TOKYO – In the dystopian fantasy Blade Runner 2049, Los Angeles 32 years from now looks a lot like China’s megacities today: grey, polluted, and dominated by tall towers emblazoned with flashing neon advertisements. The viewer never learns much about the outside world, much less in what currency the advertised goods are traded. Is the US dollar still dominant, has the Chinese renminbi taken over, or has some other currency surged to global preeminence?
US President Donald Trump seems intent on ensuring that America retreats, at least partly, from its global leadership role.
But, as was the case with the British pound in the interwar period, a currency can remain globally dominant even after its issuing country loses its economic, financial, and geopolitical hegemony. Today, too, the world should expect the US dollar to remain the key reserve currency, used to invoice and settle international trade, for a long time to come. But, in terms of international financial diplomacy, the dollar’s position may not be as secure. The question is whether the end of “dollar diplomacy,” which the economist Barry Eichengreen predicts, will necessarily mean the rise of renminbi diplomacy.
Chinese policymakers have been hoping to develop the renminbi’s role in international finance, in order to strengthen China’s geopolitical standing, since the 1990s. And, in recent years, the Chinese leadership has led a concerted effort to fulfill that ambition, especially by internationalizing China’s currency.
Yet renminbi-denominated finance is nowhere near ready to compete with – let alone rival – dollar finance. In fact, the renminbi still trails other reserve currencies (the US dollar, the euro, the Japanese yen, and the British pound) in international finance by so much that a renminbi-led international monetary system by mid-century seems about as likely as a Blade Runner 2049-style dystopia.
One reason for the renminbi’s continued weakness in international finance is that, despite considerable progress since 2010, it remains a half-baked international currency. The renminbi is illiquid and unconvertible outside designated offshore markets. As a result, its weight in international investors’ portfolios is miniscule.
Even China itself uses the renminbi in only about a quarter of its international trade, and its international finance remains dollar-denominated. China’s blue-chip firms – Alibaba, Baidu, and Tencent – are listed in New York or Hong Kong, where they are priced either in US or Hong Kong dollars. And most of China’s fast-expanding loans and overseas investments are in dollars.
But the most compelling reason why one should not expect a renminbi-dominated international finance system to arise anytime soon is that China’s leaders have never shown any sustained commitment to developing the renminbi as a true alternative to the dollar. Instead, they have pursued a cooperative approach to reform of the international monetary system, which they argue should not be dependent on any one currency.
For the Chinese, the future of the international monetary system should be one in which multiple national currencies provide choice – in terms of invoicing, payments, and asset allocation – thereby reducing the system’s exposure to national politics. Moreover, with more central banks creating liquidity, and international financial centers offering pools of it, such a system would entail a lower risk of cash crunches. Already, China has been experimenting with the development of offshore renminbi markets in key financial centers, as a way to overcome its currency’s limited liquidity.
In order to build such a multi-currency system, however, the world would need to undertake far-reaching reforms of the international institutions. This was precisely the point that Zhou Xiaochuan, the governor of the People’s Bank of China, made in a 2009 speech challenging the view that only the US, through the dollar, could guarantee the functioning of the international monetary system.
As Zhou pointed out, the US dollar’s monetary dominance is underpinned by the Bretton Woods institutions, created after World War II. Reforming the international monetary system, therefore, means reforming the governance of the multilateral financial institutions – an argument that China emphasized during its G20 presidency last year.
As the US retreats from the world stage and a multipolar global order emerges, the international monetary system may well be transformed – but probably not into a renminbi-led system. Whether because of the intrinsic weakness of China’s international finance or an understanding that a truly international currency must be more market-driven than the government-controlled renminbi could be, not even China expects the age of renminbi diplomacy to arrive anytime soon.
Project Syndicate 1995–2017