Capital Account Liberalization, Trade Finance, and RMB Internationalization

This paper develops a multi-country dynamic general equilibrium model to quantify how capital account liberalization influences the internationalization of the Chinese renminbi (RMB). The model features two major economies: the United States and China, and a continuum of small open economies. We incorporate two types of capital controls: price-based (e.g. transaction costs) and quantity-based (e.g. foreign ownership quotas) into household portfolio choices, along with frictions in trade finance that generate collateral demand. After calibration, we uncover three key findings. First, price-based controls exhibit nonlinearity effect: small reductions have little effect until a critical threshold is passed, after which RMB usage rises sharply—by about 20% in the baseline case, and up to around 27% with a larger bond market. Second, quantity-based controls also show threshold effects, with full liberalization raising RMB usage by 8–15%, depending on RMB bond market size. Third, expanding the supply of RMB-denominated bonds substantially boosts global adoption. Doubling bond supply increases RMB internationalization by roughly 30% points under tight capital controls, and around 55% when paired with full liberalization. These findings highlight the importance of jointly reducing cost frictions and expanding asset availability.