China wants the renminbi to be part of the International Monetary Fund’s basket of elite currencies — the Special Drawing Rights — and a major global currency for trade and reserve holdings. For this purpose it sees a stable and strong renminbi as desirable. It also wants the value of the renminbi to be increasingly determined by market forces. But the leadership cannot have it both ways unless it takes a different approach to managing rate adjustments. Its efforts so far have led to this month’s unexpected devaluation, generating turmoil and the widespread perception that Beijing has lost control over economic decision-making.
Internationalising the renminbi would make sense as the outcome of a long-term process of opening up capital markets and liberalising exchange and interest rates but it should not be driving near-term policy choices that must respond to cyclical market shifts. Yet this is what has been happening, causing confusion.
In the avalanche of discussion on internationalising the renminbi, surprisingly few have questioned the logic of doing it now or even if it is technically feasible. To begin with, for a currency to be used more abroad, it has to be available abroad. The US did this by running huge trade deficits and paying with dollars. It also gave dollars away through its aid programmes. But China will not want to run trade deficits instead of surpluses, nor is there a strong case for a country ranking about 90th in per capita gross domestic product to give away its money to richer nations.