Author Archives: hlfee

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)

China and the Global Financial Architecture: Keeping Two Tracks on One Path – A report for the Friedrich-Ebert-Stiftung

After the publication of my book The Cost of Free Money, which takes stock of the deterioration of the rules-based international order in light of significant economic and geopolitical challenges, I was invited by the Friedrich-Ebert-Stiftung (FES) to do some work looking at China’s role in the international institutions. The report, which is titled China and the Global Financial Architecture: Keeping Two Tracks on One Path, was written for FES’s China desk at their Berlin headquarters to help Germany’s parliamentarians better understand China’s role in the international monetary and financial systems in the year that Germany chairs the G7.

The report and its shorter executive summary offer a framework for understanding and discussing the structure of the international financial architecture and its purpose in providing the essential public goods of financing for development and a global financial safety net. The report examines the evolution of this architecture since its creation in 1944, especially China’s role as both a member of financial institutions and a builder of new ones. It discusses the consequences of China’s growth for the future of this architecture, and considers options and recommendations for other countries, especially members of the G7 and in particular Europe’s members, on how best to engage with China to get the best possible outcome for all.

The report’s main conclusions are as follows: 

  • The world cannot function without China. China is a critical component of the global financial architecture as both a member of the international institutions and as an institution-builder.
  • China is not adequately accommodated for in the current global order. Unless the international institutions are reformed, China could decide to go its own way, threatening the integrity of the global financial safety net.
  • China is not a market economy nor a liberal democracy. The challenge for the G7 is to find areas of common interest where it can work with China, encouraging it to be a productive and engaged partner in the global order.

The full report can be downloaded here and the executive summary can be downloaded here:

Covid-19 needs a sustained fiscal response

The policy response to the current economic downturn will not be a rerun of the response to the 2008 global financial crisis. Many commentators have been highlighting the parallels between the two crises, but this time the situation is different so the responses must be different.

In 2008-09, led by the US, the steps take were: interest rates cut to near zero, large fiscal stimulus, unconventional monetary policy, and fiscal tightening to rein in public debt. This was possible for two main reasons: the crisis came after almost two decades of growth and price moderation, and monetary policy had considerable scope for action.

On the back of the Covid-19 outbreak, the monetary policy response came first, and the fiscal policy measures followed. Compared with 2008, monetary policy is now considerably limited in scope (the Fed rates were around 5% in 2007, compared to around 2% in 2019). Hence, the rational has been to provide plenty of liquidity to prop up the banking and financial sector – as opposed to using monetary policy as a tool to stimulate economic growth.

The current fiscal policy response has been much larger than in 2008 as concerns about the size of public spending have been put aside.  So far, the total fiscal measures worldwide amount to 11.7 trillion dollars, or 12% of global GDP – an amount that is most certainly bold. Like in the case of monetary policy, the objective has been to prevent the collapse of the real economy – “to save lives and protect livelihoods”, as the IMF MD Kristalina Georgieva said – rather than of stimulating GDP growth.

The critical point is that the world economy went into the pandemic in a weaker position than when it faced the global financial crisis. The real GDP annual growth rate for the world economy was 5.5% in 2007, compared to just 2.8% in 2019. Furthermore, many countries and people feel some crisis fatigue after the prolonged recovery from the 2008 crisis that has been emerged, among others, in extreme politics.

This said, we should expect a strong rebound in real GDP growth (5.2% for the world economy in 2021 against a 4.4% drop this year), followed by a slowdown in the subsequent years. The bottom line is that the world economy will need time to recover from the losses caused by the pandemic and the recovery will have significant country/regional differences. This outlook is based on the assumption that everything stays the same, i.e. that we will eventually switch back to the pre-pandemic world. But we know that this is unlikely.

Against this background, we need to ask how economies will be supported through the current second wave of contagion. Most of all, how will a broad and robust recovery be engineered? It is critical to achieve GDP growth rates that not only allow losses to be recovered but also create more output. This is essential to make the current fiscal effort – and in particular the growing debt – sustainable over the long run.

Given the current circumstances, the correct policy response requires more fiscal stimulus in the short to medium term. So expect more debt. If fiscal action is directed towards long-term economic growth, then servicing the debt should not be a problem – and indeed, it is not the sheer size of debt that matters, but whether or not it is sustainable against future economic activity. Low interest rates should also help – and they should remain low for longer.

There is also a political argument that suggests that withdrawing the fiscal stimulus as soon as the recovery is under way – as happened in 2010 – is no longer feasible. The post-2008 recovery pushed the burden of adjustment on the labour market and on public spending. Wages were frozen or dropped in real terms while public spending was curtailed. Nowadays, this adjustment would be politically unfeasible. There are a number of scenarios that could play out as the crisis subsides, but which one occurs depends on how the burden of adjustment is distributed. This can happen through higher tax rate, inflation, regulations, or even debt restructuring. Any of these – or their combination – will depend on the political environment and the robustness of the recovery when it will be eventually under way.

The Cost of Free Money – Reviews

At the beginning of August The Scotsman published a review of my latest book The Cost of Free Money (July 2020, Yale University Press). As more reviews are steadily coming in, I thought it would make sense to create one place where they can be accessed easily. You can find the list below, which I’ll update as needed.


  • “A stack of new books wants to disabuse you of these ideas and many more. Though the books all look like general studies of money, they are not (except for the most important and difficult of them, Paola Subacchi’s The Cost of Free Money. Rather, they are concerned with the US dollar and, chiefly, with the oversized place of money and budgets in US political rhetoric over the past forty or fifty years. They aim to change all our thinking not just about money but about politics and society as well. ” Rebecca L. Spang, The Times Literary Supplement (July 2021)
  • “This book is an ambitious attempt to bring together several threads relating to globalization, multilateral institutions, and national economic power. A world of free trade and (especially) capital flows requires multilateral governance institutions to avoid contagious liquidity and solvency crises. The rise of China and other developing countries means that such institutions must be more inclusive than in the past. However, waning US interest in global leadership combined with mistrust of Chinese influence makes a smooth transition much harder. Finally, the lack of an alternative to the US dollar as a reserve currency adds to the tensions in the global monetary system and acts as a stumbling block to the emergence of alternatives. In the author’s words, ‘‘I ask what happens when competition for markets and resources, especially among contrasting systems led by states determined to pursue their own domestic interests, spreads into open rivalry’’.” Arslan Razmi, Journal of Economics (February 2021)
  • “Just as we are getting used to the existence of  ‘magic money trees’ which have helped finance the massive  stimulus packages we have seen during the pandemic (some 12% of GDP in the UK and the US for example, so far), here comes this excellent book to remind us that there is no such thing as free money.” Vicky Pryce, The Society of Professional Economists (8 March 2021)
  • “Paola Subacchi gives a brilliantly clear and concise analytical history of monetary management from the Gold Standard, through Bretton Woods, the Washington Consensus, into the post crisis period.” Originally posted on Amazon (25 February 2021)
  • “Paola Subacchi’s book helped me, as a non-economist, to understand what it means to live in a world with low or negative interest rates. For governments and international institutions to run up debts seemingly without limits goes against everything I thought I had learned. But there is no free lunch and this book explains why!” Originally posted on Amazon (9 January 2021)
  • “I was delighted to find the writing crisp and fluid. The explanations of the current monetary system are characterized through the wide lens of history. Instead of a chronological survey, they form a causal analysis of the monetary agreements, systems, and institutions that we take for granted today. A such, The Cost of Free Money makes for an entertaining, informative, and thought-provoking read.” Originally posted on Amazon (4 January 2021)
  • Una recensione (in italiano) di The Cost of Free Money su Aspenia 91, 2020. Andrea Goldstein offre spunti interessanti e una chiave di lettura efficace. Per esempio, il rapporto tra interdipendenza e cooperazione internazionale: “[…] lungi dal rappresentare elementi di vulnerabilità – come invece nella tradizione realista – l’interdipendenza rappresenta un elemento posi- tivo perché incita alla cooperazione. Subacchi identifica alcuni problemi fondamentali cui solo un’azione comune può dare risposta – la difficile e forse impossibile convivenza tra paesi strutturalmente in avanzo e paesi in disavanzo, l’eccessiva libertà di movimento di capitali di cui godono gli speculatori e l’abbondanza di buchi nelle maglie comunque tutt’altro che strette della regolamentazione della tassazione internazionale.”
  • The Cost of Free Money was named one of the Best Economics Books of 2020 by the Financial Times; “Subacchi, an expert on global financial and monetary systems, lucidly describes the failings of the international monetary “non-system” that emerged after the collapse of the Bretton Woods system in the 1970s, the dominance of the dollar, and the need to restore a co-operative and global monetary and financial order.” (Martin Wolf, 17 November 2020)
  • “The problem with economic globalisation is not, as many leftists have it, free trade, but rather the free movement of capital, argues economist Paola Subacchi.” Money Week (Matthew Partridge, 28 August 2020)

You can also read a preview of the book on Google Books here.