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The prospects of financial opening-up in china in light of the trilemma of international finance

• Eszter Boros
• Gabor Sztano

(2024). ECMS 2024, 38th Proceedings
Edited by: Daniel Grzonka, Natalia Rylko, Grazyna Suchacka, Vladimir Mityushev, European Council for Modelling and Simulation.
DOI: http://doi.org/10.7148/2024
ISSN: 2522-2422 (ONLINE)
ISSN: 2522-2414 (PRINT)
ISSN: 2522-2430 (CD-ROM)
ISBN: 978-3-937436-84-5
ISBN: 978-3-937436-83-8 (CD) Communications of the ECMS Volume 38, Issue 1, June 2024, Cracow, Poland June 4th – June 7th, 2024

https://doi.org/10.7148/2024-0050

Eszter boros, Gabor sztano (2024). The Prospects of Financial Opening-up in China in Light of the Trilemma of International Finance, ECMS 2024, Proceedings Edited by: Daniel Grzonka, Natalia Rylko, Grazyna Suchacka, Vladimir Mityushev, European Council for Modelling and Simulation. doi:10.7148/2024-0050

The growing use of the renminbi (RMB) in cross border financial transactions is attracting much attention, but the existence of capital controls in China is frequently pointed out as a major obstacle for the RMB to become a global currency. The Chinese monetary policy mix is a special case from the point of view of Mundell’s “impossible trinity”. Beijing follows a cautious strategy to balance between the pros and cons of certain policy combinations. The ambitious goal to internationalise the RMB has added to this complexity and would benefit from the quicker opening-up of the onshore financial market. Our paper assesses the possible trade-offs this would entail for Chinese decision-makers in light of the different policy choices of the trilemma. We apply an ARDL model to reveal how the three aspects contributed to macroeconomic stability in China in the last 15 years. Results suggest that exchange rate stability remains an effective stabilising factor, and monetary policy independence is also relevant, especially for inflationary outcomes. Financial opening-up would thus possibly come with some loss of stability. However, without taking this risk, constraints remain for the RMB to reduce its reliance on the USD as the dominant world currency.