In The People’s Money, Chatham House’s Paola Subacchi discusses the internationalization, or relative lack thereof, of the renminbi. The subject can be rather like a room of mirrors if one does not follow developments in international currencies, but for those that do, the book serves as a clear overview of the history and the issues, both in general and those facing Chinese policy-makers in particular.
The importance of the subject is perhaps self-evident: the world has lived so long with the US dollar as the preeminent reserve currency, it is hard to fathom what would happen if it were co-equal with another. This is not just a matter of the rise of China, and the cooperation or competition with the United States, but also how the dynamics of an international currency system would play out without a clear single anchor.
Subacchi, perhaps wisely, does not stray far into this theoretical territory but rather concentrates on the renminbi’s steps down this road. The conclusions are that there has been progress (if one considers it that), but that the renminbi remains what Subacchi evocatively calls a “dwarf currency”, one that plays an international role that is no way commensurate with China’s global economic and political status. In relating the progress, she also points out the impediments: political, institutional, from vested interests and just plain inertia.
The diminutive status of the renminbi relative to the weight and importance of China in just about all else is a reminder of how new and unprecedented this all is. All other international or reserve currencies are reasonably venerable (or, in the case of the euro, at least have venerable direct antecedents) and are based on developed country economies. Explaining the renminbi therefore means taking a closer look at much that might otherwise be taken more or less for granted. So along the way Subacchi gives capsule summaries of the nature of currency in general, international currencies, reserve currencies, the development of the Chinese economy and its relation with the world, the various stages of world’s monetary structure over the past century or more, the factors that move exchange rates, financial crises, all through more recent developments such as the renminbi being added to the IMF’s Special Drawing Rights (SDRs).
Subacchi makes an effort to write for the non-specialist, no easy thing for a subject with so many feedback loops and twists and turns. But I wish she had not, as do so many books on economics, compared wealth with income:
Today there are more than 1,800 billionaires in the world, with a combined wealth of almost $7 trillion. This is larger, in nominal terms, than Japan’s economy.
Wealth is an amount at a given point of time; GDP is an amount accumulated over a period of time. The units are different.
Predictions are hard to make; Subacchi’s most concrete conclusion is that “the renminbi is here to stay.” One difficulty which Subacchi touches on, but does not word is quite this way, is that internationalization is not a linear process. International currency status is to some extent the result of what elsewhere would be called network effects: the more people that accept a currency, the more people that will accept it. The US dollar is and remains the preferred currency because the US has enough of what people around the world want—investments, goods, services—that someone, somewhere is willing to take the dollars for some actual dollar-denominated process. The renminbi is not as liquid as the US dollar, not just because China’s economy is smaller, but also because there are many more restrictions on how the renminbi can actually be used.
So, there will probably be tipping points when, all of a sudden, Brazilians will be willing to contract shipments of soybeans to Nigeria in renminbi; that’s when everyone will know that the currency has truly come of age. One suspects this time is still some way off.