DP17498 Is Capital Account Convertibility Required for the Renminbi to Acquire Reserve Currency Status?

Author(s): Barry Eichengreen, Camille Macaire, Arnaud Mehl, Eric Monnet, Alain Naef
Publication Date: July 2022
Keyword(s): international monetary system, International Reserve Currencies, Renminbi
JEL(s): E58, F31, F38
Programme Areas: International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=17498

It is widely assumed that the renminbi (RMB) cannot acquire a meaningful place in central bank reserve portfolios without full liberalization of China's capital account. We argue that the RMB can in fact develop into a consequential reserve currency in the absence of capital account convertibility. Trade and investment links can drive official use and accumulation despite limited access to Chinese financial markets. But this route to currency internationalization requires policy support. China must allow access to RMB through loans and People's Bank of China (PBoC) currency swaps. It must ensure convertibility of RMB into US dollars on offshore markets. It must provide these RMB services at a stable and predictable price. Currency internationalization without full capital account liberalization thus requires the RMB to be backed by dollar reserves, which the PBOC consequently will continue to hold and use. Hence we do not foresee RMB internationalization as supplanting dollar dominance.