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6. Conclusion
Only 13 years after having been depegged from the US dollar, the RMB is starting to check the definition of an international currency. It is now used as a reserve currency by central banks and international institutions, and is one of the five currencies used in the MIF basket currency.
Its usage in the world is growing, thanks to gradual opening of its capital market and creation of RMB-denominated financial products, but since the market shocks of 2015, the growth in usage has stalled.
Those market shocks were signs of the current imperfection of the Chinese financial system.
Those markets lack transparency, with a high level of debt that seems not recoverable and that companies have been trying to hide out of their accounting books. The markets are not totally liberalized and the Chinese government is still preventing capital outflows, manages the market and exchange rates to ensure stability, and prevents short selling.
Nonetheless, prospects for RMB internationalization are good, as China is gradually opening its market, backed by a strong economy and interesting trends in financial innovation. The Belt and Road Initiative might act as a catalyzer for the internationalization of the RMB by boosting China’s trade, and thanks to RMB-denominated investments that will create foreign demand for RMB to repay them. Altogether, this would increase China’s global power, by making its currency central in global trade.
Yet, it is important to keep in mind that the internationalization of the RMB necessarily means that the financial industry will be liberalized and ruled by market principles. The exposition to market forces can reveal weaknesses of the Chinese economy and trigger a crisis. Moreover, China has been using its foreign currency reserves to finance potentially unprofitable Silk Road projects and weaken the value of the RMB.
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