INTRODUCTION
1. Figure for April 2016. PBoC figures available on Reuters Datastream.
1. MONEY IS THE GAME CHANGER
1. Barry Eichengreen,
Globalizing Capital: A History of the International Monetary System (Princeton, N.J.: Princeton University Press, 1998), 1.
2. Benn Steil and Robert E. Litan,
Financial Statecraft: The Role of Financial Markets in American Foreign Policy (New Haven, Conn.: Yale University Press, 2006), 3.
3. The survey on which the foreign exchange data are based is conducted only every three years, and the turnover levels are measured only for the month of April of the reference year. See Bank for International Settlements,
Triennial Central Bank Survey: Foreign Exchange Turnover in April 2013: Preliminary Global Results (Basel: Bank for International Settlements, September 2013). The global foreign exchange market turnover was $5.3 trillion per day in April 2013. The 2016 Triennial Survey is due to be published in December 2016.
4. Oxford Economics Datastream data series.
5. Adjusted net national income per capita at constant 2005 U.S. dollars. Oxford Economics Datastream data series.
7. Thomas Piketty,
Capital in the Twenty-First Century (Cambridge, Mass.: Harvard University Press, 2014), 435.
9. Sovereign wealth funds lack a universally accepted definition, with the result that these funds are often confused with sovereign pension funds and official foreign exchange reserves. Clay Lowery, acting under secretary for international affairs at the U.S. Treasury, defined a sovereign wealth fund as “a government investment vehicle which is funded by foreign exchange assets, and which manages these assets separately from official reserves.” Robert Kimmitt, “Public Footprints in Private Markets: Sovereign Wealth Funds and the World Economy,”
Foreign Affairs 87 (2008): 119–130.
10. Nathaniel Popper,
Digital Gold (New York: HarperCollins, 2015).
11. In the economic literature, the concepts of confidence and trust are treated as synonyms. Here I prefer to keep them separate, as they underlie the two features of money: value (confidence) and liquidity (trust).
12. George S. Tavlas and Yuzuru Ozeki,
The Internationalization of Currencies: An Appraisal of the Japanese Yen, IMF Occasional Paper 90 (Washington, D.C.: International Monetary Fund, 1992).
16. The SDR is an international reserve currency that the IMF created in 1969. It is neither a currency of nor a claim on the IMF; rather, it is a claim on the freely usable currencies of the IMF members. These currencies can be obtained through voluntary exchanges between IMF members. Alternatively, the IMF can designate IMF members with strong external positions to purchase SDRs from members with weak external positions.
19. Eichengreen,
Globalizing Capital.
20. Armand van Domael,
Bretton Woods: Birth of a Monetary System (London: Macmillan, 1978): 200–202, quoted in Harold James, “Cosmos, Chaos: Finance, Power and Conflict,”
International Affairs 90, no. 1 (2014): 47.
21. On the Bretton Woods conference and the Bretton Woods system, see Harold James,
International Monetary Cooperation Since Bretton Woods (Oxford: Oxford University Press, 1996), and Benn Steil,
The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order (Princeton, N.J.: Princeton University Press, 2013).
22. This, however, is not a necessary condition, and no theory argues that a current-account deficit is needed. A key currency can be provided even with a current-account surplus, through intermediation on the capital account, as the United States did for many years after World War II.
23. Benjamin Cohen, “Bretton Woods System,” in
Routledge Encyclopedia of International Political Economy, ed. R. J. Barry Jones (London: Routledge, 2001), 95–102.
24. Bank for International Settlements,
Locational Banking Statistics—External Position of Banks in Individual Reporting Countries (Basel: Bank for International Settlements, December 2012).
25. Bank for International Settlements,
Locational Banking Statistics—External Position of Banks in Individual Reporting Countries (Basel: Bank for International Settlements, December 2015); “Table 1.1.5, Gross Domestic Product,” National Data, Bureau of Economic Analysis, U.S. Department of Commerce, November 24, 2015,
http://www.bea.gov/itable/.
26. By the end of 2005, the Fed had raised the level of the target federal funds by 175 basis points in order to cool off market activity.
27. Alan Greenspan, “Federal Reserve Board’s Semiannual Monetary Policy Report to the Congress” (testimony before the Committee on Financial Services, U.S. House of Representatives, February 17, 2005).
28. Ben Shalom Bernanke, “The Global Saving Glut and the U.S. Current Account Deficit” (Sandridge Lecture, Virginia Association of Economists, Richmond, March 10, 2005).
29. Alan Greenspan,
The Age of Turbulence: Adventures in a New World (New York: Penguin, 2008).
30. It was William McChesney Martin, chairman of the Federal Reserve Board from 1951 to 1970, who coined the phrase “taking away the punch bowl” to describe the role of a central banker: “I’m the fellow who takes away the punch bowl just when the party is getting good.” Quoted in Lou Schneider, “Trade Winds: Credit Controls Policy Unchanged,”
Greensboro Record, October 25, 1955.
33. Robin Harding, John Aglionby, Delphine Strauss, Victor Mallet, and Amy Kazmin, “India’s Raghuram Rajan Hits Out at Unco-ordinated Global Policy,”
Financial Times, January 30, 2014.
34. IMF Committee on Balance of Payments Statistics,
Annual Report 2006 (Washington, D.C.: International Monetary Fund, October 3, 2006).
35. As the United States has been importing more than it has been exporting since the early 1980s, current-account deficits have been a constant feature, with the notable exception of a surplus in 1991.
36. IMF Committee on Balance of Payments Statistics,
Annual Report 2006 (Washington, D.C.: International Monetary Fund, January 2012). After reaching a peak of $420 billion, or 9.3 percent of GDP, in 2008, China’s surplus has dropped: in 2013, it was approximately $183 billion. Despite this drop, China’s capacity to generate a current-account surplus remains in excess of $2 billion every month—an increase of more than 300 percent since the 1980s.
37. Ben Shalom Bernanke, “Global Economic Integration: What’s New and What’s Not?” (speech, Federal Reserve Bank of Kansas City’s Thirtieth Annual Economic Symposium, Jackson Hole, Wyoming, August 25, 2006).
38. Olivier Blanchard and Gian Maria Milesi-Ferretti,
(Why) Should Current Account Balances Be Reduced? IMF Staff Discussion Note 11/03 (Washington, D.C.: International Monetary Fund, March 1, 2011).
39. Max Corden, “Global Imbalances and the Paradox of Thrift,”
Oxford Review of Economic Policy 28, no. 3 (2012): 431–444.
40. Ronald I. McKinnon,
The Unloved Dollar Standard (Oxford: Oxford University Press, 2013), 17–29.
2. CHINA’S EXTRAORDINARY BUT STILL UNFINISHED TRANSFORMATION
1. Angus Maddison,
The World Economy, vol. 2,
Historical Statistics (Paris: OECD Publishing, 2007).
2. In those years, China depended heavily on machinery and equipment imported from the Soviet Union. Nicholas R. Lardy,
China in the World Economy (Washington, D.C.: Peterson Institute for International Economics, 1994), 1.
3. Maddison,
The World Economy.
4. Lardy,
China in the World Economy, 1.
5. According to a statement issued by the North China People’s Government: “To meet the needs of national economic construction, we have reached a consensus with the government of Shandong province, the Shaanxi-Gansu-Ningxia Border Area, and the Shanxi-Suiyuan Border Area to adopt a unified currency for circulation in north China, northeast China and northwest China.” Chen Yulu,
Chinese Currency and the Global Economy: The Rise of the Renminbi (New York: McGraw-Hill, 2014), 21.
6.
China: A Reassessment of the Economy: A Compendium of Papers Submitted to the Joint Economic Committee, Congress of the United States (Washington, D.C.: U.S. Government Printing Office, July 10, 1975), 41.
7. “The Death of Gradualism,”
Economist, March 8, 1997.
9.
Selected Works of Deng Xiaoping, vol. 3,
1982–1992 (Beijing: Foreign Languages Press, 1994), 370, quoted in Henry Kissinger,
On China (London: Allen Lane, 2011), 445.
12. “Practice of a planned economy is not equivalent to socialism because there is planning under capitalism too; practice of a market economy is not equivalent to capitalism because there are markets under socialism too.”
13. Nicholas R. Lardy,
Foreign Trade and Economic Reform in China, 1978–1990 (Cambridge: Cambridge University Press, 1993), 11–12.
14. Edward S. Steinfeld,
Playing Our Game: Why China’s Rise Doesn’t Threaten the West (Oxford, England: Oxford University Press, 2010), 29.
17. Ibid. During 1927–1929, at the peak of its precommunist performance, China’s trade was 2 percent of world trade; see Lardy,
China in the World Economy, 1.
18. “China’s integration into the world economy is today having a bigger global impact than other emerging economies, or than Japan did during its period of rapid growth from the mid-1950s onwards.” “From T-Shirts to T-Bonds,”
Economist, July 28, 2005,
http://www.economist.com/node/4221685.
19. David D. Hale,
China’s New Dream: How Will Australia and the World Cope with the Re-emergence of China as a Great Power (Barton: Australian Strategic Policy Institute, February 2014), 3.
23. Matteo Ferrazzi and Andrea Goldstein, “The Automotive Industry,” in
The World’s Industrial Transformation (London: Chatham House, July 2013), 15.
24. In November 2013, China refused to reach an agreement on trade in information technology products and to expand the 1996 Information Technology Agreement, which currently covers $4 trillion in annual trade, to include 200 new products, ranging from flat-screen televisions to next-generation semiconductors.
25. Hale,
China’s New Dream, 8.
26. U.S. Energy Information Administration,
Short Term Energy Outlook (Washington, D.C.: U.S. Government Printing Office, November 2015), table 3A.
27. Hale,
China’s New Dream, 8. The rapid growth in steel output has turned China from a coal exporter into a coal importer.
28. World Bank,
World Development Indicators 2011 (Washington, D.C.: World Bank, 2011).
29.
Selected Works of Deng Xiaoping, 3:361, quoted in Kissinger,
On China, 442–443.
30. For instance, in 1985, China borrowed approximately $1.1 billion from the World Bank and almost $500 million through bilateral borrowing. In the same year, it received almost $2 billion worth of foreign direct investment. Contracted inward foreign direct investment totaled over $6 billion. State Statistical Bureau,
Chinese Statistical Abstract 1993, cited in Lardy,
China in the World Economy, 63.
31. Peter Nolan,
Is China Buying the World? (Cambridge, England: Polity Press, 2012), 85.
32. Figures for 2014. United Nations Conference on Trade and Development (UNCTAD),
Global Investment Trends Monitor, No. 18 (Geneva: UNCTAD, January 29, 2015).
33. Nolan,
Is China Buying the World?, 93. They account for around two-thirds of the overall value added in high-tech industries.
35. Hale, “China’s New Dream,” 8. More precisely, the percentages of total auto sales from Chinese joint ventures were Volkswagen, 28.8 percent; General Motors, 28.9 percent; Nissan, 20.9 percent; Hyundai, 19.5 percent; Kia, 17.7 percent; Honda, 17.1 percent; Peugeot, 14.8 percent; Mazda, 13.8 percent; Ford, 8.4 percent; BMW, 8.0 percent; and Toyota, 7.6 percent.
36. Kissinger,
On China, 358.
37. This, however, was not Deng’s first visit to the United States. He had been there in 1974 as part of a Chinese delegation to a special session of the UN General Assembly. Kissinger,
On China, 322.
38. However, according to Henry Kissinger, Deng never learned French and did not understand English: “languages are hard.” Kissinger,
On China, 324.
40. Xi Jinping, “Study, Disseminate and Implement the Guiding Principles of the 18th CPC National Congress,” in
The Governance of China (Beijing: Foreign Languages Press, 2014), 6–22.
41. David Shambaugh,
China Goes Global (Oxford, England: Oxford University Press, 2013), 177.
42. Jiang Zemin, “Text of Political Report by Jiang Zemin at the 15th National Congress of the Communist Party of China,” September 12, 1997.
43. Shambaugh,
China Goes Global, 5.
44. Alessia Amighini, Roberta Rabellotti, and Marco Sanfilippo, “Do Chinese State-Owned and Private Enterprises Differ in Their Internationalization Strategies?,”
China Economic Review 27 (2013): 312–335; Alessia Amighini, Roberta Rabellotti, and Marco Sanfilippo, “China’s Outward FDI: An Industry-Level Analysis of Host-Country Determinants,”
Frontiers of Economics in China 8 (2013): 309–336.
46. Earlier, in 2005, the Chinese National Offshore Oil Corporation had attempted, but failed, to acquire the American company Unocal for $18.5 billion in cash.
49. In addition, empirical research suggests that state-owned enterprises are more likely to invest abroad, compared to private companies, when the renminbi appreciates, given that the government grants them easier access to capital and foreign reserves.
57. Chinese National Offshore Oil Corporation’s aborted bid, in 2005, to acquire U.S. oil company Unocal exemplifies the difficulties that surround acquisitions by Chinese enterprises. Nolan,
Is China Buying the World?, 98–99.
59. These days Lenovo is a conglomerate that includes the original firm, Lenovo China, headquartered in Beijing, and Lenovo US, headquartered in Morrisville, North Carolina. Lenovo China is the business unit and runs manufacturing, R&D, software development, and business services. It is a wholly owned foreign-invested enterprise, being 100 percent owned by Hong Kong Lenovo, a legal foreign entity.
60. Nolan,
Is China Buying the World?, 98–99.
63. The concept of a “strategic” company is often stretched to include enterprises without obvious national interests.
64. Nolan,
Is China Buying the World?, 108–109.
66. Toh Han Shih, “China to Provide Africa with US$1 Trillion Financing,”
South China Morning Post, November 18, 2013,
http://www.scmp.com/business/banking-finance/article/1358902/china-provide-africa-us1tr-financing, cited in Yun Sun, “China’s Aid to Africa: Monster or Messiah?,” Brookings, February 2014,
http://www.brookings.edu/research/opinions/2014/02/07-china-aid-to-africa-sun.
3. A FINANCIALLY REPRESSED ECONOMY
2. World Bank and Development Research Center of the State Council, People’s Republic of China, “China: Structural Reforms for a Modern, Harmonious, Creative Society,” in
China 2030: Building a Modern, Harmonious, and Creative Society (Washington, D.C.: World Bank, 2013), 115.
4. Ibid. This article draws attention to the fact that some macro-prudential regulations can result in financial repression.
5. Michael Pettis has calculated that—with lending rates between 4 to 7 percentage points below adjusted GDP growth rates and with household deposits (including farm deposits) equal to anywhere from 80 to 100 percent of GDP, or approximately 122 trillion renminbi—the total transfer from households to state-owned enterprises, infrastructure investors, and other favored institutions amounts to anywhere from 3 to 8 percent of GDP annually. Michael Pettis,
The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy (Princeton, N.J.: Princeton University Press, 2014), 85.
6. Nicholas R. Lardy,
Markets Over Mao (Washington, D.C.: Peterson Institute for International Economics, 2014), 131.
9. Pettis,
The Great Rebalancing, 86.
10. Lardy,
Markets Over Mao, 11.
11. Nicholas R. Lardy,
China’s Unfinished Economic Revolution (Washington, D.C.: Brookings Institution Press, 1998), 23.
12. Peter Nolan,
Is China Buying the World? (Cambridge, England: Polity Press, 2012), 56–58.
13. World Bank and Development Research Center of the State Council,
China 2030, 104–109.
14. Michael Firth, Chen Lin, Ping Liu, and Sonia M. L. Wong, “Inside the Black Box: Bank Credit Allocation in China’s Private Sector,”
Journal of Banking and Finance 33 (2009): 1145.
15. Edward Steinfeld,
Playing Our Game: Why China’s Rise Doesn’t Threaten the West (Oxford, England: Oxford University Press, 2010), 32–33.
16. The list of national champions is longer and includes China Mobile, China Unicom, and China Telecom in the telecommunication industry; Sinopec, China National Petroleum Corporation, China National Offshore Oil Corporation, and Sinochem in the oil and chemical sector; Aviation Industry of China in the aerospace industry; and China North and China South in military and related industries. For a more exhaustive list, see Nolan,
Is China Buying the World?, 59–60.
18. State-Owned Assets Supervision and Administration firms include the three national oil companies—China National Petroleum Corporation, Sinopec, and China National Offshore Oil Corporation; the large state telecommunication companies—China Guodian Corporation and China Huadian Corporation; China’s largest state-owned coal producer, Shenhua Group; the major state power distribution companies—State Grid Corporation and China Southern Power Grid Company; and the major state airlines—Air China, China Southern, and China Eastern. Lardy,
Markets Over Mao, 51.
19. Steven P. Feldman,
Trouble in the Middle: American-Chinese Business Relations, Culture, Conflict and Ethics (New York: Routledge, 2013), 122. Of the 183 officials on the State Council above the vice-ministerial level (from nineteen ministries and commissions), 56, or 30.6 percent, have experience working in state-owned enterprises. Sheng Hong and Zhao Nong,
China’s State-Owned Enterprises: Nature, Performance and Reform, vol. 1 of Series on Chinese Economic Research (London: World Scientific Publishing, 2013), xxiii.
20. It controlled almost four-fifths of all deposits in banks and credit cooperatives and was the source of 93 percent of all loans by financial institutions. Lardy,
China’s Unfinished Economic Revolution, 61.
22. Ibid., 64–65. These four banks had been created or recreated—in the case of the Agriculture Bank, which had been abolished in 1965—at the end of the 1970s. For instance, the Bank of China was separated from the PBoC, and in 1980, a payment agency under the Ministry of Finance was converted into the Construction Bank.
23. Joint Economic Committee Congress of the United States, 1975, (Washington, D.C.: U.S. Government Printing Office, 1976), 658–659.
25. Yasheng Huang,
Capitalism with Chinese Characteristics: Entrepreneurship and the State (Cambridge: Cambridge University Press, 2008), 143.
26. Agricultural Bank of China, “Nongcun Geti Gongshangye Daikuan Shixing Banfa [Provisional regulations on loans to rural individual industrial and commercial businesses],” in
1984 Nian Nongcun Jingrong Guizhang Zhidu Xuanbian [Selection of rural financial regulations in 1984], ed. General Office of the Agricultural Bank of China (Tianjin: Zhongguo jingrong chubanshe, 1986), cited in Huang,
Capitalism with Chinese Characteristics, 145–146.
27. China Banking Society,
Almanac of China’s Finance and Banking 1996 (Beijing: China Financial Publishing House, 1996), 428, cited in Lardy,
Markets Over Mao, 103.
28. Lardy,
China’s Unfinished Economic Revolution, 71–72.
29. China Banking Society,
Almanac of China’s Finance and Banking 1995 (Beijing: China Financial Publishing House, 1995), 578, cited in Lardy,
Markets Over Mao, 103.
30. The overall banking system includes credit cooperatives.
31. China Banking Society,
Almanac of China’s Finance and Banking 2012 (Beijing: China Financial Publishing House, 2012), 419, 423–427; and Audrey Redler, “International Comparison of Banking Sectors,” European Banking Federation, March 18, 2014,
www.ebf-fbe.eu. Cited in Lardy,
Markets Over Mao, 32. The figures are for 2011 and are the latest from the China Banking Society.
32. State-owned commercial banks, in particular, have gone through a large public recapitalization, have cleaned up their balance sheets by removing nonperforming loans, and have reduced the number of branches and employees. The four largest state-owned commercial banks went through public listing, with shares sold to strategic foreign partners. Governance in the whole sector was improved with, among other measures, the creation of a bank supervisor. On the whole, Chinese banks have become more open, more competitive, and more market oriented despite continuing to face a number of challenges. Morris Goldstein and Nicholas R. Lardy,
The Future of China’s Exchange Rate Policy (Washington, D.C.: Peterson Institute for International Economics, July 2009), 45–46.
33. Firth et al., “Inside the Black Box,” 1146.
34. Lardy,
Markets Over Mao, 104.
35. At the end of 1995, approximately 83 percent of outstanding bank loans were to state-owned enterprises and local governments. Lardy,
China’s Unfinished Economic Revolution, 83.
36. Firth et al., “Inside the Black Box,” 1146.
37. See ibid., 1144–1155.
39. The figure is for government bonds outstanding in 2013.
41. “Household Savings,” Organization for Economic Cooperation and Development, accessed December 1, 2015, doi:10.1787/cfc6f499-en.
43. Lardy,
China’s Unfinished Economic Revolution, 60.
44. Reuters Datastream, accessed on May 18, 2016.
48. I thank the staff in the IMF China office for providing the estimate on wealth management products.
50. Richard Dobbs, Susan Lund, Jonathan Woetzel, and Mina Mutafchieva,
Debt and (Not Much) Deleveraging (London: McKinsey, February 2015).
4. CHINA: A TRADING NATION WITHOUT AN INTERNATIONAL CURRENCY
1. For both residents and nonresidents. More specifically, an international currency can be used for private purposes, such as currency substitution and trade and financial transaction invoicing and denomination. It can also be used for public purposes, such as official reserves, a vehicle currency for foreign exchange intervention, and an anchor currency for pegging. Peter B. Kenen,
The Role of the Dollar as an International Currency, Occasional Paper 13 (New York: Group of Thirty, 1983); Menzie Chinn and Jeffrey Frankel, “Will the Euro Eventually Surpass the Dollar as Leading International Reserve Currency?” (Working Paper 11510, National Bureau of Economic Research, Cambridge, MA, 2005).
2. Indeed, Mundell wrote in 1993 that “great nations have great currencies.” Robert Mundell, “EMU and the International Monetary System: A Transatlantic Perspective” (Working Paper 13, Austrian National Bank, Vienna, 1993).
3. Benjamin Cohen,
The Future of Sterling as an International Currency (London: Macmillan, 1971), 62.
4. Catherine R. Schenk,
The Decline of Sterling: Managing the Retreat of an International Currency, 1945–1992 (Cambridge: Cambridge University Press, 2010).
5. Nicholas R. Lardy,
Foreign Trade and Economic Reform in China 1978–1990 (Cambridge: Cambridge University Press, 1992), 19–20. There was a complete separation between domestic and world market prices that had been introduced by the mid-1950s.
6. World Bank,
China: Long-Term Issues and Options (Baltimore, Md.: John Hopkins University Press, 1985), 97, quoted in Lardy,
Foreign Trade, 20.
7. Lardy,
Foreign Trade, 20. This was the case especially in the 1950s and 1960s.
9. Lardy,
Foreign Trade, 120.
11. William H. Overholt,
The Rise of China: How Economic Reform Is Creating a New Super Power (New York: Norton, 1993), 162.
12. Ronald I. McKinnon and Kenichi Ohno,
Dollar and Yen: Resolving Economic Conflict Between the United States and Japan (Cambridge, Mass.: MIT Press, 1997), 183, 188, 199.
17. Yongding Yu, “Rebalancing the Chinese Economy,”
Oxford Review of Economic Policy 28, no. 3 (2012): 552, doi:10.1093/oxrep/grs025.
19. And the Chinese were equally eager to avoid it. See Paul Blustein,
A Flop and a Debacle: Inside the IMF’s Global Rebalancing Acts, Paper 4 (Waterloo, Ontario: Centre for International Governance Innovation, June 2012), 11–13, 22.
26. Alice Y. Ouyang, Ramkishen S. Rajan, and Thomas D. Willett, “China as a Reserve Sink: The Evidence from Offset and Sterilization Coefficients,”
Journal of International Money and Finance 29, no. 5 (September 2010): 951–972, doi:10.1016/j.jimonfin.2009.12.006; John Greenwood, “The Costs and Implications of PBC Sterilization,”
Cato Journal 28, no. 2 (Spring–Summer 2008): 205–217,
http://object.cato.org/sites/cato.org/files/serials/files/cato-journal/2008/5/cj28n2-4.pdf. For the recent change in reserve requirement ratio see Bloomberg News, “China Cuts Banks’ Reserve Requirement Ratio,” February 29, 2016,
http://www.bloomberg.com/news/articles/2016-02-29/china-cuts-reserve-ratio-in-latest-step-to-support-growth.
27. Haihong Gao and Yongding Yu, “Internationalisation of the Renminbi” (paper presented at the BoK–BIS Seminar on Currency Internationalization in Seoul, South Korea, March 19–20, 2009),
http://www.bis.org/repofficepubl/arpresearch200903.05.pdf. This study uses data for the capital account at the end of 2007.
28. Xiaolian Hu, “Convertibility of RMB-Denominated Capital Accounts: Process and Experience,” in
China’s Emerging Financial Markets: Challenges and Global Impact, ed. Min Zhu, Cai Jinqing, and Martha Avery (Singapore: Wiley, 2009), 449–458.
29. Chen Yulu notes that the best order is as follows: “capital inflows first and capital outflows next; direct investment first and portfolio investment next; portfolio investment first and bank credit next; long-term investment first and short-term investment next; institutions first and individuals next; debt securities first and equities and derivatives next; offering markets first and trading markets next; transactions backed by a true deal first and transactions not backed by a true deal next.” Chen Yulu,
Chinese Currency and the Global Economy (Chicago: McGraw-Hill, 2014), 123.
30. The authorities plan to establish a QDII program (for qualified domestic individual investors) to allow Chinese residents (and not only institutional investors) to invest in overseas capital markets.
31. Gao and Yu, “Internationalisation of the Renminbi,” 8–9.
32. I am grateful to Haihong Gao for this update based on her yet unpublished research.
5. LIVING WITH A DWARF CURRENCY
1. National Bureau of Statistics of China, “9-1 Price Indices” and “4-11 Average Wage of Employed Persons in Urban Units and Related Indices,” in
China Statistical Yearbook 2015 (Beijing: China Statistics Press, 2015),
http://www.stats.gov.cn/tjsj/ndsj/2015/indexeh.htm.
2. Imbalances on the international balance sheet are common in Asia: see, in particular, Ronald McKinnon and Gunther Schnabl, “The East Asian Dollar Standard, Fear of Floating, and Original Sin,”
Review of Development Economics 8, no. 3 (2004): 331–360.
3. Figures at the end of 2013, Andrew Sheng and Ng Chow Soon, eds,
Shadow Banking in China. An Opportunity for Financial Reform, Wiley-Fung Global Institute, 2016, table 3.16. In 2011, China’s net international investment position was $1.7 trillion, with $4.7 trillion in assets and $2.9 trillion in liabilities. See Yongding Yu, “The ‘Asset Crisis’ of Emerging Economies,” Project Syndicate, September 30, 2011,
http://www.project-syndicate.org/commentary/the—asset-crisis—of-emerging-economies.
6. Ronald McKinnon and Gunther Schnabl, “China’s Exchange Rate and Financial Repression: The Conflicted Emergence of the RMB as an International Currency,”
China & World Economy 22, no. 3 (May/June 2014): 13, doi:10.1111/j.1749-124X.2014.12066.x.
10. David Cook and James Yetman, “Expanding Central Bank Balance Sheets in Emerging Asia: A Compendium of Risks and Some Evidence,” in
Are Central Bank Balance Sheets in Asia Too Large?, Paper 66 (Basel: Bank for International Settlements, October 2012): 30–75.
11. Russia is another country where the monetary authorities have been using market interventions as a way to control capital flows and maintain stability. For example, in December 2012, Russia’s large trade surplus and strong capital inflows forced the central bank to buy $476 billion. This has considerably expanded Russia’s official reserves, which are some of the largest in the world. It was not an isolated episode. Some years earlier, in 2008, the Central Bank of Russia spent one-third of the $600 billion it held as official reserves, the world’s third-largest reserves at that time, to contain the depreciation of the ruble.
13. Cook and Yetman, “Expanding Central Bank Balance Sheets,” 30–75.
16. Calculation based on 2010 poverty headcounts at $1.90 a day (2011 purchasing power parity). The World Bank moved its poverty threshold to $1.90 a day on October 1, 2015, but data for poverty headcounts in China are available only up to 2010. “World DataBank: World Development Indicators,” World Bank, accessed November 24, 2015,
http://databank.worldbank.org/data/.
18. In 2014, China’s gross domestic product (GDP) at the current dollar exchange rate was approximately $10.4 trillion, putting it in second place after the United States, which stood at $17.4 trillion. However, with purchasing power parity, China had a GDP of $18 trillion. “World DataBank: World Development Indicators,” World Bank, accessed November 24, 2015,
http://databank.worldbank.org/data/.
20. More precisely, 38 percent of exports and 22 percent of imports are settled using the yen. Takatoshi Ito, Satoshi Koibuchi, Kiyotaka Sato, and Junko Shimizu, “Why Has the Yen Failed to Become a Dominant Invoicing Currency in Asia? A Firm-Level Analysis of Japanese Exporters’ Invoicing Behavior” (Working Paper 16231, National Bureau of Economic Research, Cambridge, Mass., July 2010), 7, doi:10.3386/w16231.
6. CREATING AN INTERNATIONAL CURRENCY
4. Mitsuhiro Fukao, “Capital Account Liberalisation: The Japanese Experience and Implications for China,” in
China’s Capital Account Liberalisation: International Perspective, Paper 15 (Basel: Bank for International Settlements, April 2003), 47,
http://www.bis.org/publ/bppdf/bispap15h.pdf.
6. Specific approaches and measures for promoting the internationalization of the yen are outlined in “Current Status and Prospects for Financial Liberalization and the Internationalization of the Yen,” a document that sets out the policy framework for the promotion of the international use of the Japanese currency.
8. In 1990, the aggregate economy of the European Union was second to that of the United States. Then called the European Community, it was less economically integrated than it is today, and it did not have a currency union and a single currency. It was also much smaller, with only twelve member states. Today they are twenty-eight.
9. OECD,
OECD Economic Outlook, vol. 2014/2 (Paris: OECD Publishing, 2014 [revised 2015]), doi:10.1787/eco_outlook-v2014-2-en.
12. Robert Mundell, “The Case for a Managed International Gold Standard,” in
The International Monetary System: Choices for the Future, ed. Michael Connolly (New York: Praeger, 1983), 1–19; Alexander Swoboda, “Financial Integration and International Monetary Arrangements,” in
The Evolution of the International Monetary System,” ed. Yoshio Suzuki, Jun’ichi Miyake, and Mitsuaki Okabe (Tokyo: University of Tokyo Press, 1990); George S. Tavlas and Yuzuru Ozeki,
The Internationalization of Currencies: An Appraisal of the Japanese Yen, Occasional Paper 90 (Washington, D.C.: International Monetary Fund, 1992).
13. The figure is for 1992.
14. C. Randall Henning,
Currency and Politics in the United States, Germany, and Japan (Washington, D.C.: Institute for International Economics, 1994); William W. Grimes, “Internationalization of the Yen and the New Politics of Monetary Insulation,” in
Monetary Orders: Ambiguous Economics, Ubiquitous Politics, ed. Jonathan Kirshner (Ithaca, N.Y.: Cornell University Press, 2003).
16. Yong Wang, “Seeking a Balanced Approach on the Global Economic Rebalancing: China’s Answers to International Policy Cooperation,”
Oxford Review of Economic Policy 28, no. 3 (2012): 569–586; Bin Xia and Dennis Chen,
从’
广场协议’
看日元升值的教训及启示 [Implications from the yen’s appreciation and lessons from Plaza Accord] (
内蒙古金融研究 [Inner Mongolia Financial Research], 2010); J. Yin,
日元国际化模式的教训及启示 [Lessons from the internationalization of the Japanese yen] (
求知 [Seeking Knowledge], 2012); J. Wei,
日本的教训:
日元升值与泡沫经济 [Lessons from Japan: On yen’s appreciation and its bubble economy] (
西安金融 [Xi’an Finance], 2006),
http://d.wanfangdata.com.cn/periodical_xajr200601001.aspx.
17. In summer 1995, both the Federal Reserve and the Bank of Japan—Japan’s central bank—intervened jointly several times to sell dollars in order to dampen the yen.
18. Y. Yu and J. Wei, “
定人民， 我 怎:
与学家 中国 率政策” [How should we stabilize the RMB: To discuss the PRC’s monetary policies with economists],
金融 [Financial Times], September 5, 2003; X. Zhao, “
燕生:
全球化与通膨胀” [Interview with Zhang Yansheng: Globalization and Inflation],
中国金融 [Journal of China Finance, no. 12] (2008); Z. Yu, “
率制度改革必主” [Reforms of foreign exchange rate must safeguard currency sovereignty],
旗文稿 [Red Flag Working Paper 11] (2010); Wei,
日本的教训 [Lessons from Japan].
20. The forum was held under the Chatham House Rule: “When a meeting, or part thereof, is held under the Chatham House Rule, participants are free to use the information received, but neither the identity nor the affiliation of the speaker(s), nor that of any other participant, may be revealed.” Accessed November 24, 2015,
https://www.chathamhouse.org/about/chatham-house-rule.
24. Haihong Gao and Yongding Yu, “Internationalization of the Renminbi” (paper presented at BoK-BIS Seminar in Seoul, South Korea, March 19–20, 2009). Neighboring countries included Hong Kong SAR, Macau SAR, and the members of ASEAN: Brunei, Cambodia, Indonesia, Laos, Malaysia, Burma/Myanmar, Philippines, Singapore, Thailand, and Vietnam.
25. Overseas participating banks, onshore settlement banks, and domestic agent banks have to be approved by both the Hong Kong Monetary Authority and the PBoC to be eligible to conduct renminbi cross-border trade settlements.
26. In those days, the Hong Kong dollar, rather than the renminbi, was the preferred currency in much of the southern province of Guangdong. William H. Overholt,
The Rise of China: How Economic Reform Is Creating a New Superpower (New York: W. W. Norton, 1993), 165.
28. As there was total segregation between the official foreign exchange market on the mainland and the “informal” unregulated markets in neighboring countries—notably, Hong Kong—exchange rates in the latter diverged from the official mainland rates, giving ample opportunity for arbitrage.
29. Chinese report, private communication.
30. Arvind Subramanian,
Preserving the Open Global Economic System: A Strategic Blueprint for China and the United States, Policy Brief 13–16 (Washington, D.C.: Peterson Institute for International Economics, June 2013), 5,
http://piie.com/publications/pb/pb13-16.pdf.
31. In July 2009, 365 enterprises were approved as mainland designated enterprises under the pilot scheme and thus were allowed to use renminbi for international trade settlement. Enterprises in the five mainland pilot cities could become designated enterprises upon recommendation from their respective provincial governments and approval by the central authorities. No specific eligibility requirements were set for enterprises outside the mainland that chose to participate in the pilot scheme. Hong Kong Monetary Authority, “Renminbi Trade Settlement Pilot Scheme,”
Hong Kong Monetary Authority Quarterly Bulletin, September 2009,
http://www.hkma.gov.hk/media/eng/publication-and-research/quarterly-bulletin/qb200909/fa2_print.pdf.
38. Private communication.
39. Beijing, Tianjin, Inner Mongolia, Liaoning, Shanghai, Jiangsu, Zhejiang, Fujian, Shandong, Hubei, Guangdong, Guangxi, Hainan, Chongqing, Xichuan, Yunnan, Jilin, Heilongjiang, Xizang (Tibet), and Xinjiang.
40. Here mainland China indicates the area under the direct jurisdiction of the People’s Republic of China.
41. Trade enterprises need to be authorized by both the PBoC and the HKMA in their respective jurisdictions. Once a renminbi-based cross-border transaction has been agreed upon, commercial banks incorporated inside mainland China and abroad implement the settlement.
42. Hans Genberg, “Currency Internationalisation: Analytical and Policy Issues” (Working Paper 31, Hong Kong Institute for Monetary Research, October 31, 2009), 6, doi:10.2139/ssrn.1628004.
44. Dong He and Robert Neil McCauley, “Offshore Markets for the Domestic Currency: Monetary and Financial Stability Issues” (Working Paper 320, Bank for International Settlements, Basel, September 2010),
http://www.bis.org/publ/work320.pdf.
7. BUILDING A MARKET FOR THE RENMINBI
1. I owe this observation to John Nugée.
2. Dong He and Robert McCauley, “Eurodollar Banking and Currency Internationalisation,”
BIS Quarterly Review, June 2012, 35–36.
3. For the definition of official liquidity and private liquidity as the two components of aggregate liquidity, see Dietrich Domanski, Ingo Fender, and Patrick McGuire, “Assessing Global Liquidity,”
BIS Quarterly Review, December 2011, 59–62. Aggregate liquidity depends on “the interaction of funding and market liquidity” and is driven by the actions of the public sector (including monetary authorities) as well as financial institutions and private investors. Ibid., 58.
4. Over the years, the eurodollar market has shifted from being a pure offshore market to intermediating funds, mainly between borrowers and lenders outside the United States. It acts to a lesser extent as a conduit between borrowers and lenders within the United States but hardly at all as a conduit between borrowers in the United States and lenders abroad. He and McCauley, “Eurodollar Banking,” 42.
6. New rules promulgated in January 2011 should increase China’s foreign direct investment toward Hong Kong. They allowed enterprises in mainland China to conduct and settle overseas direct investment in renminbi, and banks in Hong Kong can provide renminbi funds to facilitate such transactions. Hong Kong Monetary Authority,
Hong Kong: The Global Offshore Renminbi Business Hub (Hong Kong: Hong Kong Monetary Authority, January 2016),
http://www.hkma.gov.hk/eng/key-functions/international-financial-centre/renminbi-business-hong-kong.shtml.
9. Paola Subacchi, Helena Huang, Alberta Molajoni, and Richard Varghese,
Shifting Capital: The Rise of Financial Centres in Greater China (London: Chatham House, May 2012); Haihong Gao and Yongding Yu, “Internationalization of the Renminbi” (paper presented at BoK-BIS Seminar, Seoul, South Korea, March 19–20, 2009).
10. On currency swaps see also Julia Leung,
Facing the Flood: How Asia Is Coping with Volatile Capital Flows (London: Chatham House, November 2014).
11. Ma Rentao and Zhou Yongkun, “Currency Swap: Effective Method of Participating in International Financial Rescue and Enforcing RMB Internationalization,”
China Finance 4, no. 658 (2009).
12. There are no official documents that explicitly refer to the importance of the swap agreements, but it is widely acknowledged that they are an essential element of China’s renminbi strategy. They are signed “for the purpose of promoting bilateral financial cooperation, facilitating bilateral trade and investment, and maintaining regional financial stability.” “Establishment of a Bilateral Local Currency Swap Agreement Between the People’s Bank of China and the State Bank of Pakistan,” People’s Bank of China, December 28, 2011,
http://www.pbc.gov.cn/english/130721/2856547/index.xhtml. The State Council decides on the arrangements, selection, and volume of each bilateral agreement.
13. Figures at the end of July 2015. People’s Bank of China,
RMB Internationalization Report (Beijing: China Financial Publishing House, 2015), 32.
14. The Chiang Mai Initiative—a multilateral currency swap arrangement among the ten members of ASEAN, China, Japan, and South Korea—was launched in 2010 to provide a financial safety net to countries facing a liquidity crisis. It currently has $240 billion, up from the $120 billion originally committed in 2010.
15. Figures at the end of July 2015. People’s Bank of China,
RMB Internationalization Report, 41–42.
20. The HVPS is the backbone of the mainland’s China National Advanced Payment System and is a real-time gross settlement system that is primarily used for high-value renminbi transfers. International Monetary Fund,
People’s Republic of China: Detailed Assessment Report: CPSS Core Principles for Systemically Important Payment Systems, IMF Country Report No.12/81 (Washington, D.C.: International Monetary Fund, April 2012): 4, 19. In January 2012, the PBoC decided to upgrade the China National Advanced Payment System to better facilitate the renminbi cross-border trade settlement scheme. Lingling Wei, “China Is Easing Yuan-Pay System,”
Wall Street Journal, January 5, 2012,
http://www.wsj.com/articles/SB10001424052970203513604577139981921915046.
21. The RTGS system is a fund-transfer system in which the interbank transfer of high-value amounts of money or securities takes place in real time and on a gross basis (i.e., the settlement of funds occurs on a transaction-by-transaction basis without netting debits against credits). Bank for International Settlements,
Real-Time Gross Settlement Systems: Report Prepared by the Committee on Payment and Settlement Systems of the Central Banks of the Group of Ten Countries (Basel: Bank for International Settlements, 1997),
http://www.bis.org/cpmi/publ/d22.pdf.
23. Currently, the limits are no more than the equivalent of 6,000 renminbi per person per transaction if the exchange is made in cash and no more than the equivalent of 20,000 renminbi per person per day if the exchange is made through a deposit account—the same limits that were established in 2005; see “Hong Kong: The Global Offshore Renminbi Business Hub,” Hong Kong Monetary Authority, January 2016, 22, Q4,
http://www.hkma.gov.hk/media/eng/doc/key-functions/monetary-stability/rmb-business-in-hong-kong/hkma-rmb-booklet.pdf. Also see “HKMA Scraps 20,000 Yuan Daily Conversion Cap in Landmark Reform,”
South China Morning Post, November 13, 2014,
http://www.scmp.com/business/economy/article/1638077/hkma-says-yuan-exchange-cap-lifted-november-17-when-stock-connect; and Norman T. L. Chan, “Removal of RMB Conversion Limit for Hong Kong Residents” (speech), Hong Kong Monetary Authority, November 12, 2014,
http://www.hkma.gov.hk/eng/key-information/speech-speakers/ntlchan/20141112-1.shtml.
24. Here the daily remittance limit is 50,000 renminbi per person. The unused portion of such outward remittance can be remitted back to renminbi accounts in Hong Kong under the same name.
25. Also included are renminbi-denominated bonds, insurance policies, and other investment products on the Hong Kong market.
34. People’s Bank of China,
RMB Internationalization Report, 32.
38. The Chinese authorities are currently assessing the possibility of expanding the program to the Shenzhen Stock Exchange as well as to stock exchanges in other financial centers in Asia and Europe.
42. The expression “one country, two systems” was first used by Deng Xiaoping in 1984. Deng Xiaoping, “One Country, Two Systems,” in
Selected Works of Deng Xiaoping, vol. 3,
1982–1992 (Beijing: Foreign Languages Press, 1994), 46.
43. William H. Overholt,
The Rise of China: How Economic Reform Is Creating a New Superpower (New York: W. W. Norton, 1993), 197, 203.
44. On the risks to monetary and financial stability in the home economy posed by the development of offshore markets and the policy options to manage such risks, drawn from the euromarket experience, see Dong He and Robert N. McCauley, “Offshore Markets for the Domestic Currency: Monetary and Financial Stability Issues” (Working Paper 320, Bank for International Settlements, Basel, September 2010).
47. SWIFT is a network that enables financial institutions worldwide to exchange information about financial transactions in a secure environment.
48. The U.S. dollar remains in the top position, and the Hong Kong dollar follows close behind the renminbi.
50. Jesús Seade, Ping Lin, Yue Ma, Xiandong Wei, and Yifan Zhang, “Hong Kong as an International Centre for China and the World” (draft, Department of Economics, Lingnan University, Hong Kong, July 7, 2010).
8. THE RENMINBI MOVES AROUND
4. However, having mainland China as its largest trade partner—by far—is also a weakness for Taipei.
5. The memoranda were signed in November 2009. “Taipei, Beijing Sign Financial MOUs,”
Taiwan Today, November 17, 2009,
http://taiwantoday.tw/ct.asp?xItem=78329&ctNode=452&mp=9. Also see Shuching Chou, Shin-Hung Lin, Hui-Lan Yang, and Yi-Ting Shen, “The Market Reactions to the Cross-Border Banking-Evidence of Taiwan Banks in China,”
International Journal of Business and Social Science 4, no. 10 (August 2013): 217; and Wendy Zeldin, “China; Taiwan: Financial MOUs Signed,” Global Legal Monitor, Library of Congress, November 19, 2009,
http://www.loc.gov/law/foreign-news/article/china-taiwan-financial-mous-signed/.
6. Paola Subacchi and Helena Huang, “Taipei in the Renminbi Offshore Market: Another Piece in the Jigsaw,” Chatham House Briefing Paper, London, Chatham House, June 2013.
7. In the first six months of 2012, renminbi-settled trade accounted for less than 1 percent of the total value of bilateral trade between Japan and China. Ben McLannahan, “Sluggish Start for Yen/Renminbi Market,”
Financial Times, November 29, 2012,
http://on.ft.com/TnWjyt.
11. Catherine R. Schenk, “The Origins of the Eurodollar Market in London: 1955–1963,”
Explorations in Economic History 35, no. 2 (April 1998): 221–238.
19. These figures refer to the third quarter of 2015.
20. Thomson Reuters Datastream (2014). However, the pace at which China’s trade settled in renminbi was expanding has already slowed, having reached a record high of 662 billion renminbi in March 2014.
23. Arvind Subramanian and Martin Kessler, “The Renminbi Bloc Is Here: Asia Down, Rest of the World to Go?” (Working Paper 12–19, Peterson Institute for International Economics, Washington, D.C., August 2013),
https://www.piie.com/publications/wp/wp12-19.pdf.
24. National Bureau of Statistics of China, “11-6 Value of Imports and Exports by Country (Region) of Origin/Destination,” in
China Statistical Yearbook 2014 (Beijing: China Statistics Press, 2014).
25. The discrepancy in the trade balance is primarily due to the types of products that each country produces. The majority of Vietnam’s exports are either raw materials or low-value-added manufactured goods, such as coal, crude oil, rubber, seafood, and footwear. In comparison, the top products China exports to Vietnam are value-added manufactured goods, such as machinery, pharmaceuticals, and petroleum.
27. Jesús Seade, Ping Lin, Yue Ma, Xiandong Wei, and Yifan Zhang, “Hong Kong as an International Centre for China and the World” (draft, Department of Economics, Lingnan University, Hong Kong, July 7, 2010).
29. Yongding Yu, “How Far Can Renminbi Internationalization Go?” (Working Paper 461, Asian Development Bank Institute, Tokyo, February 2014).
31. On this topic, see Yongding Yu, “Revisiting the Internationalization of the Yuan” (Working Paper 366, Asian Development Bank Institute, Tokyo, July 2012).
33. Sebastian Heilmann, “Policy Experimentation in China’s Economic Rise,”
Studies in Comparative International Development 43, no. 1 (March 2008): 23, quoted in Daniel A. Bell,
The China Model: Political Meritocracy and the Limits of Democracy (Princeton, N.J.: Princeton University Press, 2015), 183. Bell stresses how a repertoire of policy experiments helped Deng Xiaoping reframe the main mission of the Chinese Communist Party from achieving communism to achieving rapid economic growth.
34. Bell,
The China Model, 183–184.
35. Heilmann, “Policy Experimentation,” 8–9, quoted in Bell,
The China Model, 184.
9. MANAGING IS THE WORD
2. Arthur Kroeber, “The Chinese Yuan Grows Up—Slowly” (policy paper, New America Foundation, Washington, D.C., March 18, 2011), 2.
3. Takatoshi Ito,
The Internationalization of the Renminbi (New York: Council on Foreign Relations, 2011), 11.
4. See for example, Yongding Yu, “Revisiting the Internationalization of the Yuan,” ADBI Working Paper Series, No. 366, July 2012.
5. This is a point that Chinese policy makers—for example, Hu Xiaolian, deputy governor of the PBoC—repeatedly stress. Hu Xiaolian, “Hu Xiaolian: Successful Experiences of Further Reforming the RMB Exchange Rate Regime,” BIS Review 105/2010, Bank for International Settlements, July 30, 2010,
www.bis.org/review/r100812d.pdf; Hu Xiaolian, “RMB Internationalization and the Globalization of China’s Financial Sector” (speech, Lujazhui Forum 2012: Reforming Global Financial Governance for Real Economic Growth, Shanghai, June 28–30, 2012), 127,
http://en.sjr.sh.gov.cn/coverage/lujiazui/pdf/2012-forum.pdf.
6. Gabriel Wildau, “Authorities Are Taking a Cautious Approach to Shanghai Test Ground,”
Financial Times, November 4, 2014.
8. World Bank and Development Research Center of the State Council, People’s Republic of China, “China: Structural Reforms for a Modern, Harmonious, Creative Society,” in
China 2030: Building a Modern, Harmonious, and Creative Society (Washington, D.C.: World Bank, 2013), 115–117.
9. For example, price controls distort the allocation of resources, whereas regulatory barriers impede the entry of private firms in a number of domains—notably, the services sector, where state firms retain near complete control.
10. Xi Jinping, “Explanatory Notes to the ‘Decision of the Central Committee of the Communist Party of China on Some Major Issues Concerning Comprehensively Continuing the Reform,’” in
The Governance of China (Beijing: Foreign Languages Press, 2014), 84. In November 2014, Keqiang Li, China’s premier, announced a ten-point plan for financial reform.
11. Quoted in Chen Yulu,
Chinese Currency and the Global Economy (Chicago: McGraw-Hill, 2014), 124.
12. More precisely, it suggested (1) fully commercializing and rationalizing the financial system; (2) further liberalizing interest rates; (3) deepening the capital market; (4) upgrading financial infrastructure and the legal framework; (5) strengthening the regulation and supervision framework; (6) building a financial safety net and developing crisis management; and (7) recasting the rights and responsibilities of government. World Bank and Development Research Center of the State Council, “China: Structural Reforms,” 118–125.
13. Zhou Xiaochuan, “Speech at the Annual Forum of Chinese Economists,” December 1, 2010, cited in Yang Jiang, “The Limits of China’s Monetary Diplomacy,” in
The Great Wall of Money, ed. Eric Helleiner and Jonathan Kirshner (Ithaca, N.Y.: Cornell University Press, 2014), 160.
14. William H. Overholt,
The Rise of China: How Economic Reform Is Creating a New Superpower (New York: W. W. Norton, 1993), 149.
15. Henry Kissinger,
On China (London: Allen Lane, 2011), 485.
16. Overholt,
The Rise of China, 150. “For example, they let institutions like the bond market develop organically—and somewhat chaotically—then stepped in to regulate them when they felt they understood the needs of the economy and the options for regulation.”
17. Yasheng Huang,
Capitalism with Chinese Characteristics. Entrepreneurship and the State, Cambridge: Cambridge University Press, 2008:145.
18. The shift in terminology from
market socialism to
socialist market economy happened in late 1992 at the Fourteenth Congress of the Chinese Communist Party. Edward S. Steinfeld,
Playing Our Game (Oxford, England: Oxford University Press, 2010), 57.
19. Small and medium-sized enterprises are evidence of “the government’s compromise between ideological correctness and economic pragmatism.” Michael Firth, Chen Lin, Ping Liu, and Sonia M. L. Wong, “Inside the Black Box: Bank Credit Allocation in China’s Private Sector,”
Journal of Banking and Finance 33 (2009): 1145.
20. Paola Subacchi, Helena Huang, Alberta Molajoni, and Richard Varghese, Shifting Capital: The Rise of Financial Centres in Greater China (London: Chatham House, May 2012).
21. In China, banks actively borrow and lend among themselves through collateralized repo transactions. The seven-day repo and three-month SHIBOR rates, which are responsive to changes in liquidity and credit conditions in the money market, have become more widely used benchmarks to gauge interbank liquidity.
22. Wensheng Peng, Hongyi Chen, and Weiwei Fan, “Interest Rate Structure and Monetary Policy Implementation in China,”
China Economic Issues (Hong Kong Monetary Authority), no. 1/06 (June 2006): 1–13; Li-gang Liu and Wenlang Zhang, “A New Keynesian Model for Analyzing Monetary Policy in Mainland China” (Working Paper 18, Hong Kong Monetary Authority, 2007).
24. Jonathan Anderson, “The Sword Hanging Over China’s Banks,” UBS Investment Research, Asian Focus, December 15, 2006, quoted in Morris Goldstein and Nicholas R. Lardy,
The Future of China’s Exchange Rate Policy (Washington, D.C.: Peterson Institute for International Economics, 2009), 49.
26. Hu, “Hu Xiaolian: Successful Experiences,” 5–6.
27. Between 1980 and 1995, the renminbi was devalued by about 70 percent in real effective terms. Goldstein and Lardy,
The Future, 24.
28. In the weeks following the authorities’ intervention, the renminbi weakened by almost 1.5 percent against the dollar—and took a couple of deep dives in July 2014.
31. Report published by the Institute of International Finance but not publicly available. See Shawn Donnan, “Capital Flight from China Worse Than Thought,”
Financial Times, January 20, 2016
35. Eswar Prasad, Thomas Rumbaugh, and Qing Wang, “Putting the Cart Before the Horse?: Capital Account Liberalization and Exchange Rate Flexibility in China” (Policy Discussion Paper 05/1, International Monetary Fund, Washington, D.C., January 2005),
https://www.imf.org/external/pubs/ft/pdp/2005/pdp01.pdf; Hongyi Chen, Lars Jonung, and Olaf Unteroberdoerster, “Lessons for China from Financial Liberalization in Scandinavia” (Economic Paper 383, European Commission, Brussels, August 2009),
http://ec.europa.eu/economy_finance/publications/publication15805_en.pdf.
10. THE AGE OF CHINESE MONEY
1.
China: A Reassessment of the Economy: A Compendium of Papers Submitted to the Joint Economic Committee, Congress of the United States (Washington, D.C.: U.S. Government Printing Office, July 10, 1975), iii.
2. Ibid., 659. The report indicated that, “while the RMB can be held by Westerners and can be converted (under certain conditions) into foreign currency, the RMB account is held within China and cannot be traded except between the foreign entity and the Bank of China.”
3. Ibid. The report also noted that China was unique among other countries with a centralized, planned economy because it used the renminbi in international trade and allowed “Western entities” to hold renminbi accounts in correspondent banks.
4. Jack Lew, “Remarks on the International Economic Architecture and the Importance of Aiming High” (speech, Asia Society Northern California, San Francisco, March 31, 2015).
5. On this point, see also Eric Helleiner and Anton Malking, “Sectoral Interests and Global Money: Renminbi, Dollars, and the Domestic Foundations of International Currency Policy”
Open Economies Review 21:1 February, 2012, p. 41.
7. Benjamin J. Cohen,
The Geography of Money, Ithaca: NY, Cornell University Press, 1998.
8. By contrast about 95 percent of U.S. exports and 85 percent of U.S. imports are invoiced in dollars. Linda S. Goldberg and Ce
́dric Tille, “Vehicle Currency Use in International Trade,” Federal Reserve Bank of New York Staff Reports, Staff Report no. 200 January 2005, p. 19. However, the majority of products using the dollar for reference pricing are traded via organized exchanges outside the U.S. market.
10. James Kynge, “Renminbi Tops Currency Usage Table for China’s Trade with Asia,”
Financial Times, May 27, 2015.
11. According to Standard Chartered, at the end of September 2014, international banking liabilities in dollars were $12 trillion, those in euros were the equivalent of $7.6 trillion, those in pounds were the equivalent of $1.4 trillion, those in yen were the equivalent of $703 billion, and those in renminbi were the equivalent of $30 billion. Standard Chartered research, Special Report, “Renminbi Internationalisation—The Pace Quickens,” June 10, 2015.
17. Qu Hongbin, “Renminbi Will Be World’s Reserve Currency,”
Financial Times, November 10, 2010.
23. Quoted in Lucy Hornby, Tom Mitchell, and Jennifer Hughes, “China Pledges No More Renminbi ‘Sudden Changes’ After IMF Decision on Currency,”
Financial Times, December 2, 2015. New Silk Road countries are those on the new Silk Road across Eurasia.
24. Many officials have expressed this view to me. However, there is no official document that spells out this strategy.
25. Benjamin J. Cohen,
The Geography of Money (Ithaca, N.Y.: Cornell University Press, 1998); Benjamin J. Cohen,
The Future of Money (Princeton, N.J.: Princeton University Press, 2004).
30. Ibid.; “Report of the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System,” United Nations, September 21, 2009,
http://www.un.org/ga/econcrisissummit/docs/FinalReport_CoE.pdf. For a discussion on using SDRs as supranational currency, see Paola Subacchi and John Driffill, eds.,
Beyond the Dollar (London: Chatham House, March 2010).
31. See, for example, Chen Yulu,
Chinese Currency and Global Economy (Chicago: McGraw-Hill, 2014), 125–149.
32. All these commodities are priced in dollars. Only the prices for cocoa, rubber, copper, lead, and tin are denominated in other currencies. According to the list of commodities price series published by the UNCTAD,
http://unctadstat.unctad.org/wds/ReportFolders/reportFolders.aspx, three-month cocoa futures are priced in SDRs; rubber is priced FOB Singapore in Singapore dollars; the London Metal Exchange official cash settlement prices for copper and lead are expressed in pounds, and the ex-smelter price for tin in the Kuala Lumpur market is expressed in Malaysian dollars.
33. In a few countries, such as India, Japan, and China, domestic contracts, both spot and futures, are settled in the domestic currency. See Elitza Mileva and Nikolaus Siegfried,
Oil Market Structure, Network Effects and the Choice of Currency for Oil Invoicing, Occasional Paper 77 (Frankfurt: European Central Bank, December 2007).
35. Agnes Lovasz and Daniel Kruger, “Venezuela, Oil Producers Buy Euro as Dollar, Oil Fall,” Bloomberg, December 18, 2006.
37. Jack Farchy and Kathrin Hille, “Russian Companies Prepare to Pay for Trade in Renminbi,”
Financial Times, June 8, 2014.
39. Farchy and Hille, “Russian Companies Prepare to Pay for Trade in Renminbi.”
40. Jack Farchy, “Gazprom Neft Sells Oil to China in Renminbi Rather Than Dollars”,
Financial Times, June 1, 2015.
42. As quoted in Benjamin J. Cohen, “The Yuan Tomorrow? Evaluating China’s Currency Internationalization Strategy,”
New Political Economy 17, no. 3 (2011): 361–371.
44. Strategy, Policy and Review Department, IMF, 2011.
45. Cohen, “The Yuan Tomorrow?”
46. On this point, see also Kirshner, “Regional Hegemony,” 236–237.