The Art of Mastering Securities
Globalization of the Yuan: A Tough Question for Regulators
The global financial system and its regulatory environment are now facing an unprecedented difficulty: the unnatural internationalization of the Chinese currency Yuan. Likewise, Chris Brummer and other financial and regulations securities academicians and professionals appreciate this new reality, and they’re looking into the feasibility of China’s strategy concerning internationalization of Yuan. China is obviously not playing by traditional financial regulations, making it important to probe all possible outcomes as well.
For a very long time, researchers and market players have argued that, for a currency to go international, it must be supported by an appropriately deep domestic market and strong regulations. After a country has fulfilled those conditions and it has a large economy that’s significantly incorporated into the global system, oversea investors may take interest in the currency. However, the manner China is changing rules to achieve internationalization of the Yuan is unprecedented in history and diverges from what may be viewed as the dominant basis of the law and macroeconomic theory.
Evidently, China has adopted measures that fall out of line with standard policy expectations. The Chinese government won’t allow a robust regulatory environment to mature, or the Yuan to naturally rise to global recognition and use–instead, it’s in the forefront of promoting as well as manipulating the internalization process. Instead of demonstrating a natural process for market growth, we’re seeing the export of the Yuan characterized by market deals and financial alliances that very often promote financial institutions and systems based on the Chinese national currency overseas. All through, China’s policy reforms have bordered on easy and free market access as opposed to better regulatory framework and oversight. So, we’re witnessing more capital controls as the main tool for risk management and providing incentive for competition among prospective hosts of Chinese national currency markets.
The exceptional Chinese policy characteristics present several critical concerns that affect the stability of global financial and monetary systems. Among them: is a government-controlled currency globalization effort feasible, and if so, in what ways does it threaten financial systems? Another issue is: at what point is it no longer safe to let market liberalization precede tightening regulation, and what could possibly go wrong if capital controls replaced prudential oversight? The merits and demerits linked with highly-restricted markets of liquidity across international finance should also be looked into.
In case China’s approach to propel its currency Yuan into broad cross-border utility and approval may destabilize the international financial system, very critical intervention is required today as suggested by securities and finance policy professionals like Chris Brummer.