Wu Xiaoqiu says only the rule of law and marketization can make the yuan a global currency.

The Renmin University professor urges systemic reforms to elevate the yuan’s international role via a "Third Way," calling the task China’s “hardest nut to crack.”

On July 27, 2025, the 2025 International Monetary Forum was held in Beijing, jointly hosted by Renmin University of China and Nankai University. A video recording of the forum is available online.

Professor Wu Xiaoqiu, Dean of the National Academy of Financial Research, Renmin University of China, delivered a keynote speech at the opening ceremony.

Wu emphasized that the internationalization of the RMB is a core indicator of building a financially strong nation, which must be grounded in market orientation, rule of law, and institutional stability. He underscored that a sound legal framework and stable confidence are fundamental prerequisites, requiring systemic reforms to further consolidate the country's soft power.

On more technical aspects, Wu said the internationalization of the RMB must break away from traditional pathways and explore a "third way." Financial reforms should focus on three key areas: optimizing asset quality on the supply side, expanding long-term capital inflows on the funding side, and strengthening the rule of law on the institutional side. These efforts should be complemented by the opening of capital markets and advanced through coordinated national strategies.

The following is a summary of his speech, posted on July 31 by the International Monetary Institute of RUC’s WeChat blog.

吴晓求：积极探索人民币国际化新路径

Wu Xiaoqiu: Proactively Exploring New Pathways for RMB Internationalization

1. RMB Internationalization Must Be Anchored in Rule of Law and Market Principles

The internationalization of the RMB is an irreversible historical task, closely tied to the improvement of the rule of law, institutional stability, and policy continuity. Only through these measures can public expectations and market confidence be stabilized, ensuring the steady progress of RMB internationalization. A modernized nation must inherently be one governed by the rule of law. The emphasis on the rule of law is not only reflected in legal theory but also serves as the foundational logic for policy formulation and reform advancement. Meanwhile, the core pillar of economic reform lies in marketization. Without marketization, we would deviate from the fundamental direction of a socialist market economy with Chinese characteristics.

In the process of building China into a financial powerhouse, the most critical challenge lies in achieving financial internationalization. At its core, finance serves as a platform—one that China must not only construct but also populate with a diversified, predictable, and growth-oriented RMB-denominated asset pool. This asset pool must be primarily supplied by China itself. While China remains committed to opening up and will eventually allow foreign companies to list in China, over 95% of these assets must ultimately originate from domestic enterprises, particularly those with global competitiveness and technological innovation capabilities. Simultaneously, national soft power is essential, reflected in the trust of investors and the international community toward China. This trust forms the foundation for attracting foreign capital and advancing RMB internationalization. Just as parents prioritize their children's growth environment and investment choices, capital invariably flows to the safest and most promising destinations. Therefore, RMB internationalization represents both the central task of systemic reform and the toughest hard nut to crack.

The internationalization of the RMB serves as a pivotal indicator of China's financial opening-up and its journey toward becoming a financial powerhouse. Indeed, a nation can hardly claim true financial leadership if its sovereign currency lacks global influence. This is precisely why RMB internationalization must remain the top priority of financial reforms for the foreseeable future, with all efforts rigorously aligned toward this strategic objective. As Dai Xianglong, former Governor of the People's Bank of China, noted, the ambitious target of increasing international investors' share in China's markets from the current 4.5% to 10% over the next decade - while appearing incremental year by year - presents profound challenges. Achieving this goal fundamentally hinges on substantive progress in RMB internationalization; without it, such aspirations would remain unattainable. RMB internationalization stands as one of the defining features of China's financial liberalization and modernization. A nation's currency serves as the ultimate barometer of its financial strength - without meaningful global adoption of the yuan, claims of financial leadership would ring hollow.

The internationalization of the RMB encompasses not only investment markets but also multiple dimensions such as financing, payment, clearing, and reserve markets—all of which require synchronized advancement. Currently, the RMB has become the world’s third-largest international currency. As highlighted in the earlier report, the RMB Internationalization Index (RII) has reached 5.68%. This progress reflects the achievements of China’s reform and opening-up in recent years, as well as the results of its economic development and legal system improvements. However, for China, 5.68% is far from the ultimate goal. In my view, the target should be 20%. Perhaps in a decade, the euro will stand at 20%, the dollar at around 40%, with the remainder allocated to currencies like the British pound and Japanese yen. If by 2035—the milestone for China to become a moderately developed country—the RMB can achieve a 20% share, it would be a truly remarkable accomplishment. The historical starting point for realizing this goal must be market-oriented reform. Without marketization and liberalization, the genuine internationalization of the RMB will remain out of reach.

2. Challenges of RMB Liberalization and the Exploration of a Path with Chinese Characteristics

For the RMB to become an international currency, it must first achieve tradability. I place great emphasis on the RMB's tradability. I have also noted the RMB's weight in the IMF's Special Drawing Rights (SDR) basket, currently at 12.28%. This figure can serve as a medium-term benchmark for us - it reflects both the IMF's confidence in China's reforms and the RMB, as well as expectations for us to continue advancing financial reforms and accelerating RMB liberalization. Of course, we must carefully consider the path forward, as traditional approaches may not be suitable for China's circumstances.

China, as a major nation, may naturally develop a "third path" shaped by the influence of its institutional framework—one that differs from both traditional planned-economy approaches and the complete American mode. Much like the evolution of Chinese capital market, where we have already been exploring a distinct mode that diverges from both the Anglo-American and German systems (as examined in my dedicated work, 《中国资本市场：第三种模式》Chinese Capital Market: The Third Mode, the liberalization of the RMB may similarly forge its own unique path with Chinese characteristics. This potential "third way" for currency internationalization warrants serious deliberation and sustained exploration.

To be candid, we currently face significant challenges in bolstering public confidenceand maintaining policy resolve. Were we to rigidly adhere to conventional paths of capital account liberalization, it could precipitate severe impacts on China's foreign exchange reserves and national security—making such an approach unviable. Existing realities already demonstrate this tension: the substantial offshore asset outflow by high-net-worth individuals reveal persistent public worries in China in asset security and in trust of the institutions. This phenomenon underscores with renewed urgency the imperative of the development of rule of law. Fundamentally, advancing RMB liberalization requires first securing the confidence of 1.4 billion Chinese citizens in the nation's future. This collective faith constitutes the bedrock upon which all currency internationalization efforts must rest.

The liberalization of the RMB must follow a gradual and orderly process. In exploring viable pathways, market-oriented reforms remain an indispensable direction for progress. Currently, we observe the People's Bank of China advancing reforms to the RMB cross-border payment system in Hong Kong—an approach I consider particularly worthy of implementation. By establishing efficient cross-border payment networks coupled with optimized foreign trade structures, China can effectively promote the global adoption of the RMB. For instance, many Belt and Road Initiative partner countries are resource-rich economies. Maintaining appropriate trade deficits with these nations could facilitate the RMB's international circulation, thereby enhancing its proportion in trade settlement and payment domains.

Currently, the RMB still lacks market-based tradability in global financial markets, and significant obstacles remain to achieving the global purchase of RMB-denominated assets. China maintains a trade surplus of $360 billion with the United States. While this situation supports our foreign exchange reserves, it also constrains the RMB's "external circulation." Therefore, China must identify breakthrough points to facilitate the RMB's "going global.” Adjusting trade structures represents one potential path. Reducing the trade surplus with the United States could help promote RMB internationalization. However, this is constrained by U.S. policy, particularly export controls in the high-tech sector. Some U.S. actions are self-contradictory—for instance, after observing China's significant improvements in chip manufacturing capabilities, they suddenly lifted sales restrictions on certain products. Such back-and-forth behavior actually undermines the normalization of China-U.S. economic and trade relations and weakens the structural foundation necessary for RMB internationalization.

The internationalization of the RMB must be approached through systematic deliberation and strategic planning based on China's economic growth model and trade structure. Simultaneously, it is imperative to establish a stable and predictable asset pool. Currently, the offshore RMB market size stands at approximately 3 trillion yuan, which falls far short of meeting the requirements for RMB internationalization. Once RMB flows offshore, it cannot remain overseas indefinitely without stable trading mechanisms and asset backing. Some have proposed issuing stablecoins pegged to offshore RMB as legal tender, but the biggest problem lies in the imperfect pricing mechanism. Any stablecoin lacking a clear pricing system and stable underlying asset structure would struggle to fulfill genuine monetary functions. The RMB still faces foundational institutional gaps in this regard. Therefore, China must carefully consider how to develop a comprehensive product ecosystem and asset market centered around offshore RMB. This matters not only for advancing RMB internationalization but also represents a systemic restructuring of China's overall asset framework.

For years, China existed in an era of shortage economy, with our policy focus centered on supply-side reforms and production capacity expansion. Today, Chinese manufacturing accounts for over 30% of global share while domestic consumption makes up merely 18% worldwide, demonstrating a typical supply-demand imbalance and structural oversupply. Facing this new situation, China must shift from the traditional "supply-driven" approach to a "demand-expansion"-oriented development model. This requires us to reshape the national income distribution mechanism through macroeconomic policies, unlock the potential of domestic demand, and align economic structure with financial market development goals. Just as China previously emphasized goods trade while largely limiting its understanding of finance to its role as a "financing tool," such perception has become utterly inadequate for meeting the requirements of a new phase. The core function of modern finance should be to provide efficient asset allocation mechanisms for the entire society. Particularly against the backdrop of advancing RMB internationalization, China's financial system must not only serve the real economy but also become a crucial platform for asset allocation by both domestic and international investors.

3. Building Strategic Support and Recycle Mechanisms for RMB Internationalization

The RMB must not only “go global” but also be able to “return.” Currently, overseas investors account for only 4.5% of investments in China's capital market through channels such as QFII, RQFII, and the Shanghai-Shenzhen-Hong Kong Stock Connect—far below the level required to support RMB internationalization. For the RMB to truly internationalize, an effective returning mechanism must be established, and the core of this mechanism lies in the capital market. Therefore, RMB internationalization is inseparable from the significant development and opening of the capital market; the two must advance in tandem. The capital market must not only serve as the logistical backbone for the RMB's “going global” but also become an international financial center for RMB-denominated asset trading. This circulation mechanism must be formed; otherwise, the path to RMB internationalization will face obstacles. From the perspective of national strategy, the development of the capital market is no longer just a financial necessity but also a strategic pillar and prerequisite for RMB internationalization.

Against this backdrop, the 中国资本市场学会 China Capital Market Society was officially established in Shanghai yesterday [July 26, 2025], with Wu Qing [Chairman of the China Securities Regulatory Commission] appointed as its chairman upon approval by the Communist Party of China Central Committee, supported by nine vice chairpersons.

This demonstrates the central leadership’s high regard for capital market development and signals an acceleration in reforms and opening-up in China's capital markets. This is not only a deepening of the financial system's reform but also a critical strategic move at the national level.

The reform of the capital market primarily involves three key tasks:

First, reforms on the asset supply side.

While the asset structure and quality in China's capital markets have seen some improvement, they remain insufficient to support the goals of RMB internationalization and establishing an international financial center. To change this situation, we must restructure the composition of publicly-traded companies, enhance their quality and competitiveness, with particular emphasis on strengthening their intrinsic connection with technological innovation. This will facilitate more high-tech enterprises to enter the capital market, ultimately forming a diversified, transparent, resilient, and predictable asset pool. Over the next decade, the composition of China's top 10 companies by market capitalization is expected to undergo a transformation, with technology firms emerging as a major force in the capital market. Besides expanding the stock market, the development of the bond market is equally crucial. After the RMB "goes global," its recycling mechanism cannot rely primarily on the stock market, as global central banks and sovereign wealth funds tend to favor government bonds for asset allocation. Therefore, the government bond market must be expanded and strengthened. Currently, China's outstanding government bonds amount to less than 37 trillion yuan, primarily traded in China's interbank market for liquidity management purposes, lacking sufficient market liquidity. Considering the substantial scale of local governments' implicit debt, China should implement a bond swap program in which central government bonds replace local government debt. This approach would address debt pressures at lower costs and with higher credit quality, optimize the asset structure, and enhance the stability and credit foundation of the financial system.

Currently, China's central government bonds are primarily positioned as financing tools to cover fiscal deficits, with fiscal authorities often not supportive of their development as independent financial products. However, for a major creditworthy nation like China, developing the central government bond market is crucial for improving financial infrastructure and enhancing liquidity in the financial system. Central government bonds possess high liquidity and credit quality, representing one of the safest asset classes in capital markets. Although their yields have declined, they remain attractive. Therefore, China should promote the use of central government bond issuance to replace high-cost local government debt, thereby reducing overall financing costs. In the past, local government bonds carried interest rates as high as 4-10%. By using central government bonds with higher credit ratings to hedge against the credit risk of local debt through 10-year or 20-year bond swaps, China can not only boost market confidence but also help alleviate local debt pressures and unleash their potential for economic development.

Second, reforms on the investment side.

Where there are assets, there must be buyers. Historically, the funding sources have been dominated by retail investors, with low participation from institutional funds, resulting in insufficient market liquidity and suppressed price discovery mechanisms. Large funds such as insurance funds, pension funds, and social security funds are often constrained by regulatory indicators, including their respective performance evaluation mechanisms and solvency requirements, making it difficult for them to participate in capital markets effectively. This regulatory orientation, which "demonizes" risk, should be adjusted. In reality, capital markets are risk markets, but more importantly, they are risk-return markets. Currently, the National Financial Regulatory Administration has begun to relax restrictions—for example, allowing 20% of insurance companies' new funds to be allocated to equity assets—which is a positive signal. Simultaneously, pension funds and social security funds should further become the "ballast stones" of investment markets, exemplifying rational and long-term investment practices. A sound market requires not only high-quality assets but also sufficient liquidity and fundamental confidence. Therefore, a "bottom-line fund" mechanism—such as stabilization funds or market adjustment funds—should be established, with liquidity support provided by the central bank or sovereign funds when necessary.

On September 24, 2024, the central bank introduced a structural monetary policy tool that directly links with capital markets, marking a significant advancement in the institutional stability of RMB-denominated asset markets. With China's capital market now reaching 250 trillion yuan—including approximately 100 trillion yuan in equities and 150 trillion yuan in bonds (medium-caliber measurement)—its stability has become directly tied to the security of the national financial system.

Third is institutional reform.

Relying solely on adjustments to the asset side and demand side is insufficient. If the institutional framework itself is unfair, non-transparent, or plagued by issues such as fraudulent listings, even the highest-quality assets will struggle to gain market trust. Therefore, institutional reform must start with the legal system. From the Criminal Law to the Company Law and Securities Law, we must establish a “benefit-liability symmetry” punishment mechanism for illegal and non-compliant behaviors, moving beyond light punishments like "three-year sentences with three-year probation." Fraudulent listings and false disclosures must be thoroughly investigated, making violators "lose their family fortunes and serve their full prison terms," thereby creating genuine deterrent power. In addition, systemic reforms are also needed for the issuance system, the trading system, mergers and acquisitions restructuring, and the delisting mechanism. The focus of regulation should shift from primarily administrative control to primarily market-oriented and rule-of-law-based regulation, with particular emphasis on strengthening transparency oversight. The core logic of the reform is to rebuild market rules and a trust system, making China's capital market a place where global investors are willing to come, stay, and invest. This is the true institutional foundation for realizing the goals of RMB internationalization and building China into a financial powerhouse.

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