ADB Distinguished Lecture Renminbi Internationalization: Tempest in a Teapot?

Internationalization of the renminbi is a stated goal of the Chinese government, its brief flirtation with Special Drawing Rights and an Asian Currency Unit notwithstanding. Chinese officials understand that a dollar-centric international monetary and financial system is a mixed blessing. Doing cross-border business in their own currency confers convenience value and efficiency advantages on United States (US) banks and firms. It frees them from the costs of converting currencies and hedging exchange rate exposures, something that Chinese banks and firms will enjoy only when they are similarly able to conduct international transactions in their home currency. Relying on the dollar for international liquidity and reserves lays the People’s Republic of China (PRC) open to the foibles of US policy, whose downside was made clear by the incipient liquidity shortage that followed the failure of Lehman Bros. in 2008. It exposes the PRC to the risk of capital losses on its foreign security holdings. Renminbi internationalization is part and parcel with Chinese leaders’ efforts to rebalance their economy from investment to consumption, from exports to domestic absorption, and from manufacturing to services, including financial services. This explains why Chinese policy makers have set their sights on “basic capital account convertibility” within five years and on elevating Shanghai to first-class-financial-center status within ten, at which time the renminbi will be a leading international and reserve currency.1 In earlier writings I staked out a relatively positive position on the prospects for renminbi internationalization.2 Currency internationalization, appropriately implemented, is in the PRC’s interest. Chinese officials have a carefully calibrated approach, beginning with authorization for domestic and foreign companies to settle their merchandise transactions in the currency, followed by permitting a limited but growing range of financial transactions to be conducted in it, and culminating in the use of the country’s currency in a range of additional financial roles, not least as a form for countries to hold their reserves. This is not unlike the PRC’s incremental