Is the Chinese Renminbi the Next Global Reserve Currency?

Again, I do not know the answers at all. But I do think that any discussion of "will the RMB or will it not" needs to be centered around what people ultimately think about China's domestic economic prospects and what it will do to its financial markets. Focusing on these near-term baby steps potentially risks missing the forest for the trees, in my view.

Donald Clarke:

I think Patrick puts the skeptical case very well and it's a convincing one to me. Damien raises some good questions, but I think those questions have answers - or at least answers that are the best we can do, given the inevitable uncertainties of the future.

First, I'm not sure that we really do all know that China plays the long, long game. Take the question of economic rebalancing. Prominent officials have been talking for years about the urgent need to shift away from an investment-led growth model, yet China has not managed to do so. Why? Short-term pain is the best explanation. I think it's hard to demonstrate that Chinese officials are markedly better than their counterparts in other countries at making and implementing policies that will pay off over the long term. Thus, it's not clear to me that we should interpret each of these steps as part of a larger plan, designed to reach fruition decades from now, to achieve reserve currency status for the RMB.

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.

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

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