and euro and the currency risk, bank risk, economic growth risk and sovereign debt risk. The results indicate there is stable relationship between the internationalization and factors discussed above, but international disparity.Chapter four analyses the special rules of transmission mechanism of systemic risk in the present situation of RMB internationalization from the time dimension. The first section analyses RMB usage in the field of international trade, finance and foreign exchange reserves. We find the process of RMB internationalization which is on the primary stage as trade currency, exists the imbalance problems. The second section builds DSGE model to describe behavior characteristics of economic system. The third section makes steady state and transitional-dynamic numerical simulation. The results show that the transmission mechanism of systemic risk includes two forms in time dimension. One is that the shocks like foreign currency price and national currency price of tradables, price of non-tradables, RMB exchange rates are transmitted through international trade. The other is that the shocks like RMB exchange rates and interest differential at home and abroad are transmitted through international finance, bank credit, and the regulation of fiscal and monetary policies. Besides, equilibrium development path is demonstrably superior to disequilibrium development path for RMB internationalization from the perspective of long and short term stability of economic system.Chapter five analyses the special rules of transmission mechanism of systemic risk in the background of RMB internationalization from the spatial dimension (industry and bank). The first section builds consumption coefficient matrix of17industries in the national economic system based on industrial relevance. The top5systemically important industry are found out by data simulation. These5industries could transmit the initial shock to more industries, which will lead to sharp fluctuations in national income. The second section builds bilateral asset correlation matrix of16listed companies based on the relationship of credits and debts among banks, and simulates the liquidity influence of a single bank closed to the whole bank system. The top5systemically important financial institutions are found out by data simulation. Otherwise, due from banks and lending capital, cash and due from central bank and buying back the sale of financial assets are the major carriers of shocks’ transmission. Interbank assets default effect, bank runs and assets discounting play leading roles in shocks’ transmission.Systemic risk regulation includes two aspects:risk assessment and management. Chapter six assesses the situation of systemic risk in China from RMB internationalization perspective. The first section reviews the documents about systemic risk assessment. We choose indicator early warning as risk assessment method by comparison of advantages and disadvantages of various assessment methods. The second section provides target of systemic risk assessment and design principles of index, and builds index system of risk assessment and early warning mechanism. The third section runs empirical assessment of risk integrity level, structural distribution and early warning results in China’s systemic risk from2005to2014by using the principal component analysis method. It turns out that systemic risk integrity level entered the stage of rising since the third quarter of2012, so risk management is necessary. Besides, risk category includes the risks of economic growth mode, asset price fluctuation, banking system stability, sovereign default, the RMB speculation and industrial structure, which are deduced in different ways.Chapter seven designs management strategy for every risk link according to deduce rule of systemic risk (shock→transmission→systemic crisis). The first section indicates the management of the source of systemic risk shocks by designing two paths of long-term and short-term institutional arrangement for RMB internationalization development. The second section designs management strategy for the risk transmission mechanism in the macro-economic system, finance system, and between them, enabling process management. The third section designs management strategy for deductive results—currency crisis, economic crisis, bank crisis and sovereignty debt crisis, enabling terminal risk management.