With some effort, it is possible to discern the outline of a future “renminbi zone” emerging as a rival to the “dollar zone” that has dominated the world’s financial system since the end of the second world war.
Though still indistinct, the contours of this new currency contingency are nowhere clearer than among the Brics countries (Brazil, Russia, India, China and South Africa), following a decision to create a Brics bank in July.
The bank’s two key entities – a New Development Bank (NDB) and a Contingent Reserve Arrangement (CRA) – are designed to form a developing world alternative to the two institutional bulwarks of the “dollar zone”, the World Bank and International Monetary Fund (IMF).
The Brics bank has not disclosed which currencies it intends to use to disburse development funding (through the NDB) and support against short-term liquidity pressures (through the CRA), but given China’s status as the world’s second-largest economy the renminbi is expected to dominate, officials and analysts say.
“It will represent a spectacular own goal if the Brics bank ends up having its assets denominated in US dollars,” says Jan Dehn, head of research at Ashmore, an emerging markets investment manager.
So a vision of a future “renminbi zone” starts to take shape: funding in renminbi is to be disbursed from a Shanghai-based multilateral organisation to emerging economy recipients to finance infrastructure projects and assist governments when liquidity crises strike.
If this future materialises, it will mean a rebalancing in global governance powers towards China and away from the “Washington consensus”. In a sense, the west has only itself to blame. The bank – which will have initial capital of $50bn and maximum allowable capital of $100bn – was formed in response to the west’s reluctance to devolve influence to emerging powers.
The IMF, for instance, allocates just 10.3 per cent of its voting rights to Brics countries despite the fact that they have more than doubled their share of global GDP to 21 per cent in 2013 from less than 10 per cent in 2000. European countries, by contrast, control voting rights of 27.5 per cent for just 18 per cent of the world’s output. To add to the imbalance, the IMF presidency is reserved for a European while that of the World Bank routinely goes to an American.
From another perspective, the Brics bank may evolve to challenge the conditionality – or cash for results – that the IMF and World Bank have sought to inculcate around the world.
With an estimated $8tn needed to finance infrastructure development plans in the Asia-Pacific region between 2010 and 2020, according to an Asian Development Bank estimate, the Brics bank will have ample opportunity to make its presence felt.
The creation of another organisation, the China-led Asian Infrastructure Investment Bank (AIIB), is set further to underline Beijing’s attempt to boost its financial soft power within the developing world.
But while the banks represent key conduits for the projection of Chinese financial power, more immediate determinants of the renminbi’s place in the world hinge on the attractiveness – or otherwise – of the Chinese currency as a unit for trade, a store of value and for portfolio investments.
In all of these categories, the renminbi remains a minnow compared with the US dollar. More than 50 central banks around the world have said they intend to invest part of their foreign currency reserves in the renminbi, according to Jukka Pihlman, global head of central banks and sovereign wealth funds at Standard Chartered. Uptake is strongest among Brics countries and in parts of Asia, Africa and Latin America that have fast-growing trade and investment links with China.
“While the renminbi is unlikely to challenge the US dollar’s dominance as a global reserve currency in the immediate future, the international monetary system is rapidly becoming ‘multipolar’, with the renminbi gaining prominence as a reserve and transaction currency,” Mr Pihlman says.
Under IMF rules, the renminbi cannot be officially included in central banks’ reported totals of reserves because it is not “freely usable”. However, some central banks have started report their offshore and onshore renminbi investments as official reserves anyway, Mr Pihlman says, indicating a further unravelling of IMF influence.
Nevertheless, if the IMF were to include the renminbi as a Special Drawing Rights reserve asset – which is up for review next year – it would act as a significant propellant for renminbi internationalisation, Mr Pihlman says.
The bigger opportunity for the renminbi, though, lies with potential changes in portfolio investment flows, says Ashmore’s Mr Dehn. An inflationary surge in the US dollar zone, which might follow the current recovery in US demand, could lead to a sharp increase in the relative attractiveness in renminbi assets (so long as inflation does not hit China too), Mr Dehn argues.
“So the gradual internationalisation of the renminbi may be followed by the potential for a greater surge, as people try to protect themselves from inflation in developed markets,” says Mr Dehn.
“I’ll eat my hat if the renminbi isn’t the strongest currency on the planet over the next 10 years,” he adds.
Source: FT
