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China wants its exorbitant privilege
China is working for quite some time in the direction of making renminbi/ yuan a reserve currency

On August 15, 1971, President Richard M. Nixon announced his New Economic Policy, a program “to create a new prosperity without war.” Known colloquially as the “Nixon shock,” the initiative marked the beginning of the end for the Bretton Woods system of fixed exchange rates established at the end of World War II.” And Nixon directed the suspension of the dollar’s convertibility into gold.”

State Bank of Pakistan recently announced that “Pakistan is hoping to boost trade and economic ties with China by trading with the country in yuan”. It is an important development since it shows that China wants to acquire exorbitant privilege as has only been enjoyed by the dollar after Nixon wound up the non-working Bretton Woods system and created dollar as the world currency. China is working for quite some time in the direction of making renminbi/ yuan also a reserve currency.

A report was published in 2006 entitled ‘The Timing, Path, and Strategies of RMB Internationalisation’, by a study group set up by the People’s Bank of China (PBoC), China’s central bank (PBoC Study Group, 2006). ‘The time has come for promotion of the internationalization of the yuan,’ the study group argued. Internationalization ‘can enhance China’s international status and competitiveness significantly [and] will increase its influence in the international economy’. China will ‘have a greater say’ and will enjoy ‘a rise in power standing’. We ‘should take advantage of the opportunity’, the report concluded. Internationalisation, it said, is ‘an inevitable choice’.

 

According to Gao Wei, an official from the Chinese Department of International Economic Affairs of Ministry of Foreign Affairs, said on March 23, 2009, without referring explicitly to the dollar, the Governor of the People’s Bank of China (PBOC) called for “an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run . . . ”

In 2013, the Xinhua News Agency exhorted the United States “Instead of honoring its duties as a responsible leading power, a self-serving Washington has abused its superpower status and introduced even more chaos into the world by shifting financial risks overseas… the introduction of a new international reserve currency that is to be created to replace the dominant US

dollar …”

Lawrence Summers, Secretary of the Treasury under President Clinton, characterised the founding of the Asian Infrastructure Investment Development Bank told Financial Times “as the moment the United States lost its role as the underwriter of the global economic system…no event since Bretton Woods comparable to the combination of China’s effort to establish a major new institution and the failure of the US to persuade dozens of its traditional allies, starting with Britain, to stay out of it.”

Benjamin J Cohen in his paper “Renminbi Internationalisation: A Conflict of Statecrafts” writes that China is intent on establishing itself as one of the world’s leading powers. Internationalization of the renminbi is an integral part of that ambition. China’s pursuit of renminbi internationalisation has followed two interrelated tracks to date: one focusing on the use of the renminbi in foreign trade; the other focusing on the currency’s use as a store of value in international finance. He writes “Today, the dollar is under attack as never before.

Challenges to its supremacy are nothing new, of course. Over the past half century, several currencies – including West Germany’s old Deutsche Mark, the Japanese yen and, at the dawn of the new millennium, the euro – have seemed poised to surpass the dollar, only to fade over time. Now a new rival looms on the horizon – the Chinese renminbi (translation: ‘people’s currency’), also known as

the yuan.

Many see the rise of the renminbi as the most serious challenge to the dollar yet. They believe the Chinese currency is perhaps even destined in time to take over the dollar’s pre-eminent role in international markets.”

Concerted actions by Brazil, Russia, India, China, and South Africa (BRICS) to pursue a dollar-alternative path, most notably the establishment by BRICS of a New Development Bank (NDB) as a rival to the west-dominated Bretton Woods system. (This is in addition to China’s formation of a China-led Asian Infrastructure Investment

Development Bank (AIID), which, combined with the BRICS Bank, poses a challenge to the World Bank and the IMF.

A milestone was reached in 2016 when the renminbi was formally admitted into the basket of currencies used by the International Monetary Fund (IMF) to set the value of its synthetic reserve asset, the Special Drawing Right (SDR). This was an honour previously accorded only to the dollar, euro, pound and yen, and was the subject of much discussion (Wang, 2015). Many doubted whether the renminbi had yet met the necessary criteria for inclusion. Reservations were overcome, however, by a vigorous campaign mounted from Beijing. China’s hope, clearly, was to trigger increased use of its currency as a reserve asset; until now such use has remained limited. According to one knowledgeable source (Liao and McDowell, 2016), as many as three dozens central banks have invested in renminbi-denominated claims in recent years. But accumulations are small. In total, the renminbi still accounts for no more than 1 per cent or so of global reserves. It is therefore fair to say that the renminbi still has a considerable way to go to match Beijing’s aspirations for its internationalization. Achievements have been considerable and most likely will continue into the future.

But on neither track has the renminbi yet come close to challenging the dominance of the US dollar. In the foreign exchange market the dollar appears on one side or the other of 88 per cent of all trades, some 22 times the renminbi’s share (BIS, 2016). And the dollar still accounts for about two-thirds of global reserves. The disparities remain enormous.

Paola Subacchi is not far off in describing the renminbi today as still something of a ‘dwarf currency’ (Subacchi, 2016).

Pakistani Newspaper Dawn had published a story on June 21st, 2017 “Exclusive: CPEC master plan revealed” in which its has concluded that “…And lastly, through greater financial integration, the plan seeks to advance the internationalisation of the RMB, as well as diversify the risks faced by Chinese enterprises entering Pakistan.”

Thus far, there are two countries that have officially allowed the yuan to be legal tender: Angola and Zimbabwe. In the case of Zimbabwe, the decision was aided by the fact that its own currency had collapsed in 2009, with an inflation rate of 500 billion per cent (yes, five hundred billion). They shifted to the US dollar and the South African rand as legal tender, then in 2015 allowed the yuan in. Pakistan is the third country to make yuan a legal tender.

(The writer is the former chairman of TRAI)