Report

Anaemic ascent: why China's currency is far from going global

14 Aug 2012
Description

Severe economic challenges and political obstacles look sure to resign China's currency to a fate short of major reserve currency status.

China’s currency is on the rise. Buoyed by the economy’s outperformance and global trade impact, policy steps over the past few years have thrust the renminbi onto the global stage. Is the renminbi going to climb to become a major reserve currency? Not so fast.

Despite impressive progress, obstacles loom. The path to reserve currency status necessitates a near complete retooling of China’s economic model: lifting capital controls, floating the exchange rate and liberalising financial markets. This involves facing down powerful vested interests and a willingness to expose the economy to unknown stresses and external volatilities. This is not going to happen quickly.

So why bother? The central bank, it appears, may be pursuing ‘reform by Trojan horse’. By pinning strategic value to internationalisation, reformers are able to achieve buy-in from top leaders in pushing their own agenda. The central bank does not want internationalisation per se, but the liberalisation that moving towards internationalisation brings. It allows, for example, authorities to push towards a floating currency, without appearing to cave to US political pressure in doing so.

Nonetheless, given rising domestic pushback and a cacophony of competing voices, strong policy support for the necessary continued reform may be lacking. Combine this with the unpalatable economic consequences of further internationalisation, and it appears that breathless commentary about the rise of the renminbi is misplaced. The renminbi’s ascent looks distinctly anaemic.

Key findings:

  • China’s currency is on the rise, but obstacles loom: the path to reserve currency status necessitates a near complete retooling of China’s economic model.
  • The central bank may be pursuing ‘reform by Trojan horse’: by pinning strategic value to internationalisation, they have been able to achieve buy-in from top leaders in pushing their reform agenda.
  • Given rising domestic pushback, a cacophony of competing voices and the unpalatable economic consequences of further internationalisation, it appears that breathless commentary about the rise of the renminbi is misplaced.
Publication Details
Published year only: 
2012
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