Why has the RMB gone global?

More than a decade has passed since the launch of what is now widely known as ‘RMB internationalisation’, or the strategic attempt by the Communist Party of China (CPC) to expand the global reach and usage of the Chinese currency, the renminbi (RMB). Such is the scale and ambition of this strategy, some policymakers and scholars have proclaimed RMB internationalisation as a form of reserve currency succession – as a challenge to the US dollar as the world’s preferred currency for market exchange. This development is especially intriguing given how the financial system within China remains relatively insulated in spite of market oriented reforms since 1978. Could RMB internationalisation truly be about global currency supremacy when financial flows in and through China continue to be highly scrutinised?

A plausible answer could be derived from the transmogrification of Chinese state capitalism into a global scale process. An inward-looking, centrally-driven project during the Mao Zedong era (1949-1976), Chinese state capitalism has been about the reinstatement of Leninism in political-economic regulation since Deng Xiaoping initiated market-like rule in the late 1970s. Today, Chinese state capitalism has evolved into a multifaceted phenomenon in which the state apparatus stands at once within and outside corporate actors: many Chinese state owned enterprises are publicly-listed in stock exchanges around the world and have bought minority stakes in major corporations overseas. This strongly aligns with the observation by Aldo Musacchio and Sergio Lazzarini that contemporary state capitalism involves state interactions with private investors either as majority or minority shareholders in publicly-traded corporations or as financial backers of purely private firms (the so-called “national champions”). To this could be added that capital accumulation by state-owned and state-linked firms are no longer confined to the territorial boundaries of China: as data from the China Global Investment Tracker reveals, its spatial configuration spans multiple locations and economic sectors worldwide.

These developments are inextricably concatenated with the transformative changes to the Chinese financial system over the past four decades. Myriad channels through which finance is derived, stored and re-allocated contrast the exclusively mono-institutional allocative system of the Mao era. Indeed, where functions are concerned, the Chinese financial system has become congruent with and could easily connect to the broader global financial system. The surprise is full integration remains a theoretical potential.

While it has substantially influenced the domestic supply, circulation and allocation of the RMB to drive job creation and capital accumulation, the Chinese party-state has been simultaneously wary of the capricious and often short-termist flows of cross-border finance so incisively analysed in Ilias Alami’s new book Money Power and Financial Capital in Emerging Markets: Facing the Liquidity Tsunami. After the 2008 global financial crisis accentuated the Chinese financial system’s vulnerability to the effects of American monetary policy (primarily hot money inflows triggered by quantitative easing) and the long-term historical decline of dollar value (due to the vast dollar holdings in the Chinese central bank), the CPC embarked on a multi-dimensional campaign to ensure it would not become a victim of any ‘liquidity tsunami’. RMB internationalisation is one important dimension, and it would be useful to understand why.

The underlying logics

The rationale underpinning the global expansion of RMB usage is primarily attributed to the CPC’s unwillingness to relinquish its fixed exchange rate regime. As I have explained previously, China has to confront the classic Mundell-Fleming trilemma because it wants to be an integral player in the global macroeconomic system: retaining a fixed exchange rate regime means it can only choose monetary control or free capital flows. Accepting free capital flows means a potential loss of financial control (and not to mention the necessary conversion of the RMB into a freely convertible currency, a point which I will return to shortly), which unsurprisingly is not an option for Beijing given its commitment to absolute domestic control. Faced with a growing amount of foreign exchange reserves (primarily the US dollar) because of the fixed exchange rate regime and pressures to re-invest dollar holdings to avoid devaluation, RMB internationalisation became a primary avenue to facilitate trade and capital accumulation in a way that reduces reliance on the dollar. It is in this regard that I concur with Milan Babic that the ‘export’ of Chinese state capitalism is not geopolitically motivated: as David Harvey has cogently argued, capital always seeks to move its crisis tendencies around, and RMB internationalisation eases the growing pressures on Chinese state capitalism by creating new channels for accumulation.

To understand the logic of this process, it would be helpful to distinguish between a trading currency that is oriented towards international trade settlements with the issuing country (China, in this context) and a fully convertible currency that is accepted for any purpose, anywhere (e.g. the US dollar). The RMB clearly falls within the parameters of the first definition – following the People’s Bank of China’s nascent attempts at currency swaps with a handful of trading partners ten years ago, almost 40 national central banks have formed swap agreements, with many banks regularly expanding the swap amounts in tandem with their countries’ expanding trade with China. The underlying objectives of these agreements are to circumvent the use of the US dollar in trade invoicing so as to reduce the exposure to dollar depreciation, and, as the more recent Belt and Road geo-economic initiative demonstrates, to broaden a China-oriented trading and investment sphere. The latter has become widely critiqued as part of a Chinese ‘debt-trap diplomacy’, with the CPC seeking to encourage partners in the Belt and Road initiative to borrow money (in RMB, of course) to finance large-scale infrastructural projects. Whether there is truth to this claim remains disputed; what is clear is the initiative has become a major channel for RMB allocation overseas.

Having such a channel is crucial because it enables the CPC to retain restrictions on the ability of foreign institutions (much less so individuals) to launch portfolio investments and engage in credit provision within China. What this means is that foreign institutions and enterprises are encouraged to use the RMB for trade settlements with Chinese partners, but they are neither permitted to invest directly in China through RMB-denominated financial instruments nor influence domestic interest rates through credit provision for China-based enterprises. RMB-denominated transactions take place in global financial centres approved by Beijing (London, Singapore, Luxembourg, the list keeps lengthening…). How much RMB can be used, where it is to be invested, and for what purposes, remain under the watchful eyes of policymakers in Beijing. This stands in direct contrast to the open US financial market, which allows traders and financiers from around the world multiple reinvestment avenues. And the contrast is arguably deliberate.

While the US system makes it attractive for foreign economic actors to hold dollars, it also makes it difficult to impose domestic monetary stimulus: quantitative easing after the 2008 financial crisis only resulted in ‘hot money’ outflows – hence the previously mentioned ‘liquidity tsunami’ – rather than stimulate growth within US territories. If anything, RMB internationalisation allows for a systematic management of monetary stimulus in China: the CPC could not only try to stimulate domestic economic growth through expanding currency supply, but also ship this excess supply overseas in locations of its choosing if domestic opportunities become exhausted. This is the primary function of RMB internationalisation.

To reinforce its control over RMB in circulation overseas, the CPC has attempted to create ‘backflow channels’ for overseas holders of RMB. As I demonstrate in my recent book On Shifting Foundations: State Rescaling, Policy Experimentation and Economic Restructuring in post-1949 China, policy experimentation to create these channels were primarily based within two territories in the Pearl River Delta – Hengqin and Qianhai – that are adjacent respectively to Macau and Hong Kong (both open economies by virtue of their colonial legacies). Research into the implementation of policies to facilitate free usage of RMB held by Macanese banks in Hengqin and interest-rate liberalisation for credit provision from Hong Kong banks to enterprises based in Qianhai has revealed an unsurprising outcome – funds have flowed into short-term developmental projects centred on real estate and logistical infrastructure and driven by state-owned enterprises (the same growth formula in most other Chinese cities), rather than into portfolio channels that could potentially trigger further reforms. While further studies on ‘backflow channels’ are required to ascertain their effectiveness, my study and the recent tightening of state control suggest that re-investment opportunities in the portfolio sector remain limited. Whether this encourages those holding RMB overseas to increase trade with or foreign direct investments in China (i.e. the valorisation of RMB holdings) have therefore become intriguing research avenues that would advance knowledge on the impacts of RMB internationalisation on domestic economic growth.

Putting RMB internationalisation into perspective

Analysts have found the persistence of Chinese state capitalism to co-exist uneasily with the demands of global economic integration (as driven and defined by the so-called ‘Washington Consensus’). RMB internationalisation is emblematic of this persistence, which now extends to the global scale. Any lack of alignment or convergence with the Washington Consensus is neither surprising nor historically inevitable, however. This is because of a crucial empirical fact introduced at the beginning of this essay: the CPC is committed to modelling its political-economic regulation under Leninism rather than to adhere absolutely to the principles of the ‘Washington Consensus’. Because the emphasis of Leninism is that of the state as the key driver of capital accumulation, any approach that undermines this specific form of state power would be circumvented. It is for this reason that RMB internationalisation would never be about superseding the dollar’s global reserve currency status in the first instance. Its overarching logic is geographical: the Chinese financial system has generated an enormous amount of risks associated with state-monopolised credit creation and a fixed exchange rate policy, and these need to be shifted to new locations around the world. This process is underway.

Dr. Kean Fan Lim is Lecturer in Economic Geography at the Centre for Urban and Regional Development Studies (CURDS), School of Geography, Politics & Sociology, Newcastle University, UK. He has researched and published extensively on East Asian economic development, focusing primarily on China, Hong Kong, Taiwan and Singapore.