Juan Carlos Martinez Oliva：Reflections of the internationalisation of RMB and China’s power

The rapid rise of the renminbi reflects a deliberate series of well-engineered actions meant to spread the Chinese currency all over the world. Chinese authorities have initially proceeded with caution, but have soon accelerated the pace towards a growing use of RMB in foreign trade and in financial transactions; new offshore centers outside of Hong Kong have been created, the most relevant being Singapore and London, but also Bangkok, Doha, Frankfurt, Kuala Lumpur, Luxembourg, Paris, Seoul, Sydney, and Toronto. Many more will certainly follow. A fast growing network of swap lines is contributing to intensifying the use of RMB as a trade settlement currency across the world. China’s swap lines may be viewed as a cross-section of its geopolitical interests ranging from key Asian partnersto oil exporting countries and strategically relevant neighbors. RMB is also present today in the foreign exchange reserves of a large number of central banks across the world.

These steps testify a strong resolve by China to turn the RMB into a broadly accepted currency at the international level. In the face of such unusual developments the question arises on the motivation of China’s authorities.
When trying to quantify benefits from currency internationalization, economic literature usuallylimits the analysis to measurable factors such as the reduction of transaction costs and uncertainty deriving from a third country’s currency fluctuations, and the benefits accruing from seigniorage, the latter being viewed as an interest-free loan from foreigners holding the national currency (Cohen B.J. (2012), “The Benefits and Costs of an International Currency: Getting the Calculus Right”, Open Economies Review, 23: 13-31). However, recent literature conclude that a monetary hegemon such as the United Stated derives little financial benefit from the international role of its currency. Some have even claimedthat downsizing such role would be economically beneficial to the U.S. (Bergsten (2009). “The Dollar and the Deficits: How Washington Can Prevent the Next Crisis.” Foreign Affairs 88, no. 6: 20–38.). Dismissing currency internationalization as a desirable option would nonetheless leave unanswered the question of why China has placed renminbi internationalization at the top of its wish list.
Geopolitical and power considerations may provide the missing ingredient for a thorough examination of renminbi internationalization; this involves adding to the analysis apparently heterogeneous elements such as China’s involvement in regional economic and financial initiatives, and China’s exercise of soft and hard power.By adding realism and conceptual sophistication, the analysis of the interaction between dominant currencies and the power of their issuerappears particularly relevant in the explanation of China’s desire to internationalize the RMB.
Arguably, if the international use of a currency is pushed far enough, it can trigger a virtuous circle based on cross-feeding effects. A powerful country can create incentives for a more intense use of its currency by its clients and partners; conversely, being the issuer of a powerful currency allows extracting benefits, both economic and strategic, from other countries, thus increasing a country’s power. A monetary hegemon may therefore internalize benefits from a widespread use of its currency while network externalities create compelling reasons to perpetuate its monetary dominance across its area of influence.

In line with the above considerations, theprocess of RMB internationalization can be viewed as an element of a deliberate strategy aimed at creating an East Asian economic community with China at its center. In this mold, the rise of RMB can be viewed as a relevant tool in the diplomatic and strategic effort to achieve the goal of President Xi’s Asian Dream of an “Asia for the Asians”. Consistently with its regional grand strategy, China is looking to win neighboring countries' support and friendship while keeping a leader’s attitude on strategic issues such as territorial sovereignty, and maritime rights and interests. By introducing security implications, China’s stated intention to “properly handle territorial and island disputes" adds relevance to the geopolitical aspects of the analysis. Rather than as an autonomous process, RMB internationalization can therefore be viewed as a functional element of China’s power strategy to enhance its geopolitical role in East Asian region.Pouring money into the AIIB and the NDB, andpushing ahead the initiative for a Maritime Silk Road Bank can be viewed as part of China’s continuing soft-power offensive. More in general, establishing renminbi off-shore centers around the world, creating a network of swap agreements with a large number of central banks, projecting new renminbi-based regional financial institutions, reinforcing its charm offensive and soft power while strengthening its strategic and military capabilities, can be viewed as mutually sustaining elements of China’s blueprint.
The late Singaporean Grand Master Lee Kuan Yewhad suggested in an interviewfew years ago that “The Chinese will want to share this century as co-equals with the United States”. While the U.S. might find it hard to surrender parts of world leadership to China, the recent U.S. diplomatic failure in the AIIB confrontation has demonstrated that times have changed, and that many countries, among which historical allies of the U.S., seem today less prone than in the past to adhere to an old-fashioned Cold War model strictly based on American hegemony, and rather inclined to a multilateral approach to global economic issues.
The rapid rise of the RMB as an international currency shows how fast global economic relations may change in the global economy. If that trend is to continue, the Chinese currency might eventually side the U.S. dollar as a world reserve currency. But what matters most in the shorter run is that the RMB has very high chances to become the main regional currency in East Asia, and a powerful vehicle for trade and investment across the area. Rather than as a threat, such an outcome should be viewed as helpful and desirable at the regional level, and a source of stability for the overall international monetary system.