The growth dividends of an international renminbi
Yang Tao says having an international currency will ease the flow of Chinese people across borders and provide a lift to its financial market, both of which can help drive economic growth
In terms of trade clearing, the renminbi has become a regional "hard" currency, and has a large and growing influence with neighbouring trade partners. Meanwhile, a number of Asian, African and Latin American countries already regard renminbi products as reserve assets. And, in addition to accelerating innovation in Hong Kong's offshore renminbi products, New York, London and other traditional financial centres are now conducting an impressive volume of renminbi-denominated investment business.
In the long term, however, if the renminbi is to truly become an international currency, it will need to be used more freely in other countries so that overseas residents and enterprises have easy access to the currency when they need it, and domestic residents and businesses can easily use it for consumption and investment. To achieve this goal, two problems need to be solved: how to make the renminbi "go global", and how to make it flow back into the Chinese market.
First, there are two ways for the renminbi to enter the global market. One is through a trade deficit. For example, in the era of the Bretton Woods system, the United States provided ample dollar liquidity to the world through its current account deficit, which depended on strong domestic demand, but which also caused a serious disequilibrium in the international balance of payments.
The second method is by promoting the export of renminbi capital, and this seems to be more effective. Experience has shown that in the gold standard era, Britain provided a substantial amount of pounds to other countries through capital exports; more recently, Japan provided yen to countries through massive foreign direct investment in the 1980s.
Next, how can we encourage the renminbi to flow back into the Chinese market? This depends on capital controls and the vitality of the domestic market. Financial markets in China are not advanced; capital projects are not yet fully convertible; contact with overseas parties in the financial market has lagged behind the overall reform process; and there are no financial instruments that support active trading.
Based on the dollar's experience, large-scale dollar exports created "oil dollars", "Europe dollars" and "Asia dollars". When these dollars came back to America through the US financial markets, the markets not only provided the necessary funds to support the development of the US economy, but they also provided the investment and hedging channels that these funds required. China's financial markets cannot provide the necessary support for renminbi internationalisation unless the country promotes innovation and development.
How does the internationalisation of the renminbi fit into the growth trajectory of China's economy? The biggest challenge now is whether a sustained and stable transition can be achieved in the context of a long-term decline.
Short-term growth depends primarily on demand. As urbanisation reaches a tipping point, investment demand is likely to fall and it will be difficult for household consumption to take the lead in stimulating demand; global trade protectionism and economic restructuring will also lead to a weakening demand for exports.
Although the short-term appreciation of the renminbi through internationalisation will not benefit exports, it will reduce trade costs and, because of changes in the exchange rate, encourage many businesses to pay more attention to developing the domestic consumer market. It is conducive to boosting imports and thus domestic consumption, and it makes it easier for medium- and high-income earners to allocate assets and invest overseas, thereby increasing the level of income and the power of consumption.
Long-term growth depends on the supply side, which includes capital, the labour force, technology and human capital. The decline in the amount of capital and cheap labour is inevitable; human capital and technological advances will become the focus of long-term growth. So, with its far-reaching significance, renminbi internationalisation has an important indirect impact on both demand and supply.
First, through greater interaction between China and the rest of the world. An international currency will make it easier for Chinese to study and live abroad, and draw more talented professionals to return to the mainland, thus improving the internationalisation of human capital in a continuous flow.
Second, it will promote innovation and development in the domestic financial market. The market can provide significant financing and risk control support for technical progress, promote the adoption of financial service models from developed economies, and lay a financial foundation that spurs technological advances and raises productivity.
Of course, the impact of renminbi internationalisation is complex, but the essential goal is to get China to form a more international and market-oriented development model. Therefore, it can become a new driving force for economic growth. However, this impetus has not yet been fully realised. Only when strategic thinking is clarified, a good domestic foundation built and the right path selected can renminbi internationalisation provide the power for China's economy to take off once again.
Yang Tao is chief economist at the publication China's Economy & Policy, and director general of the research base for industrial finance at the Chinese Academy of Social Sciences