1. Shahin Vallée Bruegel Asia Europe Economic Forum Seoul, December 10 th 2011 *The views expressed in this presentation are those of the presenter and do not necessarily represent those of Bruegel or BNP Paribas. This paper is a working paper presented for the first time and the background work was realised in the context of a joint Bruegel and CEPII report on the international Monetary System prepared for the European Commission INTERNATIONALISATION PATH OF THE RMB

2. Outline 1 1.What makes an international currency 2.Myths and consensus on international currencies Fully open capital account Flexible exchange rate Liberalised financial sector 3.Why is the RMB making steps towards 4.Some challenges and stumbling blocks

3. The Matrix 2

4. Myths and consensus 3 Capital Account Liberalisation Flexible Exchange Rate Liberalised Financial Sector Sequencing Why capital account matters Asymmetrical vs. full Capital Account Openness Offshore RMB market as a controlled opening strategy Nominal vs. Real adjustment RMB is moderately flexible Freely usable currency in SDR Financial sector openness Interest rate liberalisation Intermediation capacity Horse and cart (Prasad, Rumbaugh, Wang) FX flexibility needs to precede capital account (Mishkin) Financial liberalisation and FX flexibility Roadmap or the lack thereof

5. 4 Growth of RMB offshore Growth of RMB is very substantial (importers arbitrages?) Imbalances between deposits and asset growth Asset growth and links to the capital account openness

6. 5 FX flexibility Does Nominal Flexibility really matter? The Horse and the Cart problem Capital Account Openness precipitates currency flexibility

7. 6 RMB as a regional anchor 6 Regional Anchor Regional lender of last resort Lessons from Europe?

8. Stumbling blocks and challenges

9. Stumbling Blocks for China 8 Asymmetry of internationalization o Increase of RMB liabilities and USD Assets? o Is Pilot scheme sustainable Current Account Deficit and dissemination of reserves o RMB issuance market o Reserves in the official sector o Appreciation dynamics and rebalancing Financial Sector Reform o Domestic reform: Banks as quasi fiscal actors o Internationalisation of banks 8

10. Challenges to the paper 9 Settlement vs. Invoicing Currency Current Account deficit and internationalization of currency When does capital account restriction become binding? Move from a second tier international currency to a real reserve currency 9