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Financial reforms, divided interests, and tipping point policy-making : renminbi internationalization as a new catalyst for structural reforms in China Lu, Wanting


China’s RMB has been making quiet march onto the world stage, first into focus in the aftermath of the 2008 financial crisis, and notably gathering pace after 2012. By examining the seeming puzzle of why RMB internationalization, after a long albeit methodical trudge, accelerated after 2012, this paper seeks to offer a theory that could explain the motivations behind China’s pursuit of RMB internationalization. I argue that the existing approaches to this question, which primarily looks to the traditional economic factors such as relative national economic fundamentals, cost/benefit of currency internationalization, and impact of external shocks, fall short of explaining the timing, pace and trajectory of the RMB internationalization process. I maintain instead that the source of the dynamics driving RMB internationalization should be located in the structure of political decision making and political imperatives of the key players in the decision making process. This paper contends that RMB internationalization should above all be viewed in the broad context of China’s next round of reforms that centers on liberalizing the financial sector and developing the capital markets. Putting Chinese political decision making in the perspective of fragmented authoritarianism, this paper argues that with the balance of power of interest group coalitions favoring status quo or change in a deadlock, a lever is needed to break the stalemate and tip the balance toward reforms. Recognizing the need for financial reforms as China increasingly reaches the limit of its export-led growth model, political entrepreneurs at PBOC, under the personal leadership of Governor Zhou Xiaochuan and buttressed by the superior institutional resources and capacity, promoted RMB internationalization as the key lever to redistribute incentives and realign underlying coalitions. Capitalizing on favorable changes at the party’s top taking place post the power transition, which brought about a degree of centralization of the financial policy decision making that wasn’t available previously, Zhou Xiaochuan and his fellow political entrepreneurs were able to push forward RMB internationalization more effectively that both exposed the need for further financial sector reforms and generated broader support to tip the balance of power toward reforms.

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