China’s currency the Renminbi is not going to be a global reserve currency soon, and perhaps not in a very long time, writes political science professor Victor Shih (co-authored with Susan Shirk) in Foreign Policy.
Victor Shih:
The level of RMB deposits in Hong Kong, a more reliable sign of offshore willingness to adopt the RMB, has declined since late last year. Since both Chinese and foreign investors bank in the economically liberal Hong Kong, RMB deposits there are a bellwether of general confidence in the RMB. Enlarging the pool of RMB circulating outside mainland China, a prerequisite for it becoming a global currency, thus might prove more challenging than first imagined, especially as global economic woes reduce demand for Chinese exports and put downward pressure on the RMB.
So will the RMB ever truly go global? That depends on whether Chinese decision-makers are willing to accept the risks involved in allowing capital to flow more freely in and out of mainland China. One major risk of capital-account liberalization, as this process is called, is that it could engender financial instability. The upside is that capital-account liberalization in developing countries tends to lead to higher economic growth, lower inflation, and higher returns on equity within two to three years after the reform. In the short term, however, it can cause volatility in capital flows, which can lead to deflation or inflation and even economic crises. Chinese leaders might be worried that if they make it easier to take assets out of China, more and more wealthy Chinese will hedge their bets by moving their children’s education, their home purchasing, and their savings abroad. Because wealth is very concentrated in China, such a stampede for the exits could drain a substantial amount of deposits from China’s banking system.
Victor Shih is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers’ request form.
