China taking aim at reshaping international monetary system
China’s steady encroachment to the heart of global finance could eventually reshape the international monetary system. With the International Monetary Fund and World Bank beset by weak leadership, hamfisted decisions (not least over Greece) and failures in governance reform, China is attempting, from within and outside, to adjust the rules of the two Bretton Woods institutions founded in 1944.
Much depends on whether the Chinese authorities can maintain political stability and steer the country to more sustainable growth in coming years. If China succeeds, we could be witnessing the gradual gestation of an alternative model - let’s call it "Beijng Woods" - that would be much more Asia-focused (and less free market) than the post-war Washington-centric system.
China’s rulers are pushing ahead with measures to strengthen the renminbi - even though it is not fully convertible - to allow it to join the Special Drawing Right, the IMF’s ubiquitous composite unit of account used in official financing and reserves.
The bid to join the dollar, euro, yen and sterling in the IMF’s monetary denominator, in a review process due to be completed later this year, is essentially symbolic, since the SDR is not a currency. Yet for an emerging market economy to take a seat at the top table of world money reserved for industrialised nations would massively promote China’s credentials across global financial and investment markets.
In the last few months the Beijing leadership has been advancing efforts to turn the renminbi into a strong convertible currency, pressed on in allowing two-way flows of investments inside and outside the country, and challenged US financial dominance by establishing the Asian Infrastructure Investment Bank with significant Western support.
China still has a long way to go to gain political stature and leadership commensurate with its economic position.
If the renminbi is to become a fully-fledged reserve currency that could one day rival the dollar, the country will need much deeper financial markets, a sounder and more stable legal system, stronger banks, more transparent reporting standards, and possibly an opening towards democracy.
For all these uncertainties , the scope of financial development has been extraordinary. In a continuation of recent years’ efforts to correct a previous undervaluation of the renminbi on the foreign exchanges, the People’s Bank of China has been acting to keep the renminbi stable against the strong dollar. The Chinese currency has undergone a real (inflation-adjusted) trade-weighted appreciation of 15 per cent during the past 12 months.
This reinforces the Chinese authorities’ attempts to maintain favour with important foreign holders of renminbi. Up to 100 official institutions around the world, including conservative central banks from the UK, Switzerland, France, Austria and Australia, now hold renminbi or are planning to do so.
A stronger currency lowers China’s export competitiveness, yet the countervailing advantages are sizeable. Many Chinese enterprises have been raising loans in low-yielding, depreciating euros, producing substantial savings. The Chinese leadership is giving priority to upgrading the country’s technological base, partly through Chinese companies’ purchases of high-performing western firms - transactions aided by a weaker euro and stronger renminbi .
The SDR, established in 1969, is valued at around US$1.38, well down from $1.5 towards the end of last year, a result of dollar strength against the other three constituent currencies. If it can maintain currency stability, Beijing could advocate the renminbi’s SDR adhesion as strengthening the otherwise weakening composite unit.
Momentum towards revitalising the SDR ties in with Beijing’s wider institutional action. Significant IMF reforms have been held up for 4-1/2 years by US congressional refusal to ratify internationally agreed arrangements. Partly in retaliation, China has led the five nation Brics group’s decision to set up the New Development Bank in Shanghai. Still more significantly, the Chinese have achieved unexpected success in persuading leading European countries to join the planned Beijing-based AIIB in spite of US opposition.
A further prize, if the renminbi (as appears likely) achieves SDR status, would be for China to persuade the rest of the world to adopt an renminbi-enhanced unit for commodity transactions and for the accounts of many international financial institutions (including the AIIB) - emphasising the further spread of Chinese influence.
David Marsh is managing director of OMFIF