The value and influence of a nation’s currency is a key barometer of its self-esteem and international position. But not all currencies are the same. The renminbi is tightly controlled, not freely traded, its value not freely floated. While this gives the Chinese government great control, it also wishes for a greater international role for its currency, as befits a great nation. Hemmed in by these conflicting desires, the government has thus taken a series of careful steps to broaden the reach of the RMB. But how far can this process go? Will the renminbi ever become a reserve currency, like the US dollar and the euro? Could it supplant the dollar? What reforms must China undertake?
These are serious politico-financial questions, reflecting the underpinning of the international order. Fortunately Eswar Prasad’s book on the rise of China’s currency is no dry textbook, nor is it an actuarial summation. “Gaining Currency” has a keen awareness of the conflicts and the tensions of international currency regimes, as befits a book written by the former head of the IMF’s China division. (Prasad notes the leverage Western nations have in controlling “the choke points in international finance”, when imposing sanctions on Russia after its annexation of Crimea, and shows how China is working hard to avoid any such vulnerabilities).
What’s striking is how careful and strategic China was in allowing the use of its currency. From a near-zero use abroad, international settlements in the yuan have boomed, and its role in trade has become increasingly significant. Yet as the yuan’s importance has risen, so too have the risks. Recent moves to a more market-driven valuation have come at the same time as downwards pressure on the currency, contrary to previous expectations of continual appreciation. This comes as no surprise to Prasad, who argues that institutional reform is key to China’s currency ambitions. He shows, for example, how the People’s Bank has failed to inspire confidence, and while its moves to thwart currency speculators might be commendable, contrary behavior from such a major financial institution can spook the markets.
“Gaining Currency” is a superb, judicious overview of China’s monetary ambitions, and will be the set text on the subject for some years.
Published in Business Tianjin