Zhou Chengjun, director of the Institute of Finance at the Central Bank of China (CBC), said that for the yuan to become international, it needs to give up control of the exchange rate and allow free cross-border capital flows.
Reuters reported on May 19 that Zhou Chengjun, director of the Institute of Finance at China’s central bank, recently said that a condition for the internationalization of the yuan is to give up control of the yuan’s exchange rate, abandon exchange rate targeting and let all global market preferences, expectations and transactions determine the exchange rate.
In an article published in the public issue of Moganshan Research Institute, Zhou Chengjun said that under the conditions of RMB internationalization, China’s central bank will eventually have to give up the exchange rate target, and the RMB exchange rate is determined by the preferences, expectations and transactions of all global market players for the RMB; the central bank will have to explicitly pursue two other objectives: namely, monetary policy independence and free flow of cross-border capital.
According to Zhou Chengjun, “Why was central bank monetary policy sometimes difficult in the past? It was because of the constant need to keep an eye on the exchange rate and to maintain the basic stability of the RMB exchange rate at a reasonable equilibrium level.”
Zhou Chengjun writes, “Most typically in 2016 and 2017, when the central bank was tied to the exchange rate target, monetary policy tended to swing between independence and free cross-border capital flows.”
Zhou Chengjun said the yuan foreign exchange market will not end up in the Shanghai Foreign Exchange Trade Center or in the domestic small-currency yuan-listed market, but mainly outside the country, in all countries that have close investment and trade dealings with China and are willing to hold yuan positions and assets. Such a widely traded RMB exchange rate would be a more transparent, reasonable, fair and predictable equilibrium exchange rate, and would be more stable.
If the RMB exchange rate is an equilibrium exchange rate formed by market transactions, it means that these currencies do not need to be hedged against the RMB through the US dollar, and the RMB will become the “anchor currency” for these currencies, whose largest investment and trade partner is China. These countries’ largest investment and trade partners are China, and using the RMB as an anchor will not only help reduce the exchange rate risk of investment and trade with China, but also benefit the economic and financial stability of these countries.
In fact, only with an independent monetary policy and free flow of cross-border capital can any international market player be assured that when he is confident and interested in RMB assets, he can invest, hold and trade with confidence, and conveniently perform various liquidity management and hedging operations to ensure a balance of returns and risks,” explained Zhou Chengjun. “
Currently, the Chinese central bank controls the RMB exchange rate by setting a daily mid-price, and the RMB is not freely convertible. China still imposes controls on cross-border capital flows, and most importantly, the Chinese central bank is subject to the central government of the Communist Party of China (CPC), and its monetary policy is shaped by political factors and serves the macroeconomic objectives of the CPC, and does not have independence.
Data released by the Society for Worldwide Interbank Financial Telecommunication (SWIFT) showed that the yuan accounted for 2.2% of international payments in February this year, down 0.22% compared to January, and the amount paid decreased 13% from January, ranking fifth, with the top four being the U.S. dollar (38.43%), the euro (37.13%), the British pound (6.57%), and the Japanese yen (3.18%).
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