Is the Chinese Renminbi the Next Global Reserve Currency?

Second, if we do interpret these steps as part of a coherent policy aimed at internationalization, then that's a policy that exists now, and it's perfectly reasonable to compare it with other policies existing now to see if it's compatible. As Patrick points out, it's not: "China's entire relationship with the rest of the world economy would have to change, in ways the Chinese have strongly resisted so far." Of course, as Damien points out, China's policies could change and we can't simply assume that what was true in the past will be true in the future. Ironically, however, the argument that people make when they predict internationalization of the RMB seems to be based precisely on such a straight-line extrapolation from the past into the future: it's more internationalized than it used to be, and so we can expect it to continue on in the same direction.

I agree with Damien that what happens in China's domestic economy is important, but I don't think it's determinative on the question of whether the RMB will achieve international reserve currency status. After all, as Michael Pettis points out, "[t]he Spanish (later Mexican) silver dollar, to take the opposite example, was one of the world's dominant currencies (or tracking currencies) for hundreds of years up to the late 19th century, and yet it would be hard to argue that either Spain after the 16th Century or Mexico at any time was one of the world's dominant economies." And as Patrick points out, the Japanese yen had a very limited international role even when the Japanese economy was going gangbusters.

Finally, of course, there's the question of whether and to whom this should matter. It's by no means clear that having your currency become an international reserve currency is a good thing. Michael Pettis makes the skeptical case here, arguing that China's policymakers understand these costs, too, and have shown no sign of being willing to pay them.

Barry Naughton:

Brazil and China have signed a currency swap agreement that permits them to exchange up to $30 billion of their own currencies with the other. It gives them more flexibility to deal with emergency situations. $30 billion is a lot of money, except when it isn't. For comparison, $30 billion is the amount transacted on world foreign exchange markets in ten and a half minutes. That's the average, over 365 days a year, 24 hours a day, but of course at peak moments, these markets easily turn over hundreds of billions of dollars each minute.

In current foreign exchange transactions, US dollars are involved in over 80 percent of transactions. The RMB? Less than one percent. So is the RMB replacing the U.S. dollar? Nope. Patrick Chovanec has no trouble whatsoever knocking over the straw man, and takes us deeper, explaining some of the prerequisites of the RMB becoming a global currency. Why, then, does such a question matter? It matters because it injects something of great importance to the Chinese domestic discussion. Will China become a global power, perhaps even the preeminent global economic power? Yes, that can happen. But it will happen only when China really builds further on its strengths: when China becomes more open; when China is perceived as a place where global actors can get a fair shake; when China is a place where rule of law and fair regulatory systems mean that people all over the world are willing to hold their money in RMB-denominated assets. If and only if that happens, Chinese money will become global money, and China will become a true global economic power.

Patrick Chovanec:

Barry Naughton raises a very important point: the "holy grail" of building the Renminbi into a global reserve currency may have greater relevance to China's domestic political debate than to the global economy. I think it's fair to say that China's central bank (the People's Bank of China, or PBOC) is largely staffed by Western-educated economists who would like China to move in the direction of market reform: deregulating interest rates, opening the capital account, letting the exchange rate float, etc. If they took these to the State Council, and tried to sell them as market reforms per se, they would likely face stiff opposition. It is a far more clever strategy, in my view, to go to the State Council and tell them China's goal must be to make the Reminbi into the top global reserve currency. It appeals to national pride and sounds like it will put China in position to call the shots in the global economy.

There is a great deal of obsession, bordering on conspiracy theory, in China regarding the so-called "exorbitant privilege" that the dollar's reserve currency status gives the United States to manipulate the global economy to its advantage. I think a lot of that is nonsense, and I doubt the PBOC buys into it either. But selling the vision of an all-powerful Renminbi gives them; the mandate to pursue steps to that goal, which so happens to include market reforms such a deregulating interest rates, opening the capital account, and letting the exchange rate float. How far the PBOC can push these reforms before they get push-back from more control-minded politicians, who never realized this is what they were signing on to, time will tell, but the reformers are going to take the ball and run with it as far as they can. Cynical and machiavellian as it may seem, this is my impression how and why Renminbi "internationalization" became part of the national agenda.

Sometimes countries do the wrong thing for the right reason. Sometimes they do the right thing for the wrong reason. Opening up China's economy in order to make the Renminbi "top dog" among currencies is a good example of the latter.

A version of this post appears at ChinaFile, an Atlantic partner site.

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ChinaFile is an online magazine published by Asia Society's Center on U.S.-China Relations. 

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