Currency Devaluation and Reform Reflect China’s Push for Renminbi Internationalization
The August devaluation of the renminbi and the change in the way its exchange rate against the dollar is determined should be viewed in the context of China’s push to internationalize its currency
Dalian, People’s Republic of China China’s devaluation of the renminbi and the accompanying change in how the currency’s exchange rate against the dollar is set should be viewed in the context of the internationalization of the RMB and its progress to full convertibility, global financial experts agreed in a session at the World Economic Forum’s Annual Meeting of the New Champions.
“It was theoretically quite timely and logical to have this reform, but the result was unexpected,” said Li Daokui, Dean, Schwarzman Scholars, Tsinghua University, People’s Republic of China, referring to the slide in global financial markets after the move. “It was a relatively small adjustment downwards, but the difference is that we are in an environment where people ask what it means,” remarked Lord Turner, Senior Fellow, The Institute for New Economic Thinking (INET), United Kingdom. “China now has significant short-term capital movements,” Turner explained. “All this illustrates that the inevitable direction of change is towards capital account liberalization.”
Some of the concern in world markets stemmed from questions about the nature of the decision to devalue. “The People’s Bank of China (PBOC) is part of the State Council, so it is a political decision,” reckoned Heizo Takenaka, Professor, Faculty of Policy Management, Keio University, Japan. “As a political decision, it is understandable. He added: “Considering the size of the Chinese economy, the internationalization of the RMB is very important. But people now are expecting much more of a free-market system [for determining the renminbi exchange rate].” There would also be expectations that the PBOC would become more independent.
Could the RMB be devalued further? “The most important thing that the central bank can do is make sure that the currency is stable,” argued Anders Borg, Chair, Global Financial System Initiative, World Economic Forum. “We should make the RMB stable against a basket of currencies,” advised Huang Yiping, Professor, National School of Development, Peking University, People’s Republic of China. “This will be more beneficial to the world economy,” he said. Observed Borg: “If China continues to reform, its economy will be strong and the currency will be strong.”
Looming in November is the anticipated decision by the International Monetary Fund (IMF) on whether to include the RMB among the currencies used to set the value of the Special Drawing Rights (SDR), an international monetary reserve currency employed by the IMF. “At this point, the RMB is not yet an international currency, but we can call it a quasi-international currency,” Li told participants. “If the RMB is not a part of the SDRs, then it is not a real SDR.” Takenaka suggested that inclusion of the RMB in the calculation of the SDR would accelerate the reform of the Chinese financial markets.
The issue of the RMB’s inclusion could hinge on the votes of the US and Japan, which have significant voting power in the IMF. “It is important to keep politics out of the currency debate,” Borg warned. “The ambition of China to be part of the SDR is good. Given the role China is playing in the world economy, it is very important that the RMB be part of the SDR system.” While he supports the RMB’s inclusion in the Special Drawing Rights basket, Turner said that the IMF should make its decision based on the rules and the facts. “I am absolutely confident that the criteria will be met in the next few years, though maybe not precisely in November.” The internationalization of a currency does not necessarily bring major advantages to an economy, he observed. For example, capital outflows cannot be controlled once full internationalization is achieved.