Internationalizing the RMB: Great Risks, and Great Rejuvenation

Expanding RMB trade settlement to countries with other currencies is Beijing’s way to smooth trade, and an approach that plays a part in the gradual internationalization of the RMB, CNTV wrote on December 7. The latest two countries joining the settlement network are Australia and Canada, increasing its number to nine foreign currencies traded directly against the RMB. To be paid in US dollars spells losses for Chinese exporters, CNTV quotes a CEO who adds the wish that [w]e hope the RMB can become a freely convertible currency soon, so that banks overseas can have enough RMB to handle RMB trade.

Settlement agreements with Singapore and South Korea are reportedly being negotiated.

A paper by Chen Fengying (陈凤英), the Institute of World Economic Studies’ director (China Institute of Contemporary International Relations (中国现代国际关系研究院 / 世界经济研究所), for discussion at a forum of international (political) economists held at the Chinese Academy of Social Sciences’ Institute of World Economics and Politics (中国社会科学院世界经济与政治研究所) on November 5, explores the RMB’s internationalization as China’s strategic choice1):

The global financial crisis has caused people to reflect on the malpractice2) within the international currency system with the US dollar at its core. People who understand the issue have started a search for a reserve currency which would be suitable for decoupled sovereign countries, and which would maintain stability in the long run. The G-20 summit in Cannes, France, will discuss reform of the global currency system.3) Given these times of financial crisis, the reform of the international currency system is imperative. The US dollar’s hegemony facing an unprecedented challenge is a major opportunity at this critical point in time, and also provides choices in the great rejuvenation of the Chinese nation.

金融危机引发人们对以美元为核心的国际货币体系诸多弊端的深刻反思,有识之士开始探寻一种与主权国家脱钩、长期保值稳定的国际储备货币,2011年在法国戛纳举行的二十国集团(G20)峰会将讨论国际货币体系改革。后危机时代,国际货币体系改革势在必行,美元霸权受到空前挑战,人民币国际化适逢重大契机,亦是中华民族伟大复兴的战略选择。

In three short chapters, Chen states that

  1. there is good progress in the RMB’s internationalization (basically as described by CNTV above), which started only little more than a year ago,
  2. the RMB’s internationalization will be a long process with huge risks, and that
  3. strategic choices would be crucial.

By 2010, more than 67,000 companies were involved in the expanding RMB settlement pilot project, earning 500 billion Yuan RMB within the project, i. e. two per cent of China’s total foreign trade. Chen quotes Jin Zhongxia, the Central Bank’s (the People’s Bank of China) deputy director-general of the international department, as predicting that the amount settled in RMB would be ten-fold (apparently by the end of 2011), and therefore account  to 20 per cent of China’s foreign trade.

Another step described is the issuance of RMB bonds abroad, to be bought by central bank and certain clearance agencies. Assets held by foreign investors would indirectly stimulate global RMB circulation.

I’m not going into the details of the cautious steps advised under chapter 2, but the goals stated there might be noteworthy. By 2020, Chen writes, the RMB should become the leading regional currency, and around 2030, the goal of comprehensive internationalization should be achieved, to finally make the RMB a global reserve currency.

Coordination with the international currency system reform would be advisable, notes Chen.

Chapter 3, among others, deals with the importance of challenging the dollar (whose role is an American core national interest), without risking the depreciation of the dollar (apparently both for the role exchange rates play in a country’s competitiveness, and for the value of the American bonds held by the Chinese central bank). The U.S., warns Chen, would do anything to preserve the dollar’s, and therefore America’s, economic hegemony. (最后必须指出,美元霸权地位是美国国家利益的核心,也是维护美国经济霸权的支柱。挑战美元即是挑战美国霸权,为维护美元霸权地位,美国会不惜做任何事情。日元的惜日与欧元的今天即是前车之鉴,教训必须切记,有谋才能取胜。)

I’d like to immerse myself in this topic, but time is scarce and will remain scarce, until Christmas. Just to round the picture out a bit, Michael Pettis doesn’t believe in a leading role for the RMB as a reserve currency, citing the Asian Development Bank as predicting that by 2035, the RMB may comprise about 3 to 12 per cent of international reserves.

Pettis didn’t probably take the gradual internationalization approach into account – he wrote his post in October 2010 -, but believes that there are basically two ways.

First, China can run a current account deficit.  Second, foreign capital inflows into China can be matched by Chinese capital outflows.  The second way does not result in a net foreign accumulation of Chinese assets, but it allows foreigners to hold renminbi bonds and other assets to the same extent that Chinese hold assets abroad (above the current account surplus, of course).

Explorations there. Also, Pettis believes that the US economy could only profit from alternative global reserve currencies – if only they’d emerge.

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Notes

1) published online on November 23.
2) another possible translation would be abuse or abusive (弊端, bì duān).
3) The Cannes G-20 summit was held from November 3 to 4, and its French presidency was apparently *cough* sponsored by a number of famous brands.

G20 presidency sponsors

G20 presidency sponsors

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Related

» International Reserve Currency, Wikipedia, as of Dec 12

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