Written by Sarah Hall.
The recent and rapid internationalisation of China’s currency, the renminbi (RMB) has been identified in policy, practitioner and academic circles as one of the most significant developments within the contemporary international financial system. This is not surprising because the transformation in the status of the RMB from a domestic orientated currency to one that has been identified as potentially challenging the US dollar as the global hegemonic currency is dramatic.
Prior to 2004, RMB denominated trading was prohibited outside mainland China but by 2015, the RMB had expanded to become the fifth most used currency globally for international payments. However, whilst much of the public and political debate has focused on a potential endpoint to RMB internationalisation, assessing this on the basis of the relative strength of the RMB vis-à-vis other currencies, much can be learnt about China’s aspirations within the international financial system by examining the process and practice of RMB internationalisation.
For example, such an approach reminds us that although the internationalisation of the RMB has been rapid, it has not been a linear process without its setbacks. Perhaps most notably, in 2015, the Shanghai stock market crisis was only averted following state intervention of more than US$800 billion of public and private funds.
By foregrounding the process and practice of RMB internationalisation, three important dimensions of what we might term ‘global monetary transformation with Chinese characteristics’ can be identified.
First, RMB internationalisation has been conducted through a distinctive geography in which China has enrolled a series of international financial centres in major cities to act as offshore (i.e. beyond mainland China) RMB centres. Initially, these have been concentrated in cities geographically proximate to China, notably Hong Kong and Singapore. However, more recently, a network of international financial centres outside of Asia have developed led by London and other European centres, notably Luxembourg.
This is a unique geography that looks rather different to existing mappings and visualisations of a US-led international financial system. In the latter, the focus remains on New York and its relations to other European financial centres, particularly London through the New York-London or so-called NY-LON connection. Yet, in the case of RMB internationalisation, New York was notable in being a latecomer to the process with the Peoples Bank of China only designating Bank of China as the official RMB clearing bank in New York in September 2016. The awarding of a clearing bank to New York came after similar pronouncements for a range of other financial centres that Wall Street would typically see as much less competitive including Frankfurt, Johannesburg and Sydney. However, this unique financial centre geography of RMB internationalisation is not trivial in its implications.
On the one hand, it is a very real and physical manifestation of one of the more important drivers of RMB internationalisation in the first place – a desire by China to reduce its exposure to US dollars that dates back at least until the 2007-8 financial crisis. Moreover, the strained foreign policy relations between China and the US continue to manifest in economic policy. This is exemplified most clearly recently by the launch of tariffs on metals by the US in Spring 2018 with China remaining resolute in its ambition to protect its own interests in this dispute.
The second insight into ‘global monetary transformation with Chinese characteristics’ gained by attending to the practice of RMB internationalisation builds on these Sino-US relations and focuses on how China’s aspirations within the international financial system are by no means purely economically motivated, although that clearly plays a part.
Rather, the internationalisation of the RMB reveals the ways in which political, economic, foreign policy and diplomatic relations are tightly entwined and collectively shape the pace, scale and shape of RMB internationalisation. In this respect, the designation of London as one of the first, and leading Western offshore RMB centres is instructive. For example, in many ways, the economic rationale for enrolling London as an offshore financial centre is far from compelling and questions still remain about the value to the financial community in London of having a set of RMB denominated activities. However, there are political and foreign policy advantages to both Beijing and London in developing London’s capacity. It is, therefore, not surprising that London’s role in RMB internationalisation has been a regular topic of conversation and policy decisions in the UK-China Economic and Financial dialogues that have been central in facilitating this strand of RMB internationalisation.
For Beijing, it is recognised that having an established international financial centre involved is vital in proving credibility, economically and politically to RMB internationalisation. The potential for London to fulfil this role is amplified because of the longstanding colonial links between the UK and China as well as strong interpersonal ties between the two countries for key decision makers notably George Osborne who was one of the key architects of London’s place within RMB internationalisation during his time as Chancellor of the Exchequer. Meanwhile, for London, the opportunity to play a central role in RMB internationalisation came at a time when London’s financial community was particularly open to new financial markets as the City of London sought to cement its position as a leading international financial centres following the 2007-8 financial crisis.
Third, focusing on the process and practice of RMB internationalisation reveals the ways in which China does not only seek to participate within the international financial system as it currently operates, but is increasingly concerned with shaping the international financial system in particular ways that are often distinct from the existing US-dominated financial architecture. An early example of this comes from the formation of the Asian Infrastructure Investment Bank (AIIB) that was initiated by China in 2015 with the aim of facilitating infrastructure investment in Asia-Pacific.
This was initially interpreted as China seeking to set up a governance institution for the international financial system that was not part of the US-led architecture exemplified by the World Bank. More recently, China has sought to use its links with European financial centres, notably London and Luxembourg, to develop governance agendas around green finance through framing what counts as a legitimate green bond. This activity is closely related to wider economic, political and foreign policy aspirations that China has for leading in green finance through the wider project of delivering a green belt and road initiative.
Taken together, these three insights highlight how focusing on the end point of RMB internationalisation prevents a full understanding of the significant role China is currently playing within the international financial system. Recent developments reveal how closely related economic, political and foreign policy relations are being used to deliver ‘global monetary transformation with Chinese characteristics’ in ways that seek to destabilise, or at least question, the current global monetary order and its governance regime.
Key developments currently in progress globally, notably Brexit in the case of the EU and the Trump administration’s approach to global economic development in the US, suggest that attending to the process and practice of RMB internationalisation will only become more important as China continues to shape the world economy in distinctive and important ways.