Book Review: One Currency, Two Markets: China’s Attempt to Internationalize the Renminbi, by Edwin L.-C. Lai.

There are some key moments in China’s recent monetary history, and one of those moments is August 11, 2015, when the central bank, the People’s Bank of China, put in place a new mechanism to set the central parity rate: that is, the value of the renminbi against the US dollar. In doing so, the bank chose to step aside and allow the exchange rate to be driven more by market forces. This was part of the policy measures necessary to improve the renminbi’s “freely usable criterion”, one of the two criteria set by the IMF for inclusion in the basket of currencies that have Special Drawing Rights (SDRs). The other criterion is that the issuer of the currency needs to be one of the top five exporters. Changing the mechanism for the central parity rate resulted in a 1.9 per cent depreciation of the Chinese currency against the dollar, which rippled through financial markets. For China’s monetary authorities it was a cost worth paying, and by the end of 2015 the renminbi was included in the SDR basket – together with the dollar, the euro, sterling, and yen. This was recognition of the renminbi as a key international currency and the successful policy of internationalization of the renminbi.

Edwin Lai rightly sets the beginnings of his book in August 2015 as the turning point in “China’s attempt to internationalize the renminbi.” He guides readers through the Chinese leadership’s motivations to internationalize the currency and through the challenges and costs. He assesses the success of what in my own book on the renminbi I call “China’s renminbi strategy,” and analyzes the prospects for further internationalization going forward. Based in Hong Kong as a professor of economics, Lai identifies the establishment of the renminbi offshore market – firstly in Hong Kong and subsequently in the world’s main financial centers other than the US – as the pillar of the attempt to make the Chinese currency one that non-PRC residents would want to use in international transactions and, critically, hold in their portfolios. Keeping the offshore market separated from the onshore one – hence the book’s title One Currency, Two Markets – would protect China’s banking and financial sector from short-term capital flows. In other words, as Lai explains throughout the book, the intention of Chinese monetary authorities is the development of onshore and offshore markets that would allow the renminbi to function as an international currency without the need for China to open its capital account.

The book provides an interesting and informative read for scholars and practitioners interested in China’s policy to internationalize its currency. At some points Lai delves too much into explanations of concepts that readers should be familiar with. After all, this is not a book for a general readership as it requires some technical notions. More importantly, and despite its intrinsic value, the core of the book refers to the internationalization of the renminbi pre-2015. There is not much about the more recent shift in the policy focus of China’s monetary authorities. Although Lai provides some updates, he does not address the key issue of why the renminbi no longer features among the authorities’ economic policy priorities.

Two issues are worth stressing here. The first is the Belt and Road Initiative that has contributed to a shift in the focus of the renminbi internationalization from trade – as in the pre-2015 period – to finance. Lai somehow overlooks the problem faced by China as an “immature creditor,” which is the constraints of providing credit in its own currency. This is evident in the fact that China’s increased role in providing development finance – it is currently the largest bilateral lender – has not witnessed a similar pace in lending in renminbi. The Belt and Road has extended the use of the renminbi but ultimately the dollar remains the vehicle currency for finance provided by China.

The second issue relates to financial reforms. Lai acknowledges the need for China to implement the reform of the banking and financial sector that is necessary to create deeper and more liquid markets. However, he argues that reforms can only be implemented if they are externally driven. So opening the capital account, he believes, could force such reforms as a way to protect and preserve financial stability. I disagree with this view. Before 2015 it was disputable whether forcing the hand to reforms by opening China’s domestic market was a sensible policy given the potentially large capital outflows. Now, the Chinese economy is significantly weaker, and the renminbi is at historical lows, while banks are under pressure because of the downturn in the property sector. Thus unconstrained capital movements are no longer a policy option. Since the outbreak of Covid in late 2019 there has been a profound change in China’s economic dynamics both domestically and externally. The Chinese leadership’s decision to suspend Ant Group’s initial public offering (IPO) epitomizes this shift. In the autumn of 2020 Ant Group was preparing an estimated $30 billion-plus IPO – the largest ever – when the regulators and monetary authorities stopped the process because of undisclosed concerns about financial stability. To date Ant’s IPO is still pending. This was the first and highest-profile of a series of constraints imposed on companies operating in various sectors, from finance to education. As a result, the confidence of foreign investors has been seriously undermined. Will it recover? It is hard to say, but as financial repression is on the rise, it will be even more difficult to turn the renminbi into an asset that non-residents are willing to hold. Perhaps the best period of the renminbi’s internationalization is behind us, which Lai implicitly acknowledges in his book.

Paola Subacchi

Queen Mary University of London

One Currency, Two Markets: China’s Attempt to Internationalize the Renminbi, by Edwin L.-C. Lai (Cambridge University Press, 2021)

The People’s Money: How China is Building a Global Currency, by Paola Subacchi (Columbia University Press, 2016)

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