Risk Assessment Of The RMB Internationalization

Since the outbreak of international financial crisis in2008, much domestic and international attention has been payed to the issue of RMB internationalization. Chinese authorities grasped the favorable opportunity to consider the RMB internationalization at the strategic height, and adopted a series of positive measures to promote it. Howerer, it is not a simple open policy, but a strategic choice concerning the whole economic and financial reform, so it will affect the overall reform, if some aspects are not handled properly, or even course contradiction, it might lead to the gradual accumulation of risk and the ultimately break. For example, the risk of loss of the independence of economic and financial policies, the risk that massive reversal capital flows assault the economic and financial stability. Therefore we must identify the various risks effectively during the course of RMB internationalization, and study the reasons for its formation and conduction mechanism in order to prevent, control and resolve the risks.The paper includes five parts. The first part, namely, chapter one, is the induction; the second part, namely, chapter two, is the general theory and practice; the third part is theoretical modeling and empirical studies, including chapter three, chapter four, chapter five, chapter six and chapter seven; the fourth part, namely, chapter eight, is policy recommendations; the fifth part is conclusion.Chapter one:induction. It mainly introduces the background and significance, literature review and brief comment, research ideas, methods and content, innovations.Chapter two:the basic theory and controlling practice of the currency internationalization’s risk. There are three parts of the main content:the first is to classify and explain the risk of currency internationalization, the second is to analyze the factors affecting the risk. These two parts constitute the simple theory of currency internationalization. The third part is the practice of risk controlling for the three main international currencies:U.S.dollar, euro and yen. At this point, the chapter two builds the analysis framework of currency internationalization’s risk from both theory and practice.Chapter three:the market obstruct and deterrence risk analysis in the process of RMB internationalization. RMB internationalization can not be separated from today’s international currency system which based on the dollar as the dominant single currency system, more accurately, it’s an asymmetric currency system based on the dollar as the dominant and the euro as the subsidiary.RMB will inevitably have to compete with the two monopoly power. As it concerns the re-allocation of interests, Europe and the United States, especially the United States is bound to squzze the RMB internationalization to maintain the supremacy of dollar. According to the oligarchs theory, the chapter builds an asymmetric Stackelberg model to analyze the competition between U.S. dollar and RMB.The results show that RMB will suffer the exclusion due to dollar hegemony and monopoly power differences.RMB can not surpass dollar in short period and there will be possible cooperation in the medium and long periods. This paper argues that the currency monopoly power depends on the economy scale, by comparing the economy scale, the Japan’s economy scale is relatively small, so that the size of economy has a threshold effect in promoting currency’s internationalization. The empirical results show the existence of threshold effect, which reveals the fundamental reason of dollar’s hegemony, euro’s success and yen’s failure.Chapter four:RMB internationalization’s affect on monetary policy’s independe nee. From the currency substitution and reverse currency substitution, the text dem onstrates the asset selection behavior’s affect to money supply thus monetary policy independence. First, the text analyzes the phenomenon of currency substitution and reverse currency substitution from multiple perspectives. Second, the text analyzes the mechanism that the asset selection behavior’s affect to monetary policy indepe ndence. At last, on the basis of sticky-price model of Dornbush, the text establishe s a model of various asset selection behaviors and money supply by adding amend ed PPP and interest rate parity theory. After the empirical analysis, the chapter arg ues that the main channel of the impact to monetary policy is exchange rate whic h plays a role in RMB’s appreciation.Chapter five:RMB internationalization’s affect on fiscal policy’s independence. This chapter begins with sovereign debt crisis in Europe as an example, then analyze the internal logic that the debt crisis leading to the decline of euro’s international status. Second, starting from the basic characteristics of China’s economy and society, the text builds the IS-LM-BP model containing the factor of RMB internationalization and analyzes the constrains for fiscal policy. On this basis, the text analyzes the relationship between RMB’s status and fiscal expenditure, and discusses the possible fiscal policy dilemma and the relevant optimal fiscal policy path. The analysis reveals that if there exists fiscal policy dilemma, the optimal path for fiscal policy will be reducing the deficit or debt level, but it will be higher than the initial level. At last, in order to find the reasonable deficit or debt level, the text analyzes the level by using dynamic panel threshold model. The conclusion is that China’s deficit may have exceeded the optimal level and the space of enhancing debt is limited.Chapter six:RMB internationalization’s affect on asset price. This chapter analyze the risk that large scale capital flow’s impulse to asset price on the basis of dollar and yen’s experiences and lessons. The text begins with two basic characteristics of currency’s internationalization:currency appreciation and the large scale capital flows under the capital account liberalization, followed by the establishment of the model which contains the RMB exchange rate, short-term international capital flows and asset price in order to analyze RMB exchange rate and short-term international capital flow’s impact to asset price in the early stages of RMB internationalization. Lastly, the text examines the RMB internationalization’s impact on asset price when external environment changes, especially the international financial crisis and the European sovereign debt crisis occur.Chapter seven:RMB internationalization’s affect on macro stability. It mainly discusses the open of capital account’s impact on macro stability including output gap and price during the course of RMB internationalization. Based on traditional aggregate demand equation and supply equation, the text establishes a dynamic aggregate demand equation and supply equation including RMB internationalization factor, and then discusses the increasing openness of capital account’s impact on output gap and price. The theoretical model demonstrates that the increasing openness of capital account will cause double impact to macro stability. The empirical results show that the increasing openness of capital account mainly leads to positive output gap and rising price level in the most years of the samples, that is the overheating of economy. Furthermore, the text explains the RMB internationalization and the open of capital account’s impact on monetary policy’s independence as the useful complement to the chapter two. The result is that during the process of RMB internationalization, the interest policy targeting inflation will be limited to a large extent, the monetary authorities can only implement the interest rate policy targeting output gap.Chapter8:policy recommendations of RMB internationalization’s risk management. After the theoretical analysis and the empirical testing, RMB internationalization may cause three major risks:the market impeding and deterrence risk under the currency system dominated by dollar, the constrain of economic and financial policy’s independence and the impulse to macro stability. This chapter presents some specific policy recommendations on the proof from chapter three to chapter seven and the experience and lessons about risk management from dollar, euro and yen, mainly including to promote transformation of the mode of economic growth, to fight for the leadership of regional monetary cooperation, to clean the local government debt, to pay close attention to the negative effect to stock price from RMB effective exchange rate, to strengthen the management of international capital flows and to strengthen the focus on liquidity structure.The final part is the conclusion of the article which clarifying the important conclusions and propose some innovative ideas.Firstly, the fundamental power of international currency’s competition id the currency’s monopoly power which determined by economy scale and there exists economy scale’s asymmetric effect in promoting the currency’s internationalization. If the economy scale’s gravity in the world is lower than23.6%, one country will enhance the currency’s international status only at a lower speed, and if the corresponding proportion is greater than23.6%, one country can enhance the currency’s international status at a faster speed. At present, only the United States can reach the level, the euro zone has reached the threshold, while Japan from the standard, there is a wide gap. Therefore, although the economic foundation of RMB internationalization is solid, in the short-term, China can enhance RMB’s international status only at a lower speed, facing a higher market resistance.Secondly, the asset selection behavior can affect money supply through currency substitution and reverse currency substitution. At present it is the reverse currency substitution that causes the increase of money supply. The main channel of the impact to monetary policy is exchange rate which plays a role in the way of RMB’s appreciation; interest rate’s impact is not obvious, the external shock that the increase of U.S. money supply will also cause a great impact on domestic money supply.Thirdly, RMB internationalization can not only affect the monetary policy’s independence, but also affect the fiscal policy’s independence to a small extent. The main conclusion from the theoretical model is that the expansion of fiscal policy in promoting economy growth may lead to a fiscal policy dilemma, and therefore it is not sustainable. Based on it, the article first present the reasonable deficit and debt level considering the currency’s international status according to the data of the major international currency issuing countries.Fourthly, at the early stage of RMB internationalization, domestic liquidity is the main reason that caused the stock price’s significant fluctuation, but the change of domestic liquidity’s structure is determined by the change of short-term international capital flows which is determined by two factors, the one is RMB exchange rate, the other is the change of international economic and financial environment. When the crisis happened, domestic liquidity decline in activity and thus the stock price falls; conversely the anti-is. Moreover, the impact on stock price caused by RMB effective exchange rate is negative, this is opposite with many scholars’ results that caused by RMB nominal exchange rate before2008.Fifthly, the theoretical model insists that the open of capital account in the course of RMB internationalization has double influence on macro stability, and the monetary policy’s independence whose intermediate target is interest will be weaken. The interest policy targeting inflation will be hard to implement, the central bank can only implement the interest rate policy targeting output gap. Moreover, the self-regulating capacity of the economy is an important factor that affects the impulse on macro stability from RMB internationalization. If the capacity of adjustment is poor, it will enlarge the capital account liberalization’s impact on economy and finance. The empirical analysis shows that the improvement of capital accounts openness enlarge the positive output gap and the rise of price level, leading to overheating of the economy.