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Jan“Whether the Renminbi can acquire a stable share in the fierce internationalcurrency competition in the future depends on various factors such as economic development prospects, level of rule of law, degree of political stability and reliability of monetary policies in China.”
On October 1, 2016, the Renminbi was included in the SDR (Special Drawing Right) Basket as a new member. The formal inclusion of the Renminbi in the SDR Basket of International Monetary Foundation (IMF) as the fifth currency means that China and other four international currency issuers together constitute “permanent member states” of global financial governance in the future, similar to the structure of the five permanent members of the UN Security Council.
It marks the beginning of access of the Renminbi and that China starts to play a core role in global economic and financial governance. The rise of the Renminbi and the consequent rise of Chinese finance represent the second leap of China in the process of economic rise following the successful rise of trade over the past 30 years. However, compared with the rise of trade, the rise of the Renminbi is faced with more risks and challenges in the post-SDR era.
The challenge of opening up
The rise of the Renminbi as a main international currency means that China’s financial market must be opened to investors all over the world, and the opening of financial market contains greater risks than the opening of commodity market.
The financial system led by China still has a lot of loopholes: in respect of financial institutions, this is mainly manifested as large but not strong state-owned banks and small and scattered security investment institutions; in respect of governmental systems, manifestations include inadequate regulation of stock market, insufficient integration of government bond market and absence of continuity and publicity in monetary policies of the Central Bank from time to time.
It is because of these loopholes that China has been witnessing comparatively slow opening of the financial market and market-oriented reform of monetary policies. But in order for the Renminbi to rise as a major international currency, China’s financial market should be opener and international investors should be allowed to make more investments in China’s bond market and stock market, which pose higher requirements on the ability of the Chinese Government to manage the open financial market and safeguard financial security. Meanwhile, China should also lower its access threshold for transnational financial institutions, implying that Chinese financial institutions will face more fierce international competition.
The challenge of knowledge-oriented talents
The rise of China’s trade aims to a great extent at releasing the vitality of cheap labor forces in the country. Price advantage of labor had been one of the main advantages for China to participate in international division of labor for quite a long time and it is the vast “Chinese migrant workers” that support China to become the world’s largest goods trading country.
However, the rise of China’s finance cannot rely on these “migrant workers”, but requires a large number of high-end financial and technical talents. At present, China sees a serious shortage of excellent professionals in government financial regulators, investment banks, credit rating companies, sovereign wealth funds, etc. Additionally, as the Chinese Government becomes more involved in international financial diplomacy, various global and regional international financial institutions demand quite many financial diplomats from China. Although there are outstanding financial diplomats like Zhu Min and Jin Liqun, China has generally not been ready to supply these talents on a large scale.
The challenge of the institutional system
The Renminbi becoming an international currency means that China has to resort to more responsible monetary policies, which poses some requirements on China’s monetary policy-making system.
There is no clear legal guarantee for the independence of the Central Bank of China institutionally, so that its monetary policies are often disturbed by different factors, which will hinder the reliability of Chinese monetary policies and then the confidence of the international market in the Renminbi. Though People's Bank of China has established a good record in management of the Renminbi and preliminarily won the confidence of the international market, in order to become a worldwide central bank that issues a global international currency and keeps abreast with other major central banks such as the Federal Reserve, European Central Bank, Bank of Japan and Bank of England, People's Bank of China still have a long way to go, especially that it should strengthen the transparency and authority of its own policies.
In addition to China’s Central Bank systems, for the rise of an international currency, one of the most important internal institutional foundations is the legal system of the issuing country. China’s legal system is far insufficient to support a major global currency. Moreover, commercial investment in the Renminbi on the market is also political investment in that China will maintain long-term stability, and China has to show its ability to maintain continuous stability and vitality through a stronger institutional reform.
The challenge of currency competition
The Renminbi, as an emerging currency that rises on the international currency arena, will surely have an impact on the traditional international currency pattern dominant by US dollar, the euro, the pound and Japanese yen and thus cause other currency issuing countries to stay highly alert.
For US dollar, in consideration of China’s huge economic scale and increasing geopolitical influence, the effect of the rise of the Renminbi will surpass that of the rise of Japanese yen in those days and might threaten the hegemony of US dollar in all respects. It is worthwhile ruminating over the attitude of the US toward international development of the Renminbi.
Although the US Government does not oppose the internalization of the Renminbi and even supports it in public as the Renminbi internationalization means gradual opening of Chinese capital market, which conforms to American ideas, relative to active and enthusiastic attitude of some Asian and European countries, the US Government never took any practical actions to support the international use of the Renminbi within quite a long period in the past, which is different from the fact that the US actively encouraged and even forced the internationalization of the yen. In other words, the US expects to see an increasingly open Chinese capital market, but is not willing to see the international currency power China obtains from the rise of the Renminbi.
Meanwhile, Japan, a neighbor of China, is not pleased to see the expansion of China’s currency strength in Asian-Pacific region. Owing to geographical adjacencybetween China and Japan, competition with Japanese yen resulting from the rise of the Renminbi will inevitably be highlighted in East Asia. If the Renminbi attempts to catch up from behind and become the core currency in Asia, it should first beat the yen.
In Europe, Germany, France and other countries might even “hate the appearance of the rival of the euro” in order to safeguard the euro’s international standing of the world’s second largest common currency, and will not play a key role in supporting the rise of the Renminbi in the future. In fact, the international share of the euro is most likely to be eroded by the rise of the Renminbi, and transfer of share right advocated by IMF and World Bank against China is mainly proposed by European countries. In brief, the Renminbi rises in the environment with high competition pressures and currency usage share in the international market is somewhat zero-sum with one falling andthe other rising, so how to deal with the competition with existing international currencies is a major international challenge for the rise of the Renminbi.
The challenge of geopolitics
The rise of the Renminbi is not only an economic event, but also a political one. It will bring about a series of geopolitical chain reactions, as evidenced by the diplomatic shock caused by China’s proposition of establishing the Asian Infrastructure Investment Bank.
On the one hand, the rise of the Renminbi requires political support from other countries. China is therefore required to carry out more positive currency diplomacy and is establishing a partnership network on a global scale, attempting to resolve the geopolitical challenge posed by American alliance system. Diplomatic behaviors of China for the purpose of getting political support for the Renminbi might reshape the existing geopolitical pattern.
On the other hand, international expansion of the Renminbi, especially in the Asian-Pacific Region, easily makes other countries feel tense, and some countries worry that China will use its increasingly raised currency status as a power tool. Due to complex geopolitical contradictions, quite a few countries in East Asia stillhave a terror of threats from China, which include not only militaryand political threats, but also financial and economic ones. Theoretically, the status of international currency can be used as a national power tool to carry out compulsory behaviors, so as to pursue interests and objectives in other respects. Therefore, China should attach great importance to geopolitical consequences of the rise of the Renminbi, get more political support for the rise of the Renminbi through positive and promising currency diplomacy; besides, it should also remove the terror of quite a few countries about the rise of the Renminbi through “charm offensive”. This is the main challenge of geopolitics in the face of China in the course of the rise of the Renminbi.
In short, inclusion of the Renminbi in SDR will not necessarily guarantee successful rise of the Renminbi; instead, it is an important move in the “long march” of the Renminbi internationalization. Whether the Renminbi can obtain its own stable share in fierce international currency competition in the future depends also on various factors in China, such as economic development prospects, level of rule of law, degree of political stability and reliability of monetary policies.
Source: The article was originally contained in Issue 1531 of Social Sciences Weekly.
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