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WORKING PAPER 11-6
Capital Account Liberalization and the Role of the Renminbi
by Nicholas R. Lardy, Peterson Institute for International Economics
and Patrick Douglass, Peterson Institute for International Economics
February 2011
Despite an erosion of consensus on its benefits, capital account convertibility remains a long-term goal of China. This paper identifies three major preconditions for convertibility in China: a strong domestic banking system, relatively developed domestic financial markets, and an equilibrium exchange rate. The authors examine each of these in turn and find that, in significant respects, China does not yet meet any of the conditions necessary for convertibility. They then evaluate China’s progress to date on capital account liberalization, including recent efforts to promote renminbi internationalization and greater use of the renminbi in trade settlement. The paper concludes with an overview of remaining obstacles to convertibility and policy recommendations.View full document [pdf]
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