For those who are interested in RMB, this is mine book review:
This enlightening book by economist Paola Subacchi provides a good overview of the past and future prospects of the renminbi, the people’s currency. Since the publication of this book, many things have happened-including the huge impact on the global financial system and changes in the leadership of the United States and multilateral institutions. However, the basic challenges highlighted in the book continue to hinder China’s desire to remove the renminbi from a “dwarf currency” status (a type that is rarely used in various international transactions and is rarely held by the central bank as a reserve currency). Important, if not the dominant global currency.
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But Subacchi pointed out that policymakers are reluctant to hand over economic control to external and market forces-which is necessary for capital account liberalization and financial market development. It is this reluctance that constitutes the biggest obstacle to the renminbi’s global role.
To a certain extent, this reluctance is just the latest manifestation of a long and fierce battle between China’s push for more economic decision-makers who use market power and those who support the retention of state control. One explanation for promoting the renminbi to play a greater international role is that it is a kind of leverage through which exchange rate flexibility and capital account openness can be improved. In the 1990s and 2000s, the momentum seemed to be related to groups that supported liberalization. Recently, the pendulum has swung in the other direction, and even before the pandemic, economic policymakers have shrunk. As Subacchi concluded, China is now trying an untouched path—appreciating the currency while maintaining extensive control of the capital account. She left an unanswered question as to whether this can be achieved. I am just as skeptical as everyone else.
Back in 2015, I comment in a paper Eswar Prasad (Eswar Prasad) comments on the outlook for the RMB:
The key question then is, what price of policy autonomy are Chinese policymakers willing to pay for the internationalization of the RMB? The slowdown in growth is faster than expected, and this problem has been greatly alleviated. Are they willing to give up the leverage of exchange rate management in order to maintain the independence of monetary policy? They will give up control of the financial system (and the ability to prevent capital outflows). Will this happen because of capital account convertibility? The hard-line nature of the stock market intervention in the summer of 2015 made people stop thinking. If foreign exchange reserves continue to fall, we may see a further decline in exchange rate flexibility (and capital account opening)…
The rapid rise of renminbi reserves occurred in 2018 and will recover in 2020. From 2016 to 2019, RMB transaction volume increased from 4% to 4.3% (over 200%). Some more data below:
figure 1: Foreign exchange reserves allocated in U.S. dollars accounted for the share of total (allocated, unallocated) reserves (blue), euros (red), and RMB (green). The pink shade is the Trump administration.Source: International Monetary Fund Cafe, Various problems, the author’s calculations.
figure 2: The proportion of foreign exchange transactions in April is the US dollar (blue square), the euro (red triangle), and the renminbi (green inverted triangle). The total number of shares is 2. source: Three-year Bank for International Settlements Survey, 2019.
The International Monetary Fund provides more information on the use of RMB in the following countries/regions “The Reserve Currency in the Evolving International Monetary System”.
source: IInternational Monetary Fund (2020).
