Of all the Chinese contradictions that have been recently coming to light, the current monetary situation is certainly the most glaring. How is it possible that the currency of the second largest economy in the world is virtually unknown? Does it make sense for China to have such a nationalized coin, considering its integration in the global economy? How long can the world – China included – maintain this extravagance?
The Chinese leadership is studying the situation, evaluating its advantages and its flaws. They are called to act, but have been hesitant to commit one way or the other, trapped by impotence and indecision. The Renminbi, whose name means “money of the people,” is only marginally convertible on the international market, if at all, but Beijing has been promoting its use in regulating Chinese commerce and investments. Agreements have been signed with various other countries that would allow the use of the Renminbi on certain offshore markets, and the government has raised its availability in Hong Kong banks. Despite these measures, the Renminbi still has yet to make any true progress towards full convertibility.
Expected in 2020, full convertibility of the Renminbi will accompany the rise of Shanghai as an international hub for finance and commerce, both important steps that will raise China’s status to a level more befitting of its size. The results so far, however, have been less than promising. The Rmb is still rarely used or held as reserve, the agreements that have been are more out of convenience than conviction, and the currency has yet to be included in the ranks of the International Monetary Fund.
The indecision is delaying the undeniable advantages that would rise from the internationalization of China’s monetary system. Transaction costs would be reduced, benefitting commerce and trade, and it would provide an important pillar of stability to a global economy that needs it now more than ever. China has long been asked to take on this important responsibility, and the strategic impact would be major. Internationalizing the Remninbi would reduce the dominance of the US dollar in worldwide commerce, an event that would have immediate political repercussions.
The Renminbi, however, is protected, trapped, by limits and regulations imposed by an economic decision-making system that will not allow it to be exposed. The People’s Bank of China, China’s central bank, is directed by the government; movement of capital is strictly controlled, and exchange rates are determined by the administration, not the market. In fact, it is the rigidity by which its course is set, not the value of the Renminbi itself, that is seen to be the problem. The Unites States insists that its value be kept artificially low, but investors know that the real problem is the tight leash Beijing keeps on its currency.
Set against this rather un-dynamic backdrop, the current debate in Hong Kong over monetary policy offers a sign of possible change to come. Joseph Yam, the ex-governor of the Hong Kong Monetary Authority, has called for the reconsideration of the pegging of the Hong Kong dollar to its American counterpart. Since 1983, the fixed exchange rate of 7.8 HK dollars to the US dollar has brought stability and prosperity to the former British colony. Yam’s determination to remain anchored to the dollar during the 1997 Asian crisis allowed Hong Kong to weather the downturn relatively unscathed, compared to its neighbors. Yam’s past, including 17 years at the helm of Hong Kong’s monetary agency, and his authoritative opinions have made him a cornerstone of global finance. According to Yam, the crisis does not call for this sort of rigidity, which will only increase inflation, cause a housing bubble, and worsen social inequality. Yam wrote in a recent research paper, “As a consequence [of the peg], there is inherently a higher degree of volatility in economic activities and in domestic prices, which could be exacerbated if confidence in the determination and ability of the authorities to maintain the system wanes when the economy is under stress.” Current Hong Kong leaders quickly contradicted Yam, saying that the peg was here to stay, but Yam held his ground and said that if the Hong Kong dollar could benefit from being pegged to another currency, it would have to be with the Renminbi, and not the US dollar.
As the debate rages on, analysts are asking themselves if a link between the two Chinese currencies could be a lifeline for the Renminbi, a Plan B towards internationalization via a domestic partner, rather than the dangerous US dollar. If China stays with the US dollar, it will be the just another confirmation that Beijing’s monetary ambitions are never out of sync with its politics, a strength that may eventually become a weakness.