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Yuan Internationalization:A Hard Nut for Regulators to Crack

The global financial system and its regulatory environment are now facing an unprecedented difficulty: the unnatural internationalization of the Chinese currency Yuan. Likewise, Chris Brummer and other financial and regulations securities academicians and professionals appreciate this new reality, and they’re looking into the feasibility of China’s strategy concerning internationalization of Yuan. China is obviously not playing by traditional financial regulations, making it important to probe all possible outcomes as well.

For a very long time, researchers and market players have argued that, for a currency to go international, it must be supported by an appropriately deep domestic market and strong regulations. Once those conditions are met, foreign investors may embrace the currency, provided that the country has a sufficiently strong economy that boasts deep integration into the international economy. Yet, the reforms China is trying to force into the system toward globalizing its currency is unique to history and violates what you may hold as the prerequisites of the law and macroeconomic doctrines.

Obviously, China has embraced steps that are contradictory to traditional policy norms. Rather than lets its regulatory framework to become robust, and the Renminbi to organically grow into international acceptance and use, Chinese authorities are spearheading the promotion, and even control, of the globalization process. Instead of demonstrating a natural process for market growth, we’re seeing the export of the Yuan characterized by market deals and financial alliances that very often promote financial institutions and systems based on the Chinese national currency overseas. All this time, the authorities have pushed policy reforms that focus on market access and liberalization instead of improvements of prudential and supervisory oversight. As such, there’s been much use of capital controls as an effective way to contain risk while inducing competition anywhere Yuan markets are likely to be hosted.

The unprecedented nature of Chinese policy reforms rises a number of concerns that may seriously shake the steadiness of international financial and fiscal infrastructures. Number one is: what’s the viability of a currency globalization process that’s led by the government, and does it pose specific risks to the financial system? Number two: to what extent is it safe to have market liberalization coming before regulatory reform, and are there risks in substituting prudential checks with capital controls? Another issue that needs to be investigated is the possible risks and benefits associated with highly-controlled pools of liquidity for international finance.

If what China is doing to get its currency Yuan recognized and used widely internationally poses risks to the stability of cross-border finance, something has to be done about it fast, as recommended by financial and securities regulation pros like Chris Brummer.

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