Chinese method of currency internationalization08.09.2017
For many years, economists and political scientists have been researching the subject of monetary power in international relations (Kirshner 1995; Andrews 2006; Grosse 2009). The consensus it that the internationalization of the currency is an important aspect of monetary power, because it creates many potential benefits for a given country (or for a group of countries linked by a monetary union.)
Chinese method of currency internationalization
Introduction[ref.]This paper is based on research conducted under the grant of the National Science Centre, Poland no. 2015/17/B/HS5/00486. It is revised version of the article published in: “Stosunki Międzynarodowe – International Relations”, no. 1/2017. [/ref.]
The benefits include an increased possibility of incurring public debt and shifting the cost of possible macroeconomic adjustments to external actors. One should also consider the commercial and investment-related benefits of lowering transaction costs for domestic enterprises, and also the benefits of promoting the products and services offered by the domestic economy. According to Albert Hirschman (1980), smaller states that have to rely on foreign currency in their trade exchange are automatically at a disadvantage in economic and political relations with countries that have international currencies. The access of smaller states to foreign currency – for example during an international financial crisis – can become an instrument of exerting geopolitical pressure.
The authorities of the People’s Republic of China (PRC) are well-aware of all these benefits and therefore they seek to gradually internationalize the Chinese currency. They know, for example, that all hegemonic global (and even regional) powers in history had currencies that were used in international trade (Jiang 2014, pp. 177-178). However, the Chinese decision-makers are also aware of the potential costs and risks involved, and for this reason the internationalization of the yuan (renminbi, RMB) is being implemented gradually and under strict control of the state authorities.
The literature on the subject of international currency distinguishes two types of monetary power (Cohen 2008). The first is the ability to exert political influence on external actors, for example to maximize the economic or geopolitical benefits of a given country which is in possession of such a currency. The second is the possibility of increasing the country’s autonomy in international relations. By analysing the process of internationalization of the yuan, I will endeavour to answer the question whether China’s power in these two spheres is indeed increasing. Does the monetary policy of promoting the RMB in foreign relations increase the power of China on the regional and global arena, and does it lead to the weakening of other powers, primarily that of the United States, whose currency is currently globally dominant? The latter question is all the more compelling because the two superpowers, although linked by strong economic connections, are definitely rivals rather than allies in geopolitical terms.
The juxtaposition between the desire to promote export and maintain state control over the flow of capital in order to stabilize economic conditions on one hand and the push towards liberalisation of capital account and domestic financial markets in order to increase the internationalization of the yuan on the other hand – is often described and analysed in the literature (McKinnon, Schnabl 2014). Researchers try to ascertain whether the Chinese authorities pursue a consistent liberalization policy in order to increase the internationalization of the RMB, or whether there is proof of a U-turn: whether in the recent period they have in fact been consciously abandoning this policy. In my article, I would like to argue that the authorities are in fact trying to reconcile these two approaches and are thus in fact pursuing a uniquely Chinese method of currency internationalization. This approach to currency internationalization has precedents in previous decisions of the Chinese authorities who applied their own unique approach to privatisation, decided to selectively open up to capital investment by overseas institutions, and embraced a markedly different approach to globalization from the neo-liberal Western market rules. In such scenario of “Chinese method”, the internationalization of the currency would not require the abolition of capital controls and foregoing the strict supervision of the financial markets and exchange rates.
Within this paradigm, I would also like to consider whether in the years 2015-2016 there has occurred a meaningful change in China’s exchange rate policy and whether the capital controls have been tightened. Should the recent changes be treated as a withdrawal from the earlier policy of internationalization of the yuan, or are they in fact a consequence of its ongoing internationalization? Or finally, are they perhaps linked to the close economic ties with the US (and the dollar) and thus should be treated as a result of increase in Chinese investments on global markets? In this case, the change should be interpreted rather as a strengthening of the Chinese method of currency internationalization, than as a retreat from the internationalization policy.