The Politics of China’s Currency Internationalisation: Regional Renminbi Hubs

China at a Cross-Roads, DIIS Conference Dr. Winnie King

king.winnie@gmail.comUniversity of Bristol

2016

Restructuring with Chinese Characteristics

Assessing nature of what ‘Crossroads’ China is facing necessitates understanding:

• Why does China do what it does?• What are China’s concerns?• Where does the market come in?

• Government Intervention vs Market Mechanisms• What can it offer?

• What can we expect?• Re: Currency and Capital Flows

• RMB hubs as a lens of explanation

Motivations (Why does China do what it does?)

Currency Internationalisation in Economic Restructuring & Macroeconomic rebalancing

• Lessons of 2008 GFC Diversification of Risk; Economic Structure; Dollar Hegemony

• Supporting Development Strategy (restructuring economy [supply-side reform], access to resources, right kind of infrastructure, right kind of investment )

• Security Considerations of Growth and Diplomacy (aid & alliances; securing resource and access (One Belt One Road))

Risks (What are China’s concerns?)

Risk of Currency Internationalisation in Economic Restructuring & Macroeconomic rebalancing

• Vulnerability of capital accounts flows (Responding to 2008; learning from 1998 Asian Financial Crisis)

• Regulations and governance of monetary policy

• Currency management (stability)

• Ignoring this in the face of changing economic context:• Rising cost of labour: up 60% since 2009;; middle income trap; inequality• Rise of alternative destinations for investment and growth in

China’s ‘traditional’ labour intensive manufacturing sector: ASEAN

RMB Hubs:Where does the market come in?

and What does it offer?

Traditional preference for government intervention over the market mechanisms

• Strong historical, ideological and socio-economic roots

But reform necessitates a greater role for the market

• RMB hubs as strategically selected infrastructure

• -- for Traditional Economy and New Economic Sectors

• -- for Currency Internationalisation

• -- as a testing ground

• The political and economic logic onshore/offshore rationale

The RMB and China’s Traditional Economy

It’s all about liquidity: RMB as readily available currency

Contribution to New Economy

• Niche—Cross-Strait Trade & Investors (Greater China politics)

• Resource Pooling (deepening integration)

• Development and expansion of new financial instruments and tools (Formosa Bond)

• ODI

• Institutionalisation of regional financial networks, collaboration and cooperation on regulations, laws, normal practice

• Niche—world financial centre (expertise; time zone; innovation)

• Upgrading of China’s Financial System and beyond (‘13-5’)

• Resource Pooling

• Funding [PBoC bond (2015); RMB denominated UK govt debt (2014)]

• Greater Transparency

• RMB denominated debt

• ODI/FDI (‘13-5’)

• Taiwan London

Currency Internationalisation and State Legitimacy (What can we expect?)

Rebalancing Economic Structure (‘13-5’)

Securing and Expansion of Renminbi Market Access (Onshore/Offshore ‘Connect’)

• Transformation both China’s and Hub’s asset holdings

• Shift between government intervention and allowing market to dominate

• August 2015• Managing expectations (domestic and international)• Improved communication

• Win-Win under a ‘New Normal’more opportunities, more volatility, slower profits, maturing management

Thank you