Internationalisation Of Chinese Yuan And The Historical Precedents11 October, 2011, 15:23. Posted by Zarathustra
Tags: Chinese Yuan, Economy, Renminbi
You would have realised, if you have been reading here for long enough, that one of the reasons for my doubts on China is based on my reading of history. It is not an entirely scientific argument, but it gives me reasons to doubt the general consensus that the next great power must be China.
As I repeatedly said, great powers of the past 300 years seem to have never been intentional. The British Empire started with buccaneers, essentially pirates; then merchants started a private sector colony in India by the British East India Company. The United States were not interested in being a great power until it was forced to during the two world wars. Also, the most obvious candidates for great powers often failed at the end. Argentina in the early 20th century is one example, Soviet Union and Japan are just some examples.
So why have doubts in China? This is more of a gut feeling more than anything. The development of China has been too intentional, and the rise of it has been too obvious. When these happen and if history tells you that the most obvious candidates for great powers often failed at the end, I swing to the other side and cast my doubts.
China is quite actively pushing for the internationalisation of the Chinese currency reminbi. But in one latest paper by Jeffrey Frankel of Harvard University, the history tells us that the internationalisation of ones’ currencies can often be achieved when necessary conditions are in-place, and it could be carried out very quickly once the conditions were met without any intentional promotion by the government which issued the currency.
The renminbi is a fresh new hopeful among the ranks of international currencies. This paper looks to history for help in evaluating the factors determining its prospects. The three best precedents in the 20th century were the rise of the dollar from 1913 to 1945, the rise of the deutsche mark from 1973 to 1990, and the rise of the yen from 1978 to 1991. The main fundamental determinants of international currency status are economic size, confidence in the currency, and depth of financial markets. The new view is that, once these three factors are in place, internationalization of the currency can proceed quite rapidly. Thus some observers have recently forecast that the RMB may even challenge the dollar in a decade. But they underestimate the importance of the third criterion, the depth of financial markets. In principle, the Chinese government could decide to create that depth, which would require accepting an open capital account, diminished control over the domestic allocation of credit, and a flexible exchange rate. But although the Chinese government has been actively promoting offshore use of the currency since 2010, it has not done very much to meet these requirements. Indeed, to promote internationalization as national policy would depart from the historical precedents. In all three twentieth-century cases of internationalization, there was little popular interest in the supposed prestige of having the country’s currency appear in the international listings, and businessmen feared that the currency would strengthen and damage their export competitiveness. Probably China, likewise, is not yet fully ready to open its domestic financial markets and let the currency appreciate, so the renminbi will not be challenging the dollar for a long time.
H/T Mark Thoma