The question is
simple: Can China sustain rapid GDP growth within the confines of the
current global order, including its trade rules, or must the current
US-dominated order change drastically to accommodate China’s continued
economic rise? The answer, however, remains unclear.
One way that China is attempting to find out is by pushing to have the renminbi added
to the basket of currencies that determine the value of the
International Monetary Fund’s reserve asset, the Special Drawing Right
(SDR). As it stands, that basket comprises the euro, the Japanese yen,
the British pound, and the US dollar.
The SDR issue was the
audience’s main concern when IMF Managing Director Christine Lagarde
spoke in Shanghai in April. Her stance – that it is just a matter of
time before the renminbi is added to the basket – garnered considerable
media attention. (Regrettably, however, the media read too much into her
statement.)
Former US Federal
Reserve Chair Ben Bernanke faced the same question in Shanghai last
month. He was purposely vague in his response: the renminbi’s inclusion
in the SDR would be a positive step, he said, but it could not be taken
until China makes much more progress in reforming its financial sector
and transforming its growth model.
The IMF is expected
to vote on the renminbi’s inclusion in the SDR this October, at its
regular five-year review of the SDR basket’s composition. But even if,
unlike in 2010, a majority votes to add the renminbi to the basket, the
United States may exercise its veto power. Such an outcome would not be
surprising, given that US opposition (though in Congress, not within the
Obama administration) blocked reforms, agreed in 2010, to increase
China’s voting power within the IMF.
Limited use of the
SDR implies that adding the renminbi would be a largely symbolic move;
but it would be a powerful symbol to the extent that it served as a kind
of endorsement of the currency for global use. Such an outcome would
not only advance the renminbi’s internationalization; it would also
provide insight into just how much room there is for China within the
existing global economic order.
So far, it seems that there is not enough. In a 2011 book, the economist Arvind Subramanian
projected that the renminbi would become a global reserve currency by
the end of this decade, or early next decade, based on his observation
that the lag between economic and currency dominance is shorter than
traditionally believed. Today, China is the world’s largest economy
(based on purchasing power parity) and the largest participant in world
trade, and its government has been actively promoting renminbi
internationalization, such as through the relaxation of foreign-exchange
regulations. And yet the renminbi is used internationally much less
than Subramanian’s model predicted.
As a result, China
remains subject to US monetary policy. If the Federal Reserve raises
interest rates, China must follow suit to keep capital from flowing out,
despite the negative impact of higher interest rates on domestic
growth. Given the US dollar’s dominance in international transactions,
Chinese companies investing abroad also face risks associated with
exchange-rate fluctuations.
In fact, over the
last decade, international trade rules have created significant friction
between China and many other countries, including the US. Now,
free-trade agreements are being negotiated – namely, the Trans-Pacific
Partnership and the Trans-Atlantic Trade and Investment Partnership –
that will undermine the continued expansion of Chinese exports to the
extent that they raise entry barriers for Chinese firms.
Clearly, China has
faced major challenges within the existing global system as it tries to
carve out a role befitting its economic might. That may explain why,
with its “one belt, one road” initiative and its establishment of the
Asian Infrastructure Investment Bank (AIIB), China’s government is
increasingly attempting to recast the world order – in particular, the
monetary and trading systems – on its own terms.
The “one belt, one
road” initiative aims to re-create the ancient overland and maritime
Silk Roads that carried goods and ideas from Asia to Europe. Given that
the project will entail significant Chinese investment affecting some 50
countries, its appeal in the developing world is not difficult to
fathom.
The AIIB, too, has
proved appealing – and not just to developing countries. In fact, 57
countries – including major powers like France, Germany, and the United
Kingdom – have signed up as founding members, which may reflect a
growing awareness of the US-dominated order’s diminishing returns.
From China’s
perspective, sustained domestic economic growth seems unlikely within
the existing global system – a challenge that Japan and the other East
Asian economies did not encounter during their economic rise. Indeed,
the only country that has encountered it is the US, when it replaced the
UK as the world’s dominant economic and financial power before World
War II; fortunately, that precedent is one of accommodation and a
peaceful transition.
To be sure, China
still needs to undertake important domestic reforms, especially of the
financial sector, in order to eliminate distortions in resource
allocation and stem the economy’s slowdown. But the refusal by China’s
leaders to pursue export-boosting currency depreciation, even in the
face of decelerating growth, suggests that they are willing to make the
needed sacrifices to secure the renminbi’s international role and, with
it, long-term economic growth and prosperity.
Whether
or not the renminbi is added to the SDR basket this October, a gradual
transformation of the global system to accommodate China seems all but
inevitable.
