The Renminbi: The Political Economy of a Currency
At Foreign Policy, Arthur Kroeber embarks on an epic overview of political issues surrounding the yuan, from controversial exchange rates to its questionable future as an international reserve currency. He dismisses the popular notion of China’s powerful role as America’s banker, and argues that the US need not fear the RMB.
The above analysis suggests two broad conclusions of relevance to U.S. policymakers. First, China’s exchange-rate policy is deeply linked to long-term development goals, and there is very little that the United States, or any other outside actor, can do to influence this policy. Second, the same suspicion of market forces that leads Beijing to pursue an export-led growth policy that generates large foreign reserve holdings also means that Beijing is unlikely to be willing to permit the financial market opening required to make the RMB a serious rival to the dollar as an international reserve currency. A related observation is that an average annual appreciation of the RMB against the dollar of about 5 percent now seems to be firmly embedded in Chinese policy. An appreciation of this magnitude enables China to maintain export competitiveness while achieving two other objectives: keeping domestic consumer-price inflation under control and gradually forcing an upgrade of China’s industrial structure.
Generally speaking, these trends are quite benign from a U.S. perspective. In substantive terms, there is little to be gained from high-profile pressure on China to accelerate the pace of RMB appreciation, because the United States possesses no leverage that can be plausibly brought to bear. Although the persistent undervaluation of the RMB will present increasing difficulties for American manufacturers of high-end equipment, as Chinese manufacturers gradually become more competitive in these sectors, the steady appreciation of the currency will increase the purchasing power of the average Chinese consumer and the total size of the Chinese consumer market. U.S. policy should therefore de-emphasize the exchange rate, where the potential for success is limited, and instead focus on keeping the pressure on China to maintain and expand market access for American firms in the domestic Chinese market — which in principle is provided for under the terms of China’s accession to the World Trade Organization.
This soothing tone is echoed in two other recent pieces at Foreign Policy and a New York Times op-ed by vice president Joe Biden (via CDT).
While arguing that a lot must change before the yuan can become a viable international reserve currency, Kroeber acknowledges recent steps towards its internationalisation. The current edition of The Economist notes London’s subsequent rush to embrace the redback:
WHEN the pound sterling reigned as the world’s dominant international currency, the City of London claimed the lion’s share of the market for sterling bills of exchange, with which foreigners financed their cross-border trade and investment. After sterling was toppled by the greenback, London then invented the “euro-dollar” market, which allowed people to deposit dollars and borrow them in an offshore market beyond the reach of America’s capital controls. London’s banks are now readying themselves to profit from the growing offshore market in China’s currency, the yuan.
According to the Financial Times, Wang Qishan, a Chinese vice-premier, was due to give China’s official blessing to London’s efforts during a visit to Britain this week. The offshore business is still in its infancy, but is growing fast. China now allows yuan to circulate freely outside its borders, but not across them. Foreigners must earn yuan by selling goods to China or, in some cases, direct stakes in their companies. They can deposit these yuan in banks offshore, or invest them in offshore bonds, but they cannot invest them on the mainland without the government’s permission ….
London can boast great depth of experience in foreign exchange and a convenient time zone. Now all it needs is a deep pool of yuan deposits, a generous swap line with the PBOC, an enticing menu of yuan securities, and a catchy, local name with which to market them. Egg-fried bonds, anyone?