The People’s Money

CHINA: A REASSESSMENT OF THE ECONOMY

WHAT CAN A non-Chinese person add to the debate on China’s development? As I was writing this book, I asked myself this very question several times. A Chinese friend of mine—a fine observer of both worlds—offered a reassuring answer. Quoting an old Chinese saying (“The foreign monk is better at reciting the sutras”) he claimed that, like a foreign monk, I had the advantage of being more detached than the insiders from the day-to-day discussions and so, perhaps, stood a better chance of grasping the full picture of China’s vision for the renminbi (which means, literally, the “people’s money”). And in the spirit of a foreign monk, who brings together the insiders’ knowledge and connects all the dots, I started to research and then write The People’s Money.

Why the renminbi? Because money and finance are the missing bits of China’s extraordinary transformation that began almost forty years ago when Deng Xiaoping launched the first economic reforms. China’s rise has surprised and fascinated many people around the world. Today its economy is one of the world’s largest, competing with the most advanced countries. But it retains many features of a developing economy, from the low income per capita to the limited international use of its currency. To become an economic and financial heavyweight China needs to have a currency that can be used in international trade and finance and that non-Chinese savers and investors want to hold in their portfolio.

What China is doing to transform the renminbi into an international currency and to reform its banking and financial sector is not a linear process. There is so much trial and error, and so many interconnected components, that the whole picture of China’s strategy inevitably looks blurred. But there is a picture there—one that the rest of the world must discern to understand China’s future. In The People’s Money I try to assemble this picture by decoding official documents, analysing numbers, bringing in anecdotal evidence and factoring in formal and informal conversations—including the nods and winks from officials who cannot acknowledge explicitly what the grand plan is.

This book presents my current understanding of China’s “renminbi strategy” that, if it is successful, should usher in the age of Chinese capital and contribute to building “a moderately prosperous society” by 2020 as spelled out in the country’s Thirteenth Five-Year Plan. I have tried to bring together all the policies that have been implemented since 2010 to assess the long-term plans while also offering an overview of China’s recent economic history, because to understand current developments it is critical to look at where China comes from. Past developments and current events provide the framework to pin down what is in effect a moving target.

The future of China, and of the renminbi, is of course important for China experts, but this book is not just for them. The People’s Money tells a story in plain, nonspecialist language and aims to draw in readers interested in economic and financial affairs who feel put off by the excessive specialism in the field. Colleagues who read earlier drafts were surprised not to find any tables or charts. This was a deliberate choice to make the narrative central to the book’s structure.

Inevitably The People’s Money is also a book on the dollar, as it is impossible to talk about the renminbi, and China, without referring to the dollar, and the United States. Deliberately, I tried to steer away from the discussion on whether the rise of the renminbi will turn into a demotion of the dollar. Many books have been written on the future of the dollar, and most of these books have been written by American scholars for the domestic audience. Here I offer different perspective on how the future trajectory of the dollar will be affected by the international development of the renminbi if China succeeds in its long-term financial and monetary reforms.

Throughout the book, if not otherwise indicated, the dollar is the U.S. dollar. I also refer to the Chinese currency as renminbi. This is the official name that was introduced when the People’s Republic of China was established in 1949. It is also possible to use “yuan,” which is the name of a unit of the renminbi currency—like “pound sterling,” both the official name of the British currency and “pound that is a denomination of the pound sterling.” Originally, the name “yuan” indicated the thaler (or dollar), the silver coin minted in the Spanish empire. Japan’s yen and South Korea’s won are derived from the same Chinese character. Interestingly, in Chinese the U.S. dollar is “mei yuan,” or the “American yuan.”

ACKNOWLEDGMENTS

Writing a book often feels like an act of self-inflicted misery. The support, enthusiasm, and friendship of many people helped me contain my misery within tolerable and manageable levels. Even so, I know I was unbearable! Thank you, Stephen and Philip, and Francesco, Martina, and Sabrina (and extensions) for putting up with me.

A bunch of extraordinary women were critical to keep this project on track. Sarah Okoye kept me organized when I was busy with “the book.” Leslie Gardner believed in the project from when it was just an idea, arranged the “perfect match” and kept smiling even when everything looked pear-shaped. Bridget Flannery-McCoy was the editor from heaven: intelligent, good-humored and engaged. She helped me turn a boring technical draft into a book that a non-specialist audience may be interested to read.

Julia Leung, former Under Secretary for Financial Services and the Treasury of the Hong Kong SAR Government and then Inaugural Julius Fellow at Chatham House, helped me to see the big picture and to understand the long-term impact of China’s renminbi strategy. She was generous with her time in discussing, on a number of occasions, the principal ideas in this book, providing some goalposts at the beginning of the project and sharing her deep knowledge and understanding of China’s financial sector.

Yu Yongding was always happy and willing to share with me his thinking and to provide some warnings when my own thinking was too “Hong Kong like.” Gao Haihong, Li Jing, and Li Yuanfang not only shared with me many lunches and dinners in Beijing, but also their vast knowledge of China’s economy; they supported this project in all possible ways, especially with their friendship. The whole CASS-IWEP team—in particular Liu Dongmin and Xu Qiyuan—provided the physical and intellectual space for numerous workshops to discuss the internationalization of the renminbi.

Special thanks are also owed to Creon Butler, Director of the European and Global Issues Secretariat, Cabinet Office; Mark Boleat, Chairman of the City of London Policy and Resources Committee; and Siddharth Tiwari, Director of Strategy, Policy, and Review Department, IMF. They helped me through numerous conversations and through their participation in a number of conferences and workshops.

Yang Hua, during her post as head of Policy Planning at the Chinese Embassy in London, and George Norris, when he was the First Secretary at the British Embassy in Beijing, helped me reach many experts in China and made some logistical aspects of my China trips less tricky.

Masahiro Kawai invited me to join the Asian Development Bank Institute in Tokyo as a visiting fellow in summer 2013 to learn about the Japanese experience of internationalizing the yen. I am grateful for the numerous conversations and comments on my paper on the yen that provided some of the material I discuss in chapter 6. I also owe special thanks to Giovanni Capannelli, Ganesh Wignaraja, and Hiro Ito.

The library of the Norwegian Nobel Institute in Oslo was a perfect setting for some background work on the economic history of China; it is on one of the open shelves that I found the intriguing report written, in 1975, by the U.S. Congress delegation after an extensive visit to China. I am grateful to Geir Lundestad and Asle Toje for the invitation to spend a few weeks at the Institute as a visiting fellow in 2013.

I would like to mention the visit that Guo Wanda and his colleagues at the China Development Institute (CDI) in Shenzhen organized for me in the summer of 2011. This was my “Marco Polo” moment: Shenzhen is not only where China’s extraordinary transformation began but is also one of most vibrant and functional cities in China.

Throughout the research and the drafting I was privileged to have many discussions on the intricacies of China’s financial reforms and the internationalization of the renminbi with some of the leading policy-makers in the region. I am grateful to Fang Xinghai, Vice-Chairman, China Securities Regulatory Commission; Xia Bin, counsellor of the State Council; Wu Xiaoling, Vice-Chairman of the Financial and Economic Affairs Committee, National People’s Congress; Ma Jun, chief economist, People’s Bank of China; Jin Zhongxia, head of the research institute of the People’s Bank of China and now Executive Director for China at the IMF; K. C. Chan, Secretary for Financial Services and the Treasury of the Hong Kong SAR Government; Norman Chan, Chief Executive of the Hong Kong Monetary Authority; Mu Huaipeng, Senior Adviser at the Hong Kong Monetary Authority; Kuan Chung-ming, Minister of the National Development Council Republic of China (Taiwan) and Jih-Chu Lee, former Vice Chairperson of the Financial Supervisory Commission, Republic of China and now chair of Bank of Taiwan.

Many officials from the region as well as from international organizations spoke widely and freely to me. Some prefer not to be named, but they know who they are, and are aware of my gratitude.

I had many stimulating, interesting and challenging conversations with many experts and private-sector practitioners who were willing to share ideas and research material with me, and I benefited from comments made to me at many conferences and seminars in the region. All these individuals, in one way or the other, had input on this project. I attempt to list all, but I am sure I will inevitably forget some. A big thank you to Jonathan Batten, Andreas Bauer, James Boughton, Greg Chin, Jerry Cohen, Victor Chu, Di Dongcheng, Kelly Driscoll, Andy Filardo, Alicia Garcia-Herrero, Kate Gibbon, Stephen Green, Thomas Harris, Dong He, Paul Hsu, Paul Jenkins, Gary Liu, John Nugée, Stephen Pickford, Qiao Yide, Changyong Rhee, Andrew Rozanov, Jesús Seade, Henny Sender, Vasuki Shastry, Alfred Schipke, David Vine, Wang Yong, Alan Wheatley, Xu Liu, Jinny Yan, Linda Yueh, Geoffrey Yu, Yinan Zhu.

Paul van den Noord, Danny Quah, Li Jing, and Gao Haihong, all of whom read and made valuable comments on the draft, contributed considerably to improving the final output. Of course they do not bear any responsibility for my mistakes. I am also grateful to three anonymous reviewers for offering a huge deal of constructive criticism.

Jon Turney and Annamaria Visentin “volunteered” to read the whole draft with the eye of a lay reader, and provided the acid test of whether the book can break the barriers of specialism. If our friendship survives this trial, then there is a fair chance for the book of not being too boring.

Obviously this project would not have been possible without the practical support of many individuals. I would like to thank Josephine Chao and Ashley Wu for their help in Taipei and for making every trip across the strait a memorable one. I am grateful to Helena Huang, Matthew Oxenford, and Dominic Williams for their assistance with research. Helena dug out a huge amount of data and was invaluable during the fieldwork in China. A word of thanks for Ben Kolstad who coordinated the production of the book, Sherry Goldbecker, who copyedited it, and Ryan Groendyk at Columbia University Press, and for all my colleagues at Chatham House.