China’s economy is now the second largest in the world and a key driver of global growth. Its currency, the renminbi (RMB), was only recently elevated to the status of an official reserve currency. The potential for the RMB to develop quickly into an international currency is not without historical precedent. However, any discussion of the RMB’s ascendance might seem premature given that China has neither a flexible exchange rate nor an open capital account, once considered essential prerequisites for a country’s currency to have a major role in global financial markets.

The Chinese government’s approach to policies that promote the RMB’s use as an international currency is closely linked to domestic macroeconomic objectives and financial market development. The RMB’s impact on the global monetary system—in particular whether it will contribute positively to global financial stability—depends on the manner and speed with which China opens up its capital account and develops its financial markets as well as on the other policy changes put in place to support this process and the implications for China’s own growth and stability.

04/02 – Eswar Prasad – http://www.brookings.edu (extrait)