agreements with other central banks, in principle enabling a degree of RMb liquidity in countries other than China. This effort was unprecedented there is no other example of a country deliberately trying to internationalize its currency while maintaining a closed capital account What accounted for this unusual decision? Two observations about the backdrop for the rmB internationalization push help us to understand. First, currency internationalization came in the aftermath of the 2008 global financial crisis. Moreover it commenced shortly after People's Bank of China(PBC)governor Zhou Xiaochuan published a series of essays suggesting that the crisis was caused in part by the US dollar's dual role as a national currency and the main international reserve currency, and suggesting that the role of international reserve currency be taken over by a supra-national unit such as the IMF's special drawing rights. This led many observers to conclude that the goal of Rmb international ization was to set up the Chinese currency as an alternative or rival to the US dollar. The apparent logic was that in the event of a future crisis in which US dollar channels of finance dried up, as they did in the fall of 2008, China's own international trade and investment flows could still continue, supported by RMB finance But this explanation foundered on the contradiction between an internationalized currency and a closed capital account. In the absence of free two-way portfolio capital flows between China and the rest of the world, there was no conceivable way that internationally-available RMB balances could even come close to reaching the levels necessary to make the currency a viable international alternative to the US dollar. So either the pbc didnt know what it was doing, or something else was going on This brings us to the second background observation, which is that in the five years before the late 1990s with the recapitalization of China's technically insolvent Big Four state own the RMB internationalization program, domestic financial reform had bogged down. Starting in banks, there was a period of rapid financial-sector liberalization which included the restructuring and international listing of the big banks, the creation of specialized finance companies, and the aying of plans for interest-rate deregulation. But from 2004, the financial reform efforts fizzled out one by one. After the elimination of the ceiling on bank lending rates in October 2004, interest-rate reform halted entirely, and both deposit and benchmark loan rates were kept at artificially low levels. State-owned banks grew fat on a guaranteed interest rate margin, and paid little attention to their foreign strategic shareholders, who gradually sold off most of their shares See Mc Cauley, Robert N. 2011. "Internationalizing the Renminbi and Chinas Economic Development Model, Council on Foreign Relations Working Paper, November 2011; and Jeffrey Frankel, " Historical Precedents for the Internationalization of the RMB, paper presented at a workshop organized by the Council on Foreign Relations and the China Development Research Foundation, I November 2011 3 See zhou xiaochuan,关于改革国际货币体系的思考(“ Reflections on reforming the international monetar System"), March 23, 2009 (http://www.pbc.govcn/publish/goutongiaoliu/524/2010/20101119161635846466813/2010111916163584646681agreements with other central banks, in principle enabling a degree of RMB liquidity in countries other than China. This effort was unprecedented: there is no other example of a country deliberately trying to internationalize its currency while maintaining a closed capital account.2 What accounted for this unusual decision? Two observations about the backdrop for the RMB internationalization push help us to understand. First, currency internationalization came in the aftermath of the 2008 global financial crisis. Moreover it commenced shortly after People’s Bank of China (PBC) governor Zhou Xiaochuan published a series of essays suggesting that the crisis was caused in part by the US dollar’s dual role as a national currency and the main international reserve currency, and suggesting that the role of international reserve currency be taken over by a supra-national unit such as the IMF’s special drawing rights.3 This led many observers to conclude that the goal of RMB internationalization was to set up the Chinese currency as an alternative or rival to the US dollar. The apparent logic was that in the event of a future crisis in which US dollar channels of finance dried up, as they did in the fall of 2008, China’s own international trade and investment flows could still continue, supported by RMB finance. But this explanation foundered on the contradiction between an internationalized currency and a closed capital account. In the absence of free two-way portfolio capital flows between China and the rest of the world, there was no conceivable way that internationally-available RMB balances could even come close to reaching the levels necessary to make the currency a viable international alternative to the US dollar. So either the PBC didn’t know what it was doing, or something else was going on. This brings us to the second background observation, which is that in the five years before the RMB internationalization program, domestic financial reform had bogged down. Starting in the late 1990s with the recapitalization of China’s technically insolvent “Big Four” state owned banks, there was a period of rapid financial-sector liberalization which included the restructuring and international listing of the big banks, the creation of specialized finance companies, and the laying of plans for interest-rate deregulation. But from 2004, the financial reform efforts fizzled out one by one. After the elimination of the ceiling on bank lending rates in October 2004, interest-rate reform halted entirely, and both deposit and benchmark loan rates were kept at artificially low levels. State-owned banks grew fat on a guaranteed interest rate margin, and paid little attention to their foreign strategic shareholders, who gradually sold off most of their shares. 2 See McCauley, Robert N. 2011. “Internationalizing the Renminbi and China’s Economic Development Model,” Council on Foreign Relations Working Paper, November 2011; and Jeffrey Frankel, “Historical Precedents for the Internationalization of the RMB,” paper presented at a workshop organized by the Council on Foreign Relations and the China Development Research Foundation, 1 November 2011 3 See Zhou Xiaochuan, 关于改革国际货币体系的思考 (“Reflections on Reforming the International Monetary System”), March 23, 2009 (http://www.pbc.gov.cn/publish/goutongjiaoliu/524/2010/20101119161635846466813/20101119161635846466813 _.html)