The People’s Money: How China is Building a Global Currency
Paola Subacchi, Columbia University Press, £30.00
I recall a meeting a few years ago devoted to the opportunities which would come from the internationalization of the renminbi, the Chinese currency. The room was buzzing and there was talk was of it going truly global and achieving the status of a reserve currency, like the dollar, the pound sterling or the euro.
Fast-forward to 2017 and the mood is more sombre. In The People’s Money – How China is Building a Global Currency, Paola Subacchi, director of the International Economics Department at Chatham House, concludes that the renminbi is not yet a full-fledged international currency; in fact, it is still what she calls a ‘dwarf currency’ which even local guides in Zambia refuse to accept as ‘good money’.
The book elegantly encapsulates the author’s contributions to the topic over the years and its reflective tone aptly captures how the wider financial and policy-making community feels about the currency at present: so much promise, but increasingly troubled.
Her book’s two biggest contributions are describing in great detail the two great problems with regard to China’s foreign exchange regime and renminbi policies in the past 15 years.
First, the country’s persistent intervention in the exchange rate and its failure to allow greater flexibility when demand was strong incurred huge costs, both financial and opportunity. Chapter 5 comprehensively details the damage done. These costs were easy to gloss over or even dismiss when the country was registering double-digit growth, but the distortions are now harder to hide and becoming all too apparent.
Financial repression did not generate any incentives to develop a more mature framework and a sequence for comprehensive liberalization. This has led to China remaining what Subacchi calls an ‘immature creditor’. This applies not only to the country and its companies but also, and worst of all, to the people. Chinese savers still do not have a mature understanding of risk and expect bailouts when investments go sour.
Second, China can trumpet figures detailing ever-wider usage of the renminbi around the world in various formats, but Subacchi unequivocally states in Chapter 8 that China’s promotion of the renminbi has ‘not yet helped it decrease its dependence on the dollar’.
During the global financial crisis central banks around the world sought over half a trillion US dollars in liquidity from the US Federal Reserve. When China offered liquidity in the form of 2.3 trillion renminbi in swap lines after the financial crisis, a mere 81 billion was drawn.
Admittedly, more stable financial conditions after the crisis limited demand, but low usage is just as attributable to a lack of funding interest. Even during times of stress, obtaining renminbi liquidity would hardly help mitigate counterparty risk; it is noteworthy that during the eurozone crisis, European banks wanted dollars, not euros from the European Central Bank.
In the early weeks of 2017 price action suggests the only borrowers are short-sellers in the Chinese currency used abroad – another self-inflicted distortion arising from renminbi internationalization.
The book also reflects the author’s evolving views on renminbi internationalization over time (she implicitly acknowledges an initial ‘Hong Kong-like’ thinking). There is broad acceptance of the view that turning the renminbi into a global currency with full convertibility is good for the world and China in the long term, but there was a lack of sceptical scrutiny of the process, especially during the early stages when the People’s Bank of China equated internationalization with capital account liberalization by 2020.
In hindsight, Subacchi acknowledges that this was clearly not an appropriate goal given the other deficiencies in China’s financial system, but we are still none the wiser as to why and how Beijing got the sequencing so wrong. This is a gap the book could have helped fill quite generously.
This brings us to the second gap, relevant for looking to the past and future: who got it wrong? The necessary policy prescriptions for the road ahead are generally well established, but for renminbi internationalization and convertibility to succeed, the individuals prescribing them are just as important, if not more so. Chapter 9 is entitled ‘Managing is the Word’, but what about the managers? Subacchi’s conversations with Chinese officials, detailed throughout the book, provide valuable snapshots of their thinking, but I am sure the author has questioned whether these officials were the right people to lead the process.
Perhaps it is unfair to expect China to have the same central banking tradition as the West. Nonetheless, competence must have increased exponentially considering the growing legion of Chinese bankers and academics trained in the West over the past 30 years, but will they even be allowed to rise to the occasion under the current regime as political priorities take precedence?
The succession of Zhou Xiaochuan as governor of the People’s Bank of China, in particular, could prove decisive in determining China’s ambitions for the renminbi in the future. Subacchi frequently highlights inertia in Chinese policy-making, but perhaps that is a good thing when it comes to keeping the People’s Bank of China boringly technocratic by Chinese standards. She is extremely well positioned to advise on both the navigation and navigators, and one hopes that Beijing will learn the lessons – both historical and contemporary – detailed in this book and continue to seek her counsel in the future.