The low-key renminbi is vying for the global pattern: Isn't it against the dollar to be the ultimate card?

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China's ambition is not to counter the dollar, but to eventually replace it in the international monetary system, but to provide an alternative currency. China develops its economy and plans for transformation under the US dollar system, but in many cases, it is also interested in following the existing but improved multilateral financial organizations.

"(China is still a representative of immature creditors)"

Countries like China that have excesses in exports and foreign direct investment can offset this surplus by investing abroad (through financial and direct investment). This was the case in the UK in the 19th century, where private companies and the British government invested in pounds around the world. The same is true in Germany today, with large lending to other countries in the Eurozone (especially in southern Europe).

Ronald McKinnon and Gunther Schnabl refer to Britain and Germany as “mature” creditors. This is defined because the two countries use their own currency to lend money. Mature creditor countries use the outflow of capital and foreign claims to be denominated in their own currency. Debt must be repaid in this currency, and creditors can avoid exchange rate risk.

Although China has a huge trade surplus, the exchange of RMB is restricted, which means that China’s use of the renminbi is also limited in international lending, and external claims are denominated in US dollars. Over the years, China must establish a highly liquid US dollar debt (a dollar-denominated currency or financial asset) to offset the trade surplus. In recent years, it has gradually implemented foreign direct investment with low liquidity (foreign investment including Plants and other physical infrastructure also include government-sponsored assistance programs and investments under government control). This form of lending is a representative feature of immature creditors, and China is an example.

This mode of lending reflects the inherent and self-imposed restrictions of the renminbi.

The restriction of capital account and the risk of exchange rate asymmetry mean that the central bank can only invest in foreign financial assets, but it has to risk accumulating foreign dollar debt and accumulating US public debt. Even if Chinese commercial banks are free to invest abroad, they still have to face the risk of foreign exchange asymmetry between RMB deposits and foreign dollar and other foreign exchange claims.

Immature currencies generate a lot of costs, while mature currencies have enormous benefits.

First, many countries with immature currencies, especially developing countries, are often subject to this “original sin” and cannot borrow in their own currency. They can borrow in strong currencies, such as the US dollar, so that a willing creditor does not have both exchange rate risk and default risk (often requiring a higher premium for this). Unlike a fully developed international mature currency that can borrow in its own currency, the immature currency forms an asymmetry between the income generated by the domestic currency and the debt denominated in the international currency, just as there is a renminbi income generated by a domestic project. It is raised internationally in dollars. Once the domestic currency depreciates due to the rising risk of default, it will put more pressure on the financing costs of the immature currency countries.

Second, it is difficult for immature monetary countries to diversify domestic credit risk without risking foreign exchange. This is more of a problem for pensions and insurance companies with long-term liabilities. In the case of mature creditor countries, foreign companies and sovereign entities may issue securities denominated in the creditor’s national currency. This helps financial players in mature creditor countries to spread risk. For example, an American pension fund can decide to invest in dollar-denominated bonds issued by a large manufacturing company in France. In this case, investors can enter the foreign market without risking exchange rates, and even pay interest in US dollars.

Third, mature currency countries can expand the official claims of other countries in their own currency, which can reduce the overall risk of exchange rates, but immature currency countries do not have this choice. China is expanding its aid operations in Asia, Africa, and Latin America, and is constantly taking risks, especially as we said in Chapter 2, China's debtor countries are not bad countries with poor economics and poor governance. For example, in Venezuela mentioned in the second chapter, although there are huge oil resources, the economy has been slow to get on track for many years. Even if it supports Venezuela in incurring great risks, China still promises to provide loans and subsidies to this Latin American country. However, the continued low price of oil has put China in a state of overdue and even debt.

If China can provide lending in renminbi and exclude exchange rate risk, China can substantially reduce the risk relative to Venezuela (other borrowing countries in the same situation). In other words, China faces a risk of default by debtor countries. The risk of lowering the value of the RMB credit.

"The ambition of the Chinese leadership is not against the dollar"

The renminbi has become an international currency. It is an operational process that contributes to the transformation of the international monetary system. It reflects the changes in the world's economic interaction in the past 30 years. The renminbi is both an important element and a catalyst. In order to create a renminbi strategy, China constantly examines history and constantly rewrites history. There is no road map for reference, because the process is basically different from other countries that have gone through the same process.

China is a developing country and a world power, but unlike the glorious period of the United Kingdom and the United States, China is not a super power. It is still only a medium power in terms of average per capita income, and it is still immature in the financial industry. Power. Governed by central authoritarianism, the economy is a mixture of plans and markets. In addition to the rise of the British pound and the US dollar in the United Kingdom and the United States, China cannot rely on the anchoring of commodities such as gold in gold. On the road ahead, it is like crossing the river.

The global economic (geopolitical) order is changing and China is a key force in this development. At the same time, China continues to drive the opportunity for the world economy to become more integrated than when the yen promoted internationalization 30 years ago. But the timing may not be so good, the international economy may not provide the most timely context for the renminbi strategy. When the interest rates of the United States and other developed economies are close to zero, China’s resistance to the influx of hot money has undermined the currency controls of the PBOC, and it has also caused China’s domestic interest rates to fall too low. When the US monetary policy began to turn, China faced the opposite trouble.

Even if the situation is extremely unsatisfactory, China cannot wait for the natural development of the currency for ten or twenty years. That is to say, it cannot wait until the diversification of financial markets, the full liberalization of capital, and the full convertibility of the renminbi. In the end, China is bound to undergo a transformation process. Therefore, a managed freely convertible and renminbi strategy outside the offshore market will become the norm in the foreseeable future.

How does China transform a poorly closed country into the world's second largest economy? I believe that maintaining capital flow control and pinning the renminbi to the US dollar is in line with China's growth model and development model, but it also suppresses the growth of the renminbi and is unable to display it in the international market. China is now changing this situation.

The ambition of the Chinese leadership is not to counter the dollar, but instead replace it with the international monetary system and provide an alternative currency. Another option in the current US dollar system is to reflect the multi-polarity of the global economic order, and it is no longer just a single economic superpower in the United States. The key question is that there is no answer as to whether the system can be truly complementary, or whether there are different standards, such as incompatible payment systems, to form a separate situation. China is developing its economy under the US dollar system and planning for transformation, but in many cases it also shows that it intends to follow current but improved multilateral financial organizations, such as the IMF and the World Bank.

At the same time, China is also actively promoting regional multilateral organizations, such as the Asian Infrastructure Investment Bank (AIIB). In Asia, the renminbi has also begun to break the dollar's strong position, such as the AIIB, the New Development Bank and other initiatives, such as the Belt and Road Initiative, which links Europe and Asia, can ensure the regional advantage of the renminbi. The need for investment in infrastructure in Asia is sufficient to accommodate a development bank. In addition to economic reasons, there is a major geopolitical factor. This new bank can be seen as another counterbalance to the influence of the Asian Development Bank (ADB). The main shareholders of ADB are the United States and Japan, and China’s influence in the middle is limited.

It is now at a level of interest in world economic governance. In 2015, China showed its willingness to establish international economic governance. First, it set up an AIIB, and then the renminbi was awarded the IMF's SDR basket. The Chinese leadership is actively welcoming the new governance model, and it is no longer just the commander of the agency in Washington in the context of the Bretton forest. Can China, as Xi Jinping said in the opening speech of the G20 in the capacity of the presidency in 2016, China hopes that all countries will work together to “promote the world economy on a strong, sustainable, balanced and inclusive growth path”? In other words, the United States and Europe, especially Britain, Germany, and France, are willing to reform the governance structure that will be used after World War II, open space to the so-called emerging powers?

There are two ways to go in the era of Chinese currency. One of them may go to the governance of each other, and each has its own conflicting trade and investment standards. There are also two camps, one is the dollar camp and the other is the RMB camp, forming a confrontational situation. . The other way may be to a more open, integrated, and more peaceful world. It is still unclear which way the world will go, but no matter how you go, the renminbi is basically set.

This article is excerpted from the "The Card of the Renminbi." Paola Subacchi, translated by Liu Zhongyong.