Friday 9 May 2014

Are China's Financial Markets Deep and Liquid enough for RMB internationalisation?

Could China internationalise the RMB?

This paper examines the case for China and concludes it is not there yet.  How long?  Perhaps not as long as you might expect.  Obstacles in China have a way of disappearing when they need to.

ADBI Working Paper 477

PRINCE CHRISTIAN CRUZ, Asian Development Bank

Tsinghua University

Asian Development Bank

Domestic financial market development is a key determinant of a currency’s international status, and financial depth and market liquidity are two essential attributes for an international currency. This paper discusses the status of the People’s Republic of China’s (PRC) financial markets and their depth and liquidity conditions. The paper also compares the PRC’s financial markets with those in developed and emerging economies, contemporaneously and historically. The paper finds that the PRC’s financial markets are not as deep and liquid as those in developed economies, and are much less so than those with international currencies. To support the internationalization of the renminbi, the PRC needs to remove several major obstacles to deepen its financial markets and improve their liquidity conditions.

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