The International Political Economy of the Renminbi

Currency Internationalization and Reactive Currency Statecraft

Hyoung-kyu Chey

• Editore: Routledge
• Anno: 2021
• ISBN:
  9781000473438
• Edizione: 1
• Argomento: Business
• Categoria: Operazioni di cambio

Although the internationalization of the Chinese renminbi is an important international political event, most of the studies of it place their analytical focuses largely just on China itself, the issuer of the currency. In contrast, this book addresses the question of how foreign states have responded to the renminbi's internationalization, during its initial phase through the 2010s, and thereby breaks new ground in exploring the international politics of currency internationalization. It builds a theoretical framework for analyzing a state's policy toward renminbi internationalization, developing the key concept of reactive currency statecraft. It then applies this framework to the four select cases of the United Kingdom, Japan, South Korea and the United States.

This book reveals that all four of these countries have deliberately utilized their policies related to renminbi internationalization as means of achieving their own foreign policy goals associated with China, goals that have been principally economic in some cases but political in others. Remarkably, the predominant mode of response to the renminbi's internationalization has been accommodative. Even the United States and Japan—China's chief geopolitical and also international currency rivals—have never attempted to actively suppress it.

This study provides new insights to anyone concerned with the transformation of the world monetary order, while also contributing a valuable analysis of the international politics surrounding the rise of China.

1 Introduction

DOI: 10.4324/9781003211532-1

The history of world politics is often told as a story of the rises and declines of different nations and regions, and the rise of China is arguably a defining event in the international relations of our time. China’s power is growing, while voices proclaiming an erosion of the era of Pax Americana are increasingly heard. At this moment the question of how other countries react to this historical change is as relevant as ever, and, indeed, is at the center of intensive debates in present international relations scholarship.

The history of the world monetary order can likewise be told as a saga of the ascents and descents of various international currencies. And the most important development in recent years in this regard also involves China. It is the international rise of that country’s currency, the renminbi (RMB, literally the “people’s currency”), also known as the “yuan” (its primary unit of account) and sometimes as the “redback” in parallel with usage of the term “greenback” for the US dollar (hereafter the dollar). The renminbi’s presence in the international currency hierarchy had for a long time been unnoticed, despite the spectacular rise of China in the global political economy. The “people’s currency” has at last stepped out onto the stage, however, attracting great attention from around the world.

The internationalization of the renminbi began to take off right after the global financial crisis of 2008, and progressed rapidly through the first half of the 2010s. It reached a peak in the middle of 2015, when the renminbi once even overtook the Japanese yen to rank as the world’s fourth most used global payment currency (SWIFT, 2015b). Reflecting this stellar ascension in the renminbi’s international standing, the International Monetary Fund (IMF) announced in November of that year that it would be included from October 2016 in the elite currency basket of the Special Drawing Right (SDR)—a reserve asset issued by the IMF—along with the dollar, the euro, the yen and the British pound. This was a symbolic and milestone event in the process of renminbi internationalization, meaning that the renminbi had obtained IMF certification as a major international currency. Also notable is the fact that the renminbi’s weight in the SDR basket (10.0 percent) is higher than those of both the yen (8.3 percent) and the pound (8.1 percent).

It is true that, despite its initial impressive development, the internationalization of the renminbi is still in its nascent stage. Furthermore, its overall pace has slowed since the middle 2010s. Nevertheless, as of November 2020 the renminbi stands as the fifth most used global payment currency, surpassing both the Canadian and the Australian dollars (SWIFT, 2020b). Moreover, its share in the world’s foreign exchange reserves has continued to grow in the second half of the 2010s as well, albeit quite gradually. The saga of the redback’s international journey is still ongoing.

In the international relations literature it is frequently anticipated that the rise of a new great power, and in particular one that is dissatisfied with the existing international order, will lead to a war between that emerging power and the existing dominant one.¹ But how about the rise of a new international currency? How have foreign states responded to the very significant global monetary event of the renminbi’s internationalization? This book addresses that question, with a primary aim of helping to advance study of the international politics of currency internationalization. It develops the concept that I call reactive currency statecraft, defined as a foreign state’s strategic policy toward an international currency, and builds a theoretical framework that analyzes it from the broad perspective of foreign policy, as well as international currency policy, with a focus on the case of the Chinese renminbi. It then applies this framework to explore how four particular states—the United Kingdom, Japan, South Korea (hereafter Korea) and the United States—have reacted to the internationalization of the renminbi during its initial phase through the 2010s.

This study demonstrates that the internationalization of the renminbi has to date been essentially an international political economic event, rather than mere economic evolution. It finds that international politics has been significantly involved in the currency’s internationalization process. All of the case countries have dealt with the renminbi’s internationalization strategically, in one way or another, using it to achieve their foreign policy goals vis-à-vis its issuer, China. Remarkably, the predominant form of reaction to the renminbi’s emergence as a new international currency has been accommodative, across the case countries. None of them—including the United States and Japan, China’s chief geopolitical as well as (alleged) international currency rivals—have ever attempted to actively suppress the currency’s international rise. Some have enthusiastically pursued policies supportive of renminbi internationalization, with aims of establishing offshore renminbi hubs. They have hoped to maximize their economic gains from the growing Chinese economy by binding themselves closely with it through expanding their uses of its currency. Other states have meanwhile sought to obtain political gains via their renminbi-related policies, in effect using policy measures favorable to renminbi internationalization as diplomatic means of promoting their political relationships with China.

These findings suggest that the international political conditions for the renminbi’s internationalization have to the present time been largely favorable. And this in turn implies that, if China successfully addresses the current major economic weaknesses of the renminbi, we may well see a rapid re-elevation of the “people’s currency” in the world’s currency hierarchy.

The international politics surrounding renminbi internationalization

A good starting point for this study may be to explicate why the renminbi’s internationalization is a central international political issue, and why it is necessary to examine the responses of foreign states to renminbi internationalization in order to fully understand it.

International political implications of currency internationalization

In order for the world economy to operate, the presence of a currency that can be used for international economic activities, in other words, an international money, is a necessity—just as a modern national economy depends on the existence of a domestic currency. There is, however, no world government, and hence no world currency either. In consequence, for their international transactions market players rely on certain national currencies—most frequently the US dollar at this moment. Yet the matter of which currency, or currencies, plays the role of the leading international currency has important implications for world politics. The internationalization of a currency augments its issuing state’s power resources, and alters the international power configuration thereby.

International economic relations always generate a power dimension, as Baldwin (1985: 60) stresses.² And international monetary relations specifically are no exception. To begin with a well-known example, the internationalization of a currency generates substantial economic benefits to the issuing state, and economic gains are of course a fundamental source of a nation’s international power. International seigniorage frequently appears first on the list of the economic benefits accruing to an international currency issuer. Seigniorage historically meant the profit that a country’s sovereign enjoyed when he or she minted metals such as gold or silver into coinage. In the context of international currencies, seigniorage refers to the profits arising from foreign holdings of the domestic currency, and these profits generally have two sources. The first is foreign holdings of cash—bank notes and coins—which are equivalent to interest-free loans from foreigners made to the issuing state. No interest is paid on these cash holdings, and the issuing state can, as a result, enjoy interest savings. The other source of seigniorage profits is the low interest rates on financial assets denominated in the currency—in other words, the reduced borrowing costs for the issuing state—that emerge due to the high demand for these assets. Such low borrowing costs may among other things help the state to finance its military budget. The seigniorage benefits from issuance of an international currency tend in reality to be not so considerable, however, especially when interest rates are low. According to some estimates in the first decade of the 2000s, the interest savings that the United States enjoyed from the dollar notes circulating outside the country amounted to a mere 0.1 percent of its gross domestic product (GDP), even though the decline in borrowing costs for dollar assets ranged from 1 to 3 percent of GDP (Cohen, 2012b: 16–17).³

Arguably more important economic benefits from the issuing of a consequential international currency lie in the issuer’s ability to finance balance of payments deficits with its own currency, which allows it to delay the adjustments required by these deficits. This ability expands the issuer’s macroeconomic flexibility by weakening the market disciplinary pressures on its economic policies. Indeed, as is often noted, Charles de Gaulle’s economic adviser Jacques Rueff (1972) once remarked in this regard that the United States had been able to run large volume current account deficits “without tears,” while de Gaulle’s finance minister Valéry Giscard d’Estaing referred to this as America’s “exorbitant privilege” (Eichengreen, 2011: 4). In addition, domestic financial institutions, firms and consumers tend to benefit from the internationalization of their domestic currency. Domestic banks and non-bank financial institutions gain in business owing to their privileged access to the resources of their central bank, as well as their competitive advantages in dealing in their home currency. Domestic firms engaged in cross-border activities benefit by sidestepping any exchange rate risks, which are instead borne by their foreign counterparts. Domestic consumers profit as their purchasing powers grow along with a rise in the currency’s value due to increased foreign demand for it.

The international use of a currency significantly enhances its issuing state’s international power through diverse channels as well. The issuer’s policy autonomy from other states increases, as its use of its own currency for international economic activities lowers its dependence on foreign currencies, thus in turn reducing foreign states’ capacities to influence it. Moreover, the issuing state’s heightened macroeconomic policy autonomy from the markets, discussed above, gives it a greater potential to influence other states. This is because of how its fundamental power resources are enhanced via its increased ease of utilizing its economic resources to pursue its foreign policy goals, including paying for its armed forces (Cohen, 2006, 2015, 2019; Oatley, 2015). In fact, while any other state running deficits as large as the United States does might face strong market pressures to cut its spending or raise taxes, the United States is able to maintain the world’s largest defense budget, to thus enjoy both “guns and butter” (Wheatley, 2013b: 19). This US macroeconomic policy autonomy arises chiefly out of the dollar’s reserve currency and investment currency roles—that is, the store-of-value roles—since they create key incentives for foreigners to hold it (Cohen, 2019: 28–9).⁴

A currency’s internationalization also augments in various ways its issuer’s ability to influence foreign actors more directly, which is perhaps the ultimate goal of statecraft. First, a currency’s internationalization boosts its issuing state’s coercive power, in other words its “hard power,” over other states, as foreign actors’ dependence on the currency for international economic activities generates substantial political leverage or advantages to its issuer. The issuing state can exercise “currency statecraft” (Cohen, 2019) by leveraging its currency’s international role as a tool for achieving its foreign policy goals, to either provide negative incentives to punish unwanted behavior or positive incentives for cooperative action. This power of an international currency arises largely from its utilization as an international medium of exchange by private actors (McDowell, 2020; Wheatley, 2013a: 11).

Some good instances of the exercise of this power of its currency as a stick have been the United States’ employments of financial sanctions against hostile countries, such as Iran, North Korea and Russia recently. While the dollar is the dominant international currency and all dollar payments must be ultimately cleared through the US financial system, Washington is able to exclude any financial institution it wishes from the US-based dollar clearing networks (McDowell, 2020; Wheatley, 2013a: 11).⁵ Meanwhile, the United State’s leading roles in dealing with the 2008 global financial crisis, in particular its provision of dollar liquidity through the Federal Reserve’s dollar swap lines, may be a good example of how the issuer of a leading international currency can use it as a carrot in its foreign policy. The centrality of the dollar in global finance renders the United States capable of exercising substantial influence over the management of international financial crises, because it possesses an unequalled ability to provide dollars for foreign governments and financial institutions, and can choose when and to which foreigners it will offer them (Chey, 2012b; Helleiner, 2014, 2016; McDowell, 2016).⁶

The extended international use of a currency also strengthens the issuing state’s “structural power”—its power to shape the framework within which actors operate (Strange, 1988: 25)—helping thereby to boost its capacity to write and rewrite the rules of the game for the world economy. The issuing state may exploit this power proactively, but it can also be exercised even without the state’s intent simply “by being there” (Strange, 1996: 26). For instance, the dollar’s status as the leading international currency helps to ensure that discussions of the international monetary system take place within the context of dollar primacy. Furthermore, the reliance on a particular international currency tends to generate what Kirshner (1995) calls “entrapment,” by transforming its users’ perceptions of their own preferences in ways favorable to the issuing state’s interests. For example, those who use the dollar tend to prefer stability in its value and close relationships with the United States for their nations, and may try to advance those preferences in their domestic policymaking processes, which can lead to alterations in their nations’ policies in ways that support US interests.

In addition, the internationalization of a currency may facilitate its issuer’s “soft power”—its ability to get others to do what it wishes through attraction or cooption rather than having to use coercion or payment—given that currencies have long been viewed as core, tangible symbols of sovereignty, and their extensive international uses highly visible signs of the elevations of their issuing nations’ international statuses (Cohen, 1998: 121; Helleiner, 2006: 82). In this respect, Wheatley (2013b: 28) describes the dollar as “an instrument in the arsenal of Washington’s diplomatic power in much the same way that Apple products, Coca Cola, Hollywood film stars and the National Basketball Association project an attractive image of the country worldwide and so positively influence attitudes toward the US.”

There are on the other hand also certain costs t...