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Gaining Currency: The Rise of the Renminbi
In Gaining Currency, leading China scholar Eswar S. Prasad describes how the renminbi (RMB) is taking the world by storm and explains its role in reshaping global finance.
This book sets the recent rise of the RMB, China's currency since 1949, against a sweeping historical backdrop. China issued the world's first paper currency in the 7th century. In the 13th century, Kublai Khan issued the first-ever currency to circulate widely despite not being backed by commodities or precious metals. China also experienced some of the earliest episodes of hyperinflation currency wars.
Gaining Currency reveals the interconnections linking China's growing economic might, its expanding international influence, and the rise of its currency. If China plays its cards right by adopting reforms that put its economy and financial markets on the right track, the RMB could rival even the euro and the Japanese yen.
Prasad shows, however, that while China has successfully adopted a unique playbook for promoting the RMB, many pitfalls lie ahead for its economy and currency that could limit the RMB's ascendance. The Chinese leadership is pursuing financial liberalization and limited market-oriented reforms, but it has unequivocally repudiated political, legal, and institutional reforms. Therefore, Prasad argues, while the RMB is likely to become a significant reserve currency, it will not attain "safe haven" status as a currency to which investors turn during crises. In short, the hype predicting the RMB's inevitable rise to global dominance is overblown.
Gaining Currency makes a compelling case that, for all its promise, the RMB does not pose a serious challenge to the U.S. dollar's dominance in international finance.
This book sets the recent rise of the RMB, China's currency since 1949, against a sweeping historical backdrop. China issued the world's first paper currency in the 7th century. In the 13th century, Kublai Khan issued the first-ever currency to circulate widely despite not being backed by commodities or precious metals. China also experienced some of the earliest episodes of hyperinflation currency wars.
Gaining Currency reveals the interconnections linking China's growing economic might, its expanding international influence, and the rise of its currency. If China plays its cards right by adopting reforms that put its economy and financial markets on the right track, the RMB could rival even the euro and the Japanese yen.
Prasad shows, however, that while China has successfully adopted a unique playbook for promoting the RMB, many pitfalls lie ahead for its economy and currency that could limit the RMB's ascendance. The Chinese leadership is pursuing financial liberalization and limited market-oriented reforms, but it has unequivocally repudiated political, legal, and institutional reforms. Therefore, Prasad argues, while the RMB is likely to become a significant reserve currency, it will not attain "safe haven" status as a currency to which investors turn during crises. In short, the hype predicting the RMB's inevitable rise to global dominance is overblown.
Gaining Currency makes a compelling case that, for all its promise, the RMB does not pose a serious challenge to the U.S. dollar's dominance in international finance.
344 pages, Hardcover
First published January 1, 2016
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215 people want to read
About the author
Eswar S. Prasad
48 books54 followersEswar S. Prasad is the Tolani Senior Professor of Trade Policy and Professor of Economics at Cornell University. He is also a Senior Fellow at the Brookings Institution, where he holds the New Century Chair in International Economics, and a research associate at the National Bureau of Economic Research. He is the author of Gaining Currency: The Rise of the Renminbi and The Dollar Trap: How the U.S. Dollar Tightened Its Grip on Global Finance.
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Displaying 1 - 5 of 5 reviews
February 11, 2017
A study of recent Chinese currency and financial reforms and their implications.
Paper money was invented in China over a thousand years ago, of course. But at present, China does not enjoy a predominant position in terms of global finance. That is still held by the US dollar, which is still a reserve currency and even a haven against financial instability, even after the 2008 crisis, even after the threats of default, even after the loss of the AAA credit-rating. The imposition of sanctions on Russia, for example, was a major imposition on Russian citizens, as the SWIFT system of tracking transactions meant that they could no longer use credit cards outside of Russia.
This volume is primarily a study of the policy decisions around the yuan and how they came in place. Reformist policy officials, particularly those in the central bank (PBOC), recognized that many reforms were necessary before the yuan became as important as other global currencies like the yen or the euro. However, these were opposed by other factions within the government who were fearful of Western influences and wanted to maintain control over economic growth.
While China has made an astonishing degree of progress in this reform, Prasad is less optimistic about if this will continue. Even some of the other reformers, like Yifu Lin, want a focus on improving domestic regulatory frameworks and making the exchange rate more flexible, then open up the capital accounts. However, there is still the problem of contradictory priorities - wanting freer currency markets or government control.
Likewise, the Chinese economy still has its systemic flaws - a volatile stock market, skittish foreign investors, and a tight control on the exchange rate, which means that the government is hemorrhaging money to prop it up to deal with capital outflows.
But even so, the Chinese government has invested considerable time and energy in forming its own international institutions - the AIIB, for example, or the RCEP as a counter to the TTP. And Prasad does not consider what could possibly dethrone the dollar. Who knows where it will be?
Paper money was invented in China over a thousand years ago, of course. But at present, China does not enjoy a predominant position in terms of global finance. That is still held by the US dollar, which is still a reserve currency and even a haven against financial instability, even after the 2008 crisis, even after the threats of default, even after the loss of the AAA credit-rating. The imposition of sanctions on Russia, for example, was a major imposition on Russian citizens, as the SWIFT system of tracking transactions meant that they could no longer use credit cards outside of Russia.
This volume is primarily a study of the policy decisions around the yuan and how they came in place. Reformist policy officials, particularly those in the central bank (PBOC), recognized that many reforms were necessary before the yuan became as important as other global currencies like the yen or the euro. However, these were opposed by other factions within the government who were fearful of Western influences and wanted to maintain control over economic growth.
While China has made an astonishing degree of progress in this reform, Prasad is less optimistic about if this will continue. Even some of the other reformers, like Yifu Lin, want a focus on improving domestic regulatory frameworks and making the exchange rate more flexible, then open up the capital accounts. However, there is still the problem of contradictory priorities - wanting freer currency markets or government control.
Likewise, the Chinese economy still has its systemic flaws - a volatile stock market, skittish foreign investors, and a tight control on the exchange rate, which means that the government is hemorrhaging money to prop it up to deal with capital outflows.
But even so, the Chinese government has invested considerable time and energy in forming its own international institutions - the AIIB, for example, or the RCEP as a counter to the TTP. And Prasad does not consider what could possibly dethrone the dollar. Who knows where it will be?
April 19, 2017
I enjoyed this book much more than I thought I would. It's not too overly slogged down with massive amounts of research and data. Eswar explains his reasoning for the rise of the renminbi on the world stage and the reasons why it will not overtake the US dollar as a worldwide reserve currency very logically.
The renminbi is gaining a lot of headwind versus the other 5 major curriencies (Euro, Yen, Pound Sterling, Swiss Franc, Canadian dollar) as China is aggressively pursuing its use internationally as a foreign exchange currency. Though, it may steadily increase its use as an exchange currency, it will never be considered a safe haven. China's political and legal structure is too controlling and the market is too volatile. Thus, no confidence exists in their currency as a reserve. The US treasury holds that confidence strongly and the dollar will for the foreseeable future be the dominant global reserve currency. America has a free flowing currency exchange, democratic structure, corporate transparency, and freedom of press. Just a few key ingredients to currency dominance.
Gotta hand it to China though, they are forcing countries to swap portions of their investments to the renminbi from other currencies just to keep China investing in their infrastructure. You scratch my back I'll scratch yours. Whether that is actually good for the receiving nation is another topic. Though, it's interesting what Ecuador said about the switch from the US to Chinese investment, "The problem is we are trading American imperialism for Chinese imperialism".
It'll be very interesting to watch China as they continue to push the renminbi onto the world. Their success depends on financial market development, their exchange rate flexibility, and capital liberalization. Though it's hard fathoming them changing their political environment. Lets see if BRICS or their created AIIB will amount to much. The AIIB is interesting since they are creating a lender for infrastructure.
Look forward to his previous book The Dollar Trap.
The renminbi is gaining a lot of headwind versus the other 5 major curriencies (Euro, Yen, Pound Sterling, Swiss Franc, Canadian dollar) as China is aggressively pursuing its use internationally as a foreign exchange currency. Though, it may steadily increase its use as an exchange currency, it will never be considered a safe haven. China's political and legal structure is too controlling and the market is too volatile. Thus, no confidence exists in their currency as a reserve. The US treasury holds that confidence strongly and the dollar will for the foreseeable future be the dominant global reserve currency. America has a free flowing currency exchange, democratic structure, corporate transparency, and freedom of press. Just a few key ingredients to currency dominance.
Gotta hand it to China though, they are forcing countries to swap portions of their investments to the renminbi from other currencies just to keep China investing in their infrastructure. You scratch my back I'll scratch yours. Whether that is actually good for the receiving nation is another topic. Though, it's interesting what Ecuador said about the switch from the US to Chinese investment, "The problem is we are trading American imperialism for Chinese imperialism".
It'll be very interesting to watch China as they continue to push the renminbi onto the world. Their success depends on financial market development, their exchange rate flexibility, and capital liberalization. Though it's hard fathoming them changing their political environment. Lets see if BRICS or their created AIIB will amount to much. The AIIB is interesting since they are creating a lender for infrastructure.
Look forward to his previous book The Dollar Trap.
June 6, 2017
Although more than a tad disorganized and plodding, this book does show how China conducts international financial diplomacy, and how that affects the global economy.
As one would imagine, China and the Chinese Communist Party are as often concerned about the political ramifications of their currency as the economic. The author quotes Vladimir Putin after the Ukraine sanctions, who marveled that "We never thought about it before, we believed that all our partners - Visa and Mastercard- are depoliticized economics entities. It turns out that they are strongly affected by political pressures," or in other words, the sanctions. To avoid such dangers, the People's Bank of China (PBC) since 2002 has set up its own "UnionPay," an interbank settlement system; since 2010 they have set up bilateral currency trading deals with Russia, Japan, South Korea and others; since 2012 they have set up offshore clearing centers for the currency; and since 2015, a Cross-border International Payment System (CIPS), which they hope to take the place of the international SWIFT bank communication system. All attempt to secure stability and international acceptance of their own brand of currency trading and control.
Yet China does want their currency, the Renminbi (RMB), to be not just a shield for the country, but a means for other countries to trade with and invest in China. The country's increasing capital openness is demonstrated by the fact that the sum of China's external liabilities and assets, at $11 trillion, are six times what they were a decade ago. Since 2002, the qualified foreign institutional investor (QFII) rule allows long-term foreign investors to buy once restricted A-shares on the China stock exchanges with RMBs. Other schemes like RQFII (for offshore RMB investors), the Hong Kong-Shanghai Stock and Mutual Fund Connects (to allow stock listings both at home and abroad), QDII (allowing domestic financiers to invest abroad), and Free Trade Zones (starting in Shanghai in 2013 - allowing two way investment), have also helped liberalize the country's "capital account," even though the country still tries to keep strict limits on short-term cash or debt, for fear of foreign currency "runs."
Gradually, China has also been shifting its foreign currency holdings from PBC reserves to private holders (as part of the campaign of "holding foreign exchange by the people"), which has also helped to liberalize trading of foreign currencies at home. Since 2015, the government has allowed the RMB to trade more freely on open markets (both domestically and in the important Hong Kong currency market, where much of China's reforms take place). The increased trading of the currency has actually led the value of the currency to fall gradually, due to the increased financial outflows from the country.
Ultimately, however, the author notes these currency reforms can only go so far. Despite China being by some measures the largest economy on Earth, the RMB is only the fifth-most used currency in the world for trading (tied with the Canadian dollar) at about 1.1% of all currency turnover, and it is only about the 7th in reserve bank holdings (behind the Swiss Franc), despite attempts since 2008 to open up RMB swap lines and encourage foreign central banks to hold it. The author notes that the real problem with the RMB's relative small international share is not economic size or openness, it's politics. As long as the domestic political situation in China is fraught, and as long as the Communist Party holds onto tenuous power, the RMB will not be an international safe asset. In other words, the RMB is in no danger of overtaking the dollar or even the euro or pound soon.
As you can tell, there are a lot of disorganized acronyms, dates, and facts in this book, but many of them are interesting. The book made me want to learn more about China's financial development.
As one would imagine, China and the Chinese Communist Party are as often concerned about the political ramifications of their currency as the economic. The author quotes Vladimir Putin after the Ukraine sanctions, who marveled that "We never thought about it before, we believed that all our partners - Visa and Mastercard- are depoliticized economics entities. It turns out that they are strongly affected by political pressures," or in other words, the sanctions. To avoid such dangers, the People's Bank of China (PBC) since 2002 has set up its own "UnionPay," an interbank settlement system; since 2010 they have set up bilateral currency trading deals with Russia, Japan, South Korea and others; since 2012 they have set up offshore clearing centers for the currency; and since 2015, a Cross-border International Payment System (CIPS), which they hope to take the place of the international SWIFT bank communication system. All attempt to secure stability and international acceptance of their own brand of currency trading and control.
Yet China does want their currency, the Renminbi (RMB), to be not just a shield for the country, but a means for other countries to trade with and invest in China. The country's increasing capital openness is demonstrated by the fact that the sum of China's external liabilities and assets, at $11 trillion, are six times what they were a decade ago. Since 2002, the qualified foreign institutional investor (QFII) rule allows long-term foreign investors to buy once restricted A-shares on the China stock exchanges with RMBs. Other schemes like RQFII (for offshore RMB investors), the Hong Kong-Shanghai Stock and Mutual Fund Connects (to allow stock listings both at home and abroad), QDII (allowing domestic financiers to invest abroad), and Free Trade Zones (starting in Shanghai in 2013 - allowing two way investment), have also helped liberalize the country's "capital account," even though the country still tries to keep strict limits on short-term cash or debt, for fear of foreign currency "runs."
Gradually, China has also been shifting its foreign currency holdings from PBC reserves to private holders (as part of the campaign of "holding foreign exchange by the people"), which has also helped to liberalize trading of foreign currencies at home. Since 2015, the government has allowed the RMB to trade more freely on open markets (both domestically and in the important Hong Kong currency market, where much of China's reforms take place). The increased trading of the currency has actually led the value of the currency to fall gradually, due to the increased financial outflows from the country.
Ultimately, however, the author notes these currency reforms can only go so far. Despite China being by some measures the largest economy on Earth, the RMB is only the fifth-most used currency in the world for trading (tied with the Canadian dollar) at about 1.1% of all currency turnover, and it is only about the 7th in reserve bank holdings (behind the Swiss Franc), despite attempts since 2008 to open up RMB swap lines and encourage foreign central banks to hold it. The author notes that the real problem with the RMB's relative small international share is not economic size or openness, it's politics. As long as the domestic political situation in China is fraught, and as long as the Communist Party holds onto tenuous power, the RMB will not be an international safe asset. In other words, the RMB is in no danger of overtaking the dollar or even the euro or pound soon.
As you can tell, there are a lot of disorganized acronyms, dates, and facts in this book, but many of them are interesting. The book made me want to learn more about China's financial development.
December 17, 2020
This book is really amazing, without having deep knowledge of international finance mechanisms Eswar Prasad shares the story of the RMB's rise in a way I got to really understand. He recognizes the central banks' wishes and draws a direct line between those and the actions they have taken. He assess those actions and states objective conclusions. It's up to the reader to form their opinions of those conclusions.
My own little summary:
The CPC set out many decades ago to have the Renminbi be both a reserve and safe-haven currency. Having the Renminbi be of those two would allow China more than ever to throw around its weight in the scene of international finance.
Regarding being a reserve currency, they have somewhat succeeded. The government has largely succeeded promoting the currency when possible: cross-country transactions are settled in RMB, capital accounts are slowly liberalizing, the IMF has included the Yuan in its Special Drawing Rights (SDR) basket. All of these increase the relevance of the RMB as a reserve currency - a currency that other central banks want to own.
However, on the front of becoming a safe-haven currency the opaque nature of the market forces within China's domestic economy limits its success. When the high courts rule that the central party leadership is above the constitution it is more than reasonable for international investors to be wary of the independence of the central bank and the government. With the RMB's returns out-gaining the dollar the RMB maintains itself as an investment, but when it comes to safety, US T-bills still hold the poll position w/o any fear of the RMB's rise.
China's progress is nothing to scoff at - however DEEP internal reforms (or the fall of the dollar) are needed before USD loses its place in world finance.
My own little summary:
The CPC set out many decades ago to have the Renminbi be both a reserve and safe-haven currency. Having the Renminbi be of those two would allow China more than ever to throw around its weight in the scene of international finance.
Regarding being a reserve currency, they have somewhat succeeded. The government has largely succeeded promoting the currency when possible: cross-country transactions are settled in RMB, capital accounts are slowly liberalizing, the IMF has included the Yuan in its Special Drawing Rights (SDR) basket. All of these increase the relevance of the RMB as a reserve currency - a currency that other central banks want to own.
However, on the front of becoming a safe-haven currency the opaque nature of the market forces within China's domestic economy limits its success. When the high courts rule that the central party leadership is above the constitution it is more than reasonable for international investors to be wary of the independence of the central bank and the government. With the RMB's returns out-gaining the dollar the RMB maintains itself as an investment, but when it comes to safety, US T-bills still hold the poll position w/o any fear of the RMB's rise.
China's progress is nothing to scoff at - however DEEP internal reforms (or the fall of the dollar) are needed before USD loses its place in world finance.
January 24, 2018
Overall a worthwhile read for perspective on history of the Renminbi as well as current issues facing its controversial (currently) durability. I was disappointed at times as the author attempted to optimize metrics to show the Renminbi's status (if one measure doesn't achieve high enough rank for the currency or country then just use another measure that does), but in the end the author provides more than enough balance and concludes along fair lines given the collective work.
Displaying 1 - 5 of 5 reviews