The mighty Renminbi?

RASHMEE ROSHAN LALL February 25, 2019

Economist David Lubin begins his excellent piece on the Renminbi with a telling quote. “Great powers”, says the Nobel-laureate economist Robert Mundell, “have great currencies”.

So where is China’s, asks Mr Lubin, author of ‘Dance of the Trillions: Developing Countries and Global Finance’.

In the past 11 years, one might have expected the Renminbi to become one of the world’s most significant currencies. Indeed, after the 2008 financial crisis, the Chinese currency assumed greater importance. In 2015, “almost 30 per cent of China’s trade was being settled in renminbi; Hong Kong banks were holding some RMB 1 trillion worth of yuan-denominated deposits”. More crucially, 2015 was the year the Renminbi became one of currencies that underpin the International Monetary Fund’s reserve asset. It seemed as if the Renminbi was acquiring the status of a global reserve currency.

Except that it hasn’t.

Most of us price things in dollars. International commerce is run in dollars. As The New York Times recently noted, “The dollar has in recent years amassed greater stature as the favored repository for global savings, the paramount refuge in times of crisis and the key form of exchange for commodities like oil.”

Apparently, “dollar-denominated lending to borrowers outside the United States, excluding banks, soared between late 2007 and early 2018, according to the Bank for International Settlements. It increased to more than 14 per cent of global economic output from less than 10 per cent.”

Why has the Renminbi not challenged the dollar in quite the way it should?

The New York Times suggests the following reasons – “the Chinese government’s restrictions on taking money out of the country and its alarming detentions of foreigners”. But Mr Lubin puts it much better. The Renminbi doesn’t have the three things sought by international investors: legal security, ease of use and unrestricted convertibility.

The situation may not change in a hurry because, as Mr Lubin writes, “While Chinese policymakers seem interested in the internationalization of the renminbi, they appear less interested in its liberalization.”

That said, he acknowledges change might happen in the long-term by means of “a Bretton Woods-like renegotiation of the international monetary system”. Only then would it be possible for the Renminbi to be a truly global currency even as China retained some control over managing the capital account.

Mr Lubin ends as an advocate for patience. The US overtook the UK as the world’s largest economy in the mid-1850s, he points out, but sterling accounted for 87 per cent of global foreign exchange reserves even in 1947.