Abstract
In response to the Great Recession since 2007 that exposed the weaknesses of a dollar-centered international currency system, China started to take measures to internationalize its currency, the renminbi. Against the backdrop of China’s fast economic growth, renminbi internationalization naturally caught the attention of the financial community and academic circles. This chapter addresses itself to three aspects of renminbi internationalization—why China wants to internationalize its currency, how China goes about doing it, and how far renminbi internationalization can go. The chapter concludes that the success of renminbi internationalization hinges upon whether China can effectively reform its financial sector, a “high ground” China’s politico-economic system is based upon.
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Notes
- 1.
The speech, in both Chinese and English versions, was available on the website of the PBoC . But it has been removed for unknown reasons. I will provide some speculations on this later in this chapter.
- 2.
For an excellent survey on Chinese intellectuals’ responses to these two speeches as well as their perceptions of the US dollar’s role in the 2007–09 financial crisis, see Chin, Gregory, and Wang Yong, “Debating the International Currency System: What’s in a Speech?” China Security 6:1, 2010, pp. 3–20.
- 3.
A 2 x 3 categorization of currency roles serves as the standard analytical framework for the literature on international monetary relations. The hexapartite categorization refers to the three functions of any currency (medium of exchange, unit of account, and store of value at two levels (market and government). The market-level analysis addresses the foreign exchange trading/trade settlement, trade invoicing, and investment in financial markets in the three currency functions in seriatim. The government-level analysis is directed to intervention, anchor, and reserve in the three currency functions in seriatim.
- 4.
On the issue of renminbi internationalization, and other related issues like capital account liberalization or a more flexible renminbi exchange rate, the PBoC serves as a strong bureaucratic advocate and has high stake in these policies. See Freeman III, Charles W., and Wen Jin Yuan, “China’s Exchange Rate Politics,” A Report of the CSIS Freeman Chair in China Studies, June 2011, Washington, D.C.: Center for Strategic and International Studies.)
- 5.
Kroeber , Arthur, “China’s Global Currency: Lever for Financial Reform,” Monograph Series Number 3, Brookings-Tsinghua Center for Public Policy, February 2013, pp. 19–25. Thorton, Alistair, “Anemic Ascent: Why China’s Currency Is Far from Going Global,” Lowy Institute, August 2012.
- 6.
Quoted from Yu, Yongding, “How Far Can Renminbi Internationalization Go?” in Eichengreen , Barry, and Masahiro Kawai, eds., Renminbi Internationalization: Achievements, Prospects, and Challenges (Jointly published by Asian Development Bank Institute and Brookings Institution, 2015), p. 60.
- 7.
Chin, Gregory, and Wang Yong, “Debating the International Currency System: What’s in a Speech?” China Security 6:1, 2010, pp. 3–20.
- 8.
The term “sinews of war” is borrowed from the book title of John Brewer’s class study on the impact of finance on British power. Brewer, John, The Sinews of War: War, Money and the English State, 1688–1783 (Cambridge, MA: Harvard University Press, 1990 reprint). Representative of this school of thought that China’s renminbi internationalization is an obvious attempt to challenge the American hegemony is Jonathan Kirshner. See Kirshner, Jonathan, “Dollar Primacy and American Power: What’s at Stake?,” Review of International Political Economy, 15:3, August 2008, pp. 418–438, and “After the (Relative) Fall: Dollar Diminution and the Consequences for American Power,” in Helleiner, Eric, and Jonathan Kirshner, eds., The Future of the Dollar (Ithaca, NY: Cornell University Press, 2009), pp. 191–215.
- 9.
Chang, Abby, master thesis, unpublished manuscript, Graduate Institute of International and Strategic Studies, Tamkang University, New Taipei City, Taiwan, 2018.
- 10.
Mercator Institute for China Studies, China Monitor, No. 18, October 2014. http://www.merics.org/fileadmin/user_upload/downloads/China-Monitor/China_Monitor_No_18_en.pdf
- 11.
IMF , Currency Composition of Official Foreign Exchange Reserves (COFER), Q2, 2017.
- 12.
For data in Chinese, see “Report on Renminbi Internationalization,” People’s Bank of China, June 2015; “2015 Annual Report on the Internationalization of Renminbi,” Institute of International Currencies, Chinese People’s University, 2015. The latter puts renminbi internationalization in the context of “One Belt , One Road,” even though it was reported that the AIIB , the China-initiated development bank for Asia’s infrastructure building, will lend in U.S. dollars only. See “China’s New Asia Development Bank Will Lend in U.S. Dollars,” Financial Times, January 17, 2016. http://www.ft.com/cms/s/0/762ce968-bcee-11e5-a8c6-deeeb63d6d4b.html#axzz49YH7JggA. The Brookings Institution and Asian Development Bank Institute jointly published an anthology that gives in-depth analysis on each of the internationalization measures. See Eichengreen , Barry, and Masahiro Hawai, eds., Renminbi Internationalization: Achievements, Prospects, and Challenges (Washington, D.C.: Brookings Institution, 2015). Websites of Bank for International Settlements, IMF , World Bank all information. Banks like HSBC, Standard Chartered, Deutsche Bank, and some others all have publications on the topic.
- 13.
Cohen, Benjamin, J., Currency Power: Understanding Monetary Rivalry (Princeton, NJ: Princeton University Press, 2015), pp. 135–159.
- 14.
The only research I could find in this regard is McCauley, Robert N., “Internationalizing the Renminbi and China’s Financial Development Model,” Council on Foreign Relations, November 2011.
- 15.
In summarizing the findings of research based on historical-comparative analysis, I relied mostly on the following references: Cohen, Benjamin, note 11, esp. chapters 6 through 9; Eichengreen , Barry, Globalizing Capital, 2nd Ed. (Princeton, NJ: Princeton University Press, 2008) and Exorbitant Privilege, Reprint Ed. (New York: Oxford University Press, 2012); Frankel, Jeffrey, “Historical Precedents for Internationalization of the RMB,” Council on Foreign Relations, 2011. Since these analyses have some overlapping in their historical accounts, I will not mention specific references in the summary.
- 16.
North , Douglass C., and Barry R. Weingast, “Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England,” The Journal of Economic History 49:4, December 1989, 803–832. North’s works are numerous. Since most students of economic development should be familiar with at least some of these works, I will list a couple of them in next footnote
- 17.
For example, North , Douglass C., and Robert Paul Thomas, The Rise of the Western World (New York: Cambridge University Press, 1976); North , Douglass C., The Economic Growth of the United States: 1790–1860 (New York: W. W. Norton, 1966); Sussman, Nathan, and Yishay Yafeh “Institutions, Reforms, and Country Risk: Lessons from Japanese Government Debt in the Meiji Era,” Journal of Economic History 60:2, June 2000, pp. 442–467; Montinola, Gabriella, Yingyi Qian, and Barry R. Weingast, “Federalism, Chinese Style: The Political Basis for Economic Success in China,” World Politics 48, October 1995, pp. 50–81; Woodruff, David M., Money Unmade: Barter and the Fate of Russian Capitalism (Ithaca, NY: Cornell University Press, 2000); Acemoglu, Daron, and James A. Robinson, Why Nations Fail (New York: Crown Business Publishing Co., 2012).
- 18.
Shih , Victor C., Factions and Finance in China: Elite Conflict and Inflation (New York: Cambridge University Press, 2008).
- 19.
Tan , ZhiBo and Zhou Li-an, “Officials’ Tenure, Credit Cycles and Investment Cycles,” Financial Research, No.6, 2015, pp. 80–93.
- 20.
Li, Yinan , “China’s Political Business Cycle,” Institutions and Governance Program, University of California Berkeley, 2012.
- 21.
In the case of China, see Elliott, Douglas J., and Kai Yan, “The Chinese Financial System,” Brooking Institution, 2013.
- 22.
Pettis , Michael, Avoiding the Fall: China’s Economic Restructuring (Washington, D.C.: Carnegie Endowment for International Peace, 2013).
- 23.
Pei , Minxin, China’s Trapped Transition: The Limits of Developmental Autocracy (Cambridge, MA: Harvard University Press, 2007.
- 24.
Figures vary. This figure is based on Financial Times, which is quite close to Bank for International Settlements figure.
- 25.
Naughton , Barry, “Supply-side Structural Reform: Policy Makers Look for a Way out,” China Leadership Monitor, Issue 49, Winter 2016, March 1, http://www.hoover.org/research/supply-side-structural-reform-policy-makers-look-way-out.
- 26.
Authoritative Person, “The Big Trend in a New Season,” (開局首季問大勢), Front Page, People’s Daily, May 9, 2016.
- 27.
Krugman, Paul, “China’s Naked Emperors,” New York Times, July 31, 2015. http://www.nytimes.com/2015/07/31/opinion/paul-krugman-chinas-naked-emperors.html?_r=0
- 28.
“China’s Currency Test: Can it Get Capital Controls Right?,” Knowledge@Walton, February 17, 2016, http://knowledge.wharton.upenn.edu/article/chinas-currency-test-can-it-get-capital-controls-right/.
- 29.
Naughton , “Supply-Side Structural Reform,” Op.cit., p. 3.
- 30.
Pei , Minxin, “Two Ways to Break Beijing’s Political Stalemate,” Nikkei Asian Review, May 6. http://asia.nikkei.com/Politics-Economy/Policy-Politics/Minxin-Pei-Two-ways-to-break-Beijing-s-political-stalemate.
- 31.
Cohen, Currency Power, pp. 214–236.
- 32.
Zhou Xiaochuan , interview with Caijing, October 9, 2017. http://finance.sina.com.cn/china/gncj/2017-10-09/doc-ifymrqmq2358476.shtml
- 33.
Hirschman, Albert O., Exit, Voice, and Loyalty (Cambridge, MA: Harvard University Press, 1970.)
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Ho, Sy. (2018). Understanding the Internationalization of the Renminbi. In: Leng, TK., Aoyama, R. (eds) Decoding the Rise of China. Palgrave Macmillan, Singapore. https://doi.org/10.1007/978-981-10-8288-7_7
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