Fourteen years ago, Dr Zhou Xiaochuan, Governor of China’s central bank, People’s Bank of China (PBoC), gave a seminal speech on the policy scenario at that time and suggested some reforms. He felt that the extant system was unsustainable and needed to be revamped. His objectives were clear: to de-dollarise and replace it with a multi-currency backup; and to internationalize the Renminbi or RMB. The two goals are integral and overlap.
He argued persuasively that the current system is inherently unstable when the reserve currency (US $) is also a national currency of one member country, as it creates a conflict of interest between developed and developing countries. He advocated a multi-currency reserve and, as a corollary, the internationalization of the Yuan/RMB. Indeed, it became the battle cry of the PBoC for years.
De-dollarisation moves are not unknown to the world. It is the staple diet of Leftists. A good part of de-dollarisation is the result of geopolitical developments, including indiscriminate resort to sanctions. The Ukraine sanctions are the worst as they have driven Russia and some other countries into the Yuan camp, an extraordinary bonus.
The determined and tireless efforts of the PBoC to internationalize the Yuan/RMB over a decade, especially to distance itself from the dollar, cannot be underestimated. It adopted two tracks for the use of RMB -- cross-border trade settlement and the creation of an offshore market. In short, these steps taken then by the PBoC helped promote the integration of China with ASEAN, Hong Kong and other overseas markets.
Every analyst of every hue, whether critical or laudatory, ends up with the plea that unless the PBoC makes the yuan convertible, it cannot be a reserve currency and also challenge the dollar. It is an ideological barrier or a Rubicon the Chinese cannot cross as they are wedded to economic stability as the bedrock of their policy. They were apprehensive of getting “trapped” in the capitalist model.
There is fear lurking among policymakers, especially in emerging economies, that they cannot withstand buffeting by global storms.
There were other grounds for changing track. Studies done by PBoC researchers revealed that the efforts involved in internationalization of the RMB were not commensurate with the results achieved. A researcher Ming Zhang found that the actual settlement was nowhere near the invoices filed. The actual use of the RMB was very low and declining over the years. Two Chinese scholars (Haihong Gao and Yongding Yu) have explained in a paper for the Asian Development Bank that “the success of renminbi internationalisation is dependent on market forces, well designed and strategic thinking.” It also needs supportive global cooperation and favorable economic circumstances.
Perhaps the Chinese policymakers realised that they could move away from chasing the mirage of the neoclassical precepts and seek other radical alternatives or options. The PBoC had weathered several crises in the past and realized that its present economic reach such as markets, trading alliances, FDI, etc., had to create a rival area under its own regime. For China, significantly, the denial of access to SWIFT forces Russian firms to shift to the Cross-Border Inter-Bank Payment System (CIPS).
China has cultivated its relationship with ASEAN over the years. It was the first country to offer strategic support to ASEAN. Commodities and components from across ASEAN passed through China. The Mission of the People’s Republic of China declared, “China and ASEAN are cooperating to build the epicentre of growth.” So true when that declaration was made.
The story of the economic sway of China over Central Asia in the post-Cold War era is as fascinating as it is complex. The vacuum created by the Soviet withdrawal was filled by the Chinese who keep a hold on them through the SCO and other bilateral arrangements. The flagship project BRI or Roads and Bridges made for closer connectivity and cooperation.
Central Asia with its strategic location and oil, gas, and mineral endowments became a hotbed of global powerplay. Central Asian towns became veritable China Bazaars with regular use of yuan as legal tender.
An interesting development inspired by China is the anti-dollar mood and a drive to use local currency. Most of the banks have formed associations and are gaining strength. The anti-dollar move has spread wildly and even entered the corridors of BRICS. New members make a beeline for membership. These trends reflect the anger and anguish of many. But the vested interests are entrenched for so long and gain so much that it cannot be reformed in our time.
(The author served in the Ministry of Finance, Government of India, and retired as Joint Secretary)