Diego N. Marcos, Professor of Macroeconomics of National University of Rosario, Santa Fe, Argentina in an interview to WEJ spoke about the internalization of Yuan (RMB), the effect it will cause on global economy and the conditions China has to keep it mind in order to succeed.
Mr. Marcos, recently, various experts all around the world started to alert the media about China’s monetary aspirations and its attempts to push dollar on the side, how would you assess such a tendency?
The issue of Yuan or RMB has two different levels of comprehension – domestic and international.
Let’s start with the international level. China today cannot refuse to play the geopolitical game, and this tendency would only grow with time. It simply has to be involved. And actively engaging on the financial and monetary markets is an inevitable measure. In the third millennium the countries with currencies used worldwide as “Reserve Currencies” are more powerful than those with a nuclear weapon. So, the internalization of RMB is not just a financial issue. It must be understood under a geopolitical-institutional approach that China is implementing.
The other side of the coin, the domestic level plays even deeper meaning. As any other institution of the Chinese economy, money will become global. You must also take into consideration that the previous model of growth that China has realized was based on the availability of land and cheap labor, but it is over now. Beijing’s new model for growth is based on the capital and technological capabilities. And part of the deal here is directly linked with RMB internalization.
So, is it true to assume that China will use Yuan as a tool of geopolitical struggle with US?
Not exactly, the financial game, if you please, between the US and China is not part of the competition. On the opposite, US and China are leaning towards sharing “World Monetary Hegemony”, rather than fighting for it. I presume, in the long run, they will have to share it with Japan and EU also.
Does that mean that RMB will just take some part of dollar’s former influence?
We must not mistake, the US dollar will still be the first currency in the long run, as it is today. RMB will be the second global currency for the markets, reserves and such. There are many important currencies in the world, but in the future, due to the geopolitical and economical situation, it is RMB’s time to be dollar’s second. And it is going to rise faster than any other rising second currency.
How is it going to affect the market exactly?
In the midterm there is going to be a re-arrangement of financial flows. Hong Kong, London, Singapore and the Shanghai Free Trade Zone are going to play a stellar role in the times to come. But, there is going to be a lag before we can see the effect in the real economy.
As for now – we could already spot different measures in work by the Chinese government, such as discounts being offered to big companies, encouraging them to use the RMB. At the same time the Chinese government is trying to promote trading and financial deals in RMB with other countries. They could obtain good deals in the short run. It is in the interest of Beijing, that other countries used RMB in their deals, thus they could negotiate great conditions from China. Same goes for the energy, food and resources exporters, they would definitely be of high interest for China to promote contracts in RMB.
Following your thought, could you tell us more on the question of who’s going to benefit from RMB assertion, besides China?
Once again, I will confirm that RMB is not a threat to the world. It is just the other way around. We need to have as many Reserve Currencies as possible. This immense power that is in the hands of the US today is too much. So, we all benefit from China’s ambitions to promote RMB. It is better to have 10 currencies in the world with 10% share each of the total global transactions than having 1 with 91% and 9 with 1%. Competition is always good for consumers.
Are there any potential risks that China might face considering the internalization of RMB?
Every time a country moves up in the scale of power, new privileges come with responsibilities. China must be prepared to play a key role in finance and that is a dangerous game. To become global, implies free capital flows at some point in the midterm. Capital and financial markets move so fast that there is no room for a mistake.
Another potential risk is a retaliating policy from other countries (i.e. US). I am confident it is not the case, although it is possible at least in theory. The most probably scenario is to share the Monetary Hegemony.
The last potential risk is in the long run. If China succeeded and “won the currency war” worldwide, then we would have another superpower and switch the financial newspapers frontpage from the FED to the People´s Bank of China.
In any case, China’s path to achieving desired internalization must be complicated. How would you describe the conditions for reaching this goal?
In my understanding, there are three major steps that Beijing has to follow:
1. Exchange rate must be relatively stable with other reference currencies.
There were two different periods of the RMB valuation: from the beginning of the Deng Xiaoping´s Reform up to the last day of 1993 and from then up to today. It has been a “stable” path. This first condition about stability seems to be fulfilled, but it must be taken into account that there is a Capital Account Control in China. This is something not sustainable for the long run in a context of competing with the other main reserve currencies. Like, when in July of 2005 People´s Bank of China announced that the exchange rate is linked to a currency basket, and the government can interfere the market process when necessary, many were suspicious. Although there is a recent tendency to let exchange rate float free.
2. RMB must provide liquidity to the world.
This is going to be the key question into the years to come.
USA has been the biggest Current Account deficit country of the world for almost half a century now. The US imports energy from the Middle East and manufactured goods from South East Asia. Naturally, the exporters tend to save US$ and invest them in United States Treasury Bonds (UST) or similar assets. China and Japan are close to have half of the total UST holdings abroad.
Although it was the standard practice for more than 30 years, it is not going to be this way in the coming years. USA has a smaller CC deficit every year and will probably have a surplus in not such a long time from now. Maybe, the sooner than the later it will switch from deficit to surplus. There are two main drivers for that: The Shale Oil and Gas revolution in USA and the continuous improvement of technological intensive entrepreneurship process in USA.
If the USA Current Account Deficit switches to a surplus (or not a big deficit could be the same for this analysis) then, there is a real possibility for the US$ to appreciate in front of the other currencies. But we must also consider: How will the RMB be placed into the foreign markets by that time? Will China pay for commodities in RMB? Are there going to be some contracts settled in RMB?
This is going to be an opportunity for China to internationalize its currency because of the withdrawal of US $ from the provision of liquidity to foreign markets and will make room available for new liquidity suppliers. China is also going to have a less surplus Current Account (maybe a deficit?) in the future and that could be a possibility to supply RMB to the markets, but If not, there must be a strong policy for credits to other countries (Marshall Plan was an example of this in the after WWII world). Nowadays we can see more foreign trade being settled in RMB and also the Shanghai Free Trade Zone is going to be a place for going through this process.
Every Chinese attempt to switch from an Export/Investment oriented economy to a more balanced economy with the domestic consumption will lead China to the need to continue with imports of energy, food and resources.
3. Rules of the game must be clarified in advanced:
The banking system (included the “shadow” banking) must be up to the task for internationalization. After 1997 with the return of Hong Kong to China the system accelerated the reform and development. The big 5 banks can provide stability working with the People´s Bank of China but the Shibor (as a reference) has not always been as stable as needed. There are some risks involved in this market that must be solved before opening.
Maybe the Shanghai Free Trade Zone will become the gate to be opened for the future of the currency. A 100% convertible RMB there could be a start-up. The arbitrage of interest-rates will be a first-test to pass. Hong Kong could help as well.
Interviewed by Anton Barbashin