China knows that, where trade and investment lead, a global currency follows

Andrew Sheng says China's enthusiasm for the new Silk Road fits into its plans for the renminbi

PUBLISHED : Friday, 05 December, 2014, 12:50pm
UPDATED : Wednesday, 28 September, 2016, 8:44am

Students of renminbi internationalisation tend to forget that the globalisation of Chinese currency happened much earlier with copper coins, which were first standardised and minted in the Qin dynasty, about 2,200 years ago. My Chinese art historian teacher used to tell me that Chinese coins and ceramic shards were the first durable global debris, easily found around the rubble sites from Sri Lankan temples to Egyptian pyramids.

Money followed trade. Because China was short of silver and gold, common coins were minted mostly in copper. Silver in China was used as an official storage of value as early as AD1,000, but it was rarely minted as coins.

Having invented paper, China was also the first to experiment with fiat or printed money. The Song dynasty encouraged exports to finance their losing war against the Huns, which the succeeding Yuan dynasty also encouraged. Unfortunately, printing more paper money led to inflation.

Both dynasties encouraged trade with the West through two key channels, the land Silk Road across Central Asia to Egypt and Rome, and the maritime Silk Road via the Strait of Malacca and India. Chinese exports of silk, porcelain, crafts and spices were traded for gold, silver and copper coins, as Europe had little products at that time that China wanted.

This imbalance in trade, plus the need to defend against the Huns and Ottomans, forced Europe to industrialise.

It was the fall of Constantinople to the Ottoman Empire in 1453 that cut off the land trade. This blockage spurred the Spanish to go westwards to reach China, discovering America instead in 1492. Similarly, the Portuguese sailor Vasco da Gama raced to reach the East via the African Cape of Good Hope.

By 1453, the Ming empire had passed its peak in outward exploration, having abandoned the Zheng He voyages 20 years earlier.

The discovery of the Americas and the conquest of Mexico and Peru made Spain very rich. But it was the opening up of new silver mines in these two countries and its shipment to China via Manila in 1571 that facilitated global trade. Silver and food like chillies, corn, peanuts, potatoes and tomatoes came to Asia via the Mexico-Manila route. It was the availability of large quantities of silver that enabled the Ming reformer Zhang Juzheng to unify the Chinese tax system in 1581 to enable taxes to be paid in silver.

Why did China need so much silver? It was partly due to the sharp increase in population, which rose from 59 million to 160 million by late Ming, as well as the rise in overall prosperity, supported by political stability and growth in foreign trade. It was estimated that one quarter to half of the South American production of silver ended up in China, with the Mexican silver dollar widely used as currency.

Silver, and later opium, became the settlement currency for the first global trade imbalance. In short, it was the Chinese use of silver, produced by the West in South America, that anchored the globalisation of trade.

China only abandoned silver as its standard in 1935, ending over 900 years of monetary history. Silver is so ingrained in Chinese finance that banks are literally named as silver business-houses.

Currency still follows trade. President Xi Jinping's announcement of the new Silk Road is a reformulation of the East-West land trade route, while the maritime Silk Road expands the westward trade through Southeast Asia, Southern Asia and thence to Africa and beyond.

Today, there are actually two maritime Silk Roads - the historical southern route via the Strait of Malacca, and the newer Arctic route, which, thanks to global warming, may be open four months a year to enable ships from China to travel to Northern Europe faster than via the Suez route.

All these suggest China has a grand strategy to develop global infrastructure and trade via the new Silk Roads, financed through the BRICS bank, the Silk Road Fund and the Asian Infrastructure Investment Bank. Renminbi internationalisation becomes trade- and investment-driven, rather than through the capital account. These would aid not only global recovery but also Chinese structural reforms.

Rather than trying to compensate for the lack of global demand from increasing domestic consumption, which will take time, China realises there are still many opportunities for opening up new trade and investing in infrastructure with trading partners. This would shift production away from the coastal areas to inland provinces with direct land and rail routes to neighbouring countries.

There is a pattern forming on renminbi internationalisation. History suggests that global currencies have to be founded on real trade and business, supported by liquid financial markets, efficient institutions and robust infrastructure.

The last Chinese global currency standard served China for over half a millennium. Creating the next global currency will not therefore be a short-term journey.

Andrew Sheng is writing on global finance from an Asian perspective