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China took two key lessons from the great financial crisis. It realised that the US could be an unreliable economic partner, so that remaining inside the “US dollar zone” would always risk turbulence. It also understood, as a crisis-ridden US had no difficulty in selling its debt to the world, that in financial terms the possession of a global reserve currency meant never having to say you are sorry.
Thus, since its elevation to a national policy in 2009, China’s campaign to “internationalise” the renminbi was an endeavour that appealed to two of the most basic priorities of Communist party power – self-reliance and security. Subsequently, the cause has also become imbued with other objectives such as the opening of the country’s capital account and the induction of foreign money into China’s bond and equity markets.
Such a broad agglomeration of aims has made the goal of winning a global role for China’s currency revealing of Beijing’s long-term geopolitical strategy. In the words of Michael Power, strategist for Investec Asset Management, Beijing hopes to spur the “transformation of Shanghai into one of the principal fountainheads of global capital”.
“[The] vision initially seeks to make China a leading player in the world of capital and one which, in the fullness of time, could even see Wall Street migrate to ‘Great Wall Street’,” Mr Power says.
The advantages of creating a wellspring for global capital are manifold, as the experience of New York and London show. Not only do broad and deep financial markets attract talent and create jobs, they also allow the countries that host them to raise capital at relatively cheap rates – a key attraction for China as it chafes under a debt load estimated by McKinsey, the management consultancy, to amount to 282 per cent of GDP.
Similarly, a dynamic financial market with greater international participation would facilitate the funding of China’s “One Belt, One Road” (OBOR) initiative, a central government programme led by Mr Xi that envisages the building of large infrastructure and transport projects by Chinese contractors in 65 countries with a total population of 4.4bn.
OBOR is one of the defining visions of the administration of Xi Jinping, the president, and ranks high in his “China Dream”, a hankering to recapture atavistic glories and restore China to a position of economic centrality and moral superiority in world affairs.
But without an internationally respected currency, these interconnected ambitions will be hard to realise. Its economic sovereignty will continue to be circumscribed unless it can extricate itself from the “US dollar zone”, which it occupies by dint of conducting its merchandise trade primarily in the greenback and then recycling its US dollar surpluses into the American debt markets.
Beijing sees clearly that its endeavour to separate itself from the influence of the US dollar will be stillborn unless it can nurture a viable “renminbi zone” to replace it. This means opening its renminbi capital markets to foreign investment inflows, so that companies that trade in the red-back, central banks that hold it on reserve and fund managers around the world can hope to be rewarded.
Yet this takes time. Three feet of ice does not come from one night of frost, as the Chinese saying goes. Nevertheless, some analysts expect Beijing to move rapidly in opening its domestic debt markets.
“This is going to be the largest change in capital markets in anyone’s lifetime,” said Hayden Briscoe, senior vice-president at AllianceBernstein, the fund company.
Mr Briscoe notes that China’s domestic bond market is already more than $5tn in size, making it the third largest bond market in the world after the US and Japan. However, foreign ownership of onshore Chinese corporate and government bonds remain tiny because of Beijing’s restrictions on inflows.
While these restrictions are being relaxed, Beijing’s willingness to accelerate the process has come into question over the past month following wild share price gyrations on domestic stock markets and the criticism levelled at supposed foreign “manipulators” of stock trading.
Such outbursts describe China’s Achilles heel. Internationalising the renminbi requires opening domestic capital markets, but doing so cedes influence to foreign capital and invites foreigners to pick over issues such as Chinese corporate governance, sovereign creditworthiness, the administrative probity of local governments and a host of other issues that Beijing regards either as its own business or outright “internal affairs”.
For this reason, the aspiration towards greater global influence that China seeks through internationalising its currency may require a corresponding relaxing of control over financial markets at home. Although this trade-off may prove uncomfortable at times, it should not derail the grand design while Beijing believes it can gain more in international clout than it loses in internal control.
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