RMB internationalization a long-term process
China needs to exercise caution while further opening up its financial sector due to two reasons. One, because it lacks well-developed financial infrastructure. And two, because the mismatch in the market-based exchange rate and interest rate and financial opening-up could destabilize its financial market.
Further opening-up of China's financial sector requires the authorities to be vigilant against abnormal fluctuations caused by large-scale short-term capital inflow and excessive appreciation or sharp depreciation of the renminbi. Also, the country could face increased risks due to excessive cross-border capital flows. Therefore, China should build a mechanism that would enable market-oriented allocation of production factors to boost competition in and ensure the healthy development of its financial market.
Given that financial risks will hinder financial opening-up, China should attract more foreign financial institutions to help their domestic counterparts to reduce and overcome competitive risks. The government also needs to encourage domestic financial institutions to "go global", and use "legitimate supervision", instead of "reasonable supervision", over their foreign investment to overcome financial risks. And the authorities should pay closer attention to financial risks arising out of US-China trade disputes.