China's Long March to Dismantling the Financial Great Wall: RMB Internationalization and Macroprudential Policy

This essay argues that the RMB internationalization scheme has wrongly pitched itself as an international project rather than a domestic one. The procyclical nature of the RMB internationalization scheme is at odds with macroprudential thinking, which aims to prevent systemic risks. Considering similar systemic risks inherent in China’s financial and banking systems as well as the shadow banking sector, the RMB scheme would not succeed without improving the capacity of various domestic financial institutions. Overemphasis on its global outcomes distorts the sequence of reforms necessary for a successful scheme and is likely to destabilize China’s domestic banking and financial sectors, where systemic risk exists. With a realigned focus, however, the RMB scheme could serve to inject fresh dynamics into ongoing reforms by introducing a host of macroprudential policies.