China Review News (CRN) recently published an article discussing risks and risk remediation of the internationalization of the Chinese currency, the RMB. The article expressed the belief that, if the RMB is to compete head-to-head against the US Dollar and the Euro, then opening up capital accounts for free exchange will be required. However, without proper protection, that openness may result in a major disastrous outcome. The article focused on three primary risk areas as well as their “firewall policies”: (1) A complete market based floating exchange rate is required for full internationalization and a corresponding rate fluctuation risk control must be in place. (2) Free capital inflow may cause a major domestic financial bubble in areas such as the housing market. Comprehensive administrative and tax policies can help. (3) A free currency market may allow a massive capital outflow like the one in the 1990s that triggered the Asian Financial Crisis. Action must be taken to increase the rate of return on investments. The article concluded by emphasizing the importance of firewall-building to improve the readiness for RMB internationalization.
Source: China Review News, February 9, 2013