Financial Risk Identification and Control in the Openness Context: A System Dynamics Approach to Renminbi Internationalization

Abstract

In an attempt to control a series of domestic and foreign financial risks amid the internationalization of Renminbi (RMB), China’s currency, this article categorizes these risks into five types: excessive volatility risk of exchange rate, balance of payments risks, policy risks, crisis contagion risks, and excessive volatility risk of financial asset prices. By employing system dynamics simulation models and sensitivity analysis, this paper examines strategies for financial risk control. Results indicate that the impacts of crisis contagion risk and balance of payments risk are the most significant, and that financial risks are extremely sensitive in such aspects as the degree of capital openness, exchange rate volatility, and foreign trade dependency. The paper suggests adopting strategies like gradually opening China’s capital accounts, maintaining its exchange rate fluctuations within a reasonable range, stabilizing its dependency on foreign trade, and ensuring that its growth rate of M2 matches that of the nominal GDP – a combined effort to control the complicated financial risks arising from various sources.