Does democracy matter for renminbi success?
Barry Eichengreen says at the least, China needs a more rules-based, transparent bureaucracy
China has unveiled its first aircraft carrier, and is gearing up to challenge the United States in the South China Sea. By initiating a plan to internationalise its currency, China is similarly seeking to challenge the dollar on the international stage.
In carving out a global role for the renminbi, Chinese policymakers are proceeding deliberately. So, will China's plan succeed?
The answer, in my view, turns on how China addresses four challenges. First, China will have to build more liquid financial markets.
Second, much will depend on how China navigates the transition to a more open capital account.
Third, the renminbi's international and reserve-currency prospects will be shaped by how China handles its growth slowdown.
The last challenge can be stated as a question that is rarely posed: is China's political system an obstacle to renminbi internationalisation?
The pound and the dollar, the principal international and reserve currencies of the 19th and 20th centuries respectively, were issued by democracies. One reason why democracy might matter is that democratically elected governments are best able to make the credible commitments needed to develop deep and liquid financial markets. They can commit not to expropriate creditors, since the latter will vote them out of office if they do.
Might it be possible for China to establish limits on arbitrary executive power and strengthen creditor rights sufficiently without undertaking a fully fledged transition to democracy?
Until now, constraints on decision-making by the general secretary of the Chinese Communist Party, the country's top leader, have been limited. But that is beginning to change. The general secretary is increasingly constrained by the party's other institutions.
Other bureaucratic decision-makers, for their part, are increasingly constrained by requirements of transparency. Internet-based movements are forcing policymakers to strengthen labour and environmental standards. Why not creditor rights?
Since the early 19th century, the leading international currencies have been those of countries with democratic political systems, where arbitrary official action is constrained and creditors are well represented. This does not imply that China must have a "democratic spring" before the renminbi becomes a leading international currency. But it does suggest it will have to strengthen the powers of the National People's Congress further and create a more transparent rules-based bureaucracy to achieve its monetary goals.
