Renminbi may follow own script in internationalization(2)

On the other side of the coin, so to speak, the most obvious downside to renminbi internationalization is the potential weakening of macroeconomic levers that have so far stimulated Chinese exports, for example, the managed-band exchange rate regime. Internationalization would also pose the risk of Chinese nationals transferring assets overseas on short notice and allow for hot money－speculative capital that can move between markets rapidly－to more easily penetrate the domestic economy and inflate another property bubble.

China's financial markets are not sufficiently open at present to allow comprehensive renminbi internationalization. Notably, Chinese nationals and firms still cannot independently purchase financial assets denominated in foreign currency. They are only able to invest in the renminbi in a select number of government-accredited foreign financial institutions or buy foreign securities only via a select number of State-controlled financial institutions.

But many of the other preconditions for internationalization have largely been met: by some measures, China has overtaken the US as the world's largest economy; infla tionary pressures are low; greater currentaccount convertibility is now permitted; and, as we have seen, governments overseas have issued renminbi-denominated sovereign bonds.

The global financial crisis of 2008 and the subsequent eurozone crisis, which has never gone away, have made speculation of imminent renminbi internationalization all the louder. And the viability of the Japanese yen－once mooted to supplant the greenback－has been tarnished since Japan's "lost decade" of the 1990s.

The renminbi came to the fore as a future alternative to the US dollar mainly because China's banks performed so much better than Western ones through the global financial crisis. Until recently, some Western economists labeled China's banking system as the weakest link in its development model. Yet the fact that following the financial crisis－contrary to Europe and the US－no major bank bailouts were reported in China, that a growth rate of over 9 percent was still achieved between 2008 and 2009, and that China is now challenging the US for the title of the world's largest economy, points to the continuing shift in power from West to East.

In light of this, some may be tempted to conclude that the question we should be asking is not if the renminbi will supplant the US dollar as the global reserve currency but when. However, there is distinct reticence among senior Chinese policymakers to set the renminbi in direct competition with the dollar.

The governor of the People's Bank of China, Zhou Xiaochuan, has long said that the renminbi need not supplant the US dollar as the global reserve currency. Instead he advocates an international reserve currency that cannot be controlled by a single sovereign state.

For now China is focused on trying to enhance the role that the renminbi plays in trade with neighboring Asian countries as part of a regional trade bloc. After all, China is entitled to ask why much of intra-Asian trade should be carried out in dollars even though US companies are scarcely involved. Such a regional experiment could help coordinate renminbi overseas exposure and help gain experience in averting currency instability in the future.

According to accepted, Western-dominated economic norms, China seems a long way away from a full flotation of the renminbi in the world's financial markets, particularly given the country's strict capital controls, which make its financial system quite insular from global money markets.

But perhaps one of the greatest challenges in assessing this debate is the tendency of commentators to judge the prospects for renminbi internationalization based on what happened to the pound sterling and the US dollar in the 20th century and to the euro in the early 21st century. On this basis we find that the Chinese economy of the present is compared to the British, American and EU economies of the past.

If we head blinkered down this path we risk ruling out the possibility of China carving out its own unique route to global economic eminence－one where, for example, the depth of domestic capital markets might not turn out to be a critical determinant of renminbi internationalization as was the case in the Anglo-American development trajectory.

Therefore we may find that the extent to which the renminbi can go global in the near future may not be determined solely by domestic financial and equity-market reform moves but, more importantly, by the overall geostrategic posture that China opts to embrace in its dealings with the International Monetary Fund, the World Bank and the G20－and the next stage of the development model that China chooses to follow.

The author is director of the China Policy Institute at the University of Nottingham and professor of the modern history of China. The views do not necessarily reflect those of China Daily.