The Future of Chinese Financial Liberalization

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by IAN WEISSGERBER

NANJING — As China rises as a global superpower while continuously growing as an international destination for foreign direct investment (FDI), the government has begun to open financial markets within the country in order to internationalize the RMB. However, in order for this plan to succeed, the People’s Bank of China (PBC) must be able to attain a greater degree of autonomy from Beijing. Despite this, the state still maintains a planned economy system and it has fallen behind its announced schedules to implement economic reform in the past. As time passes and market pressures grow in China, the People’s Republic will be faced with many decisions. A big decision China needs to make is whether or not, and when, to liberalize the markets and allow the RMB to be traded on the global scale. If China fails to do so, the economic ramifications could be severe.

In recent years, China has slowly begun to undergo an economic shift from an export-driven economy to a consumption-based economy, thereby forcing the Chinese government to alter its strategy of economic growth. In doing so, the financial markets have begun to open up. As a result, interest rates and market exchange rates, which were once determined by the state, will increasingly be subject to market forces. This places Beijing in a difficult situation, as they will be forced to loosen their grip in order to sustain economic development and continue to attract foreign direct investment. Therefore, just as easily as FDI has helped propel the Chinese economy during the past thirty years, the loss of FDI due to over-regulation could cripple the Chinese economy and make the state’s efforts for naught.

If autonomy is granted, however, although there is potential for volatility, China’s economic growth over time would have a much better chance at keeping pace with the explosion of growth it have experienced recently. The current increasing level of consumption, due in part to the country’s vast urbanization, can attest to the validity of this claim. As Beijing further liberalizes the financial markets and loosens its grip of the PBC, it will effectively strengthen control while easing both domestic and international pressure.

Overall, if China successfully implements market reform, and facilitates the internationalization of the RMB, the results could be extremely beneficial for everyone involved. For if the RMB prospers, so too will FDI, thereby strengthening China’s overall position in the global market. And if this happens, the economic juggernaut that is China will accelerate its growth and become a force unlikely to slow down in the near future.