This article was first published in Quantum magazine.
Hopes that China may be prepared to countenance liberalization and the opening up of its financial sector are likely to be dashed, says David Smith. Risk aversion and caution will remain its watchwords as it defines its new global role.
A couple of years ago, it all seemed fairly clear. At a time when the world economy was teetering on the brink of collapse as a result of the global financial crisis, Beijing appeared to be taking the lead on reform of the international monetary system.
After years in which calls for reform—usually from France—had fallen on deaf ears, suddenly the world’s second-largest economy was in the vanguard of the demand for change. Zhou Xiaochuan, governor of the People’s Bank, the Chinese central bank, set out a vision of reform very much along the lines proposed more than 60 years earlier by John Maynard Keynes at the Bretton Woods conference in 1944.
Instead of an international monetary system based on the dollar—the model chosen at Bretton Woods in preference to Keynes’s version—the People’s Bank governor gave a powerful hint that Beijing preferred to shift the focus on to the special drawing right (SDR), the IMF’s currency basket. Just as America was on course to be replaced as the world’s biggest economy by China, so the dollar would lose its global pre-eminence. That, it seemed, was China’s vision and it was dramatic.
Fast forward to late March 2011 and the scene was set for a specially convened G20 “high-level seminar” in Nanjing, China, to discuss international monetary reform. While China was host, the French president Nicolas Sarkozy was in the chair as president also of the G20. Sarkozy was maintaining the Élysée Palace tradition of wanting a shake-up of the system and an end to its dominance by the dollar.
If he was expecting China’s wholehearted support, however, he was disappointed. Wang Qishan, the Chinese vice-premier, did his best to correct the impression that his country was pressing for rapid reform. “The reform process will be long-term and complex,” he said.
Official guidance was that the People’s Bank governor’s analysis two years earlier had been exploratory, even academic, rather than a program for action. It may even have been deliberately provocative in the face of Washington’s criticism of Beijing’s currency policy, with the aim of showing that the world may not be as permanently dependent on the dollar as America likes to think.
A Gradual Approach
That, however, is not the way China operates. Flying metaphorical kites is not its style. Something has changed. Its enthusiasm for reform has cooled, perhaps because analysts have pointed out that a gradual approach is the best way of preserving the value of its huge and growing dollar reserves. Even on the narrow question of including China’s currency, the renminbi, in the SDR basket, no progress was made in Nanjing.
The Chinese authorities, having appeared at one stage to be enthusiastic, pulled back from even that, not least because Timothy Geithner, the US Treasury Secretary, said only currencies that were truly flexible—in other words not tightly managed—should be included in the SDR.
China’s unwillingness to see the renminbi attain reserve currency status, and certainly Beijing’s unwillingness to promote it as in any way a rival to the dollar, remains. So what does China want?
The current official focus is on the gradual “internationalization” of the renminbi, by which it is meant its greater use in commercial transactions and in some third-party activity. China’s Ministry of Finance has been actively promoting the currency’s use in regional trade transactions, not least by offering tax rebates, and recently issued a ¥6 billion bond in Hong Kong to promote its use in settlements.
The lesson, if it were needed, is that China will proceed with caution. What China wants when it comes to international monetary reform is not to rock the boat too much, while heading off external criticism of the undervaluation of her currency. That means France’s hopes of a strong ally for reform in the remaining months of her G20 presidency will almost inevitably come to nothing.
“China doesn’t think that there’s really much room for progress in the G20 under France,” said Zhang Ming, an economist at the Chinese Academy of Social Sciences. “The government has become more realistic in pushing instead for yuan internationalization, something it can achieve itself. It is not as enthusiastic as before about getting into the currency reform issue.”
China’s approach to international monetary reform will exasperate those who think it is time the country adopted a more aggressive international role to go with her increasing economic clout. That, however, is the Chinese way. Gradualism is the watchword. Change will occur, but rushing it will benefit nobody; neither China nor her international partners.
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