China’s currency could create ‘risk’ for financial system, IMF says
Joel Gehrke
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China’s currency stands to “be more predominant in international transactions” in the years to come, according to the International Monetary Fund, raising potential “risks” for global markets.
“It is about the regulation and the plumbing of the financial system,” IMF financial counselor Tobias Adrian told reporters Tuesday. “To the extent that institutions are well regulated and are well governed, you know, financial stability risks should be contained.”
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Chinese President Xi Jinping favors a growing use of Chinese currency in international transactions, in a challenge to the primacy of the U.S. dollar as the global reserve currency. Xi and Russian President Vladimir Putin hope that the use of alternatives to the dollar will curtail the U.S. government’s ability to impose economic sanctions.
“You know, for the moment, the renminbi has still limited convertibility,” said Adrian, using one of the names for China’s currency. “And we do expect that, over time, convertibility will be increased and that the renminbi is going to be used more often and might be more predominant in international transactions.”
That observation marked the halting start of a comment on the ramifications of Xi’s ambitions for China’s currency, prompted by a journalist at the IMF annual meetings in Washington. “Does increasing use of the renminbi promote global financial stability?” the reporter asked.
That apparently simple question forced Adrian and his IMF colleagues into 10 seconds of cautious silence. “So, that’s a very good question,” Adrian acknowledged with a chuckle.
Adrian eventually settled on drawing a distinction between using Chinese currency for international payments — what he called “convertibility” — and the question of whether Beijing could be trusted to play a central role in major investment markets.
“So, you know, usage for payments in and of itself would not, in general, represent any implications for financial stability,” said Adrian, who also directs the IMF’s Monetary and Capital Markets Department. “But, of course, we would also expect that capital markets around renminbi-issued securities would develop over time … At the moment, of course, the U.S. dollar is the dominant currency, not just for trade, but also for capital markets, and I think on the capital market side, this is where the financial stability question occurs.”
Some countries see the emergence of China’s currency as a potentially stabilizing force, in the sense that it might allow them to conduct business unaffected by U.S. financial sanctions in the event of a crisis. That viewpoint found perhaps its most startling support in recent days from French President Emmanuel Macron, who stunned allies with a complaint that the “extraterritoriality of the U.S. dollar” could constrain European autonomy in the event of a crisis between the United States and China.
“If the tensions between the two superpowers heat up … we won’t have the time nor the resources to finance our strategic autonomy, and we will become vassals,” Macron told reporters while traveling last week in China.
Macron’s attitude is congenial with Xi and Putin’s long-stated desire to constrain the American ability to impose economic punishments in connection to foreign policy or national security disputes.
“The sides intend to resist attempts to substitute universally recognized formats and mechanisms that are consistent with international law for rules elaborated in private by certain nations or blocs of nations,” Putin and Xi said in a joint statement last year. “[Russia and China] are against addressing international problems indirectly and without consensus, oppose power politics, bullying, unilateral sanctions, and extraterritorial application of jurisdiction.”
A few weeks later, Putin launched his campaign to overthrow the Ukrainian government, and the U.S. and its allies mobilized a bruising array of economic sanctions through the G-7, the bloc of the world’s seven largest industrialized economies. U.S. and European officials, along with Japan, hope that their measures will constrain Russia while sending a signal to Beijing of the economic pain that would befall China if Xi attacks Taiwan.
Yet some analysts argue that China’s potential to rival the U.S. dollar is exaggerated because Beijing can’t let “the rest of the world to accumulate large claims in” Chinese currency without risking either economic or political instability.
“That means either China has to run external deficits, which, as a mercantilist state with a single-minded focus on industrial policy, it will not,” economist George Magnus, a research associate at Oxford University’s China Center, wrote at the Telegraph last month. “Or it has to permit free outward movement of capital, which it will also not do partly because it does not trust its own citizens to keep money at home, and partly because the resulting outflow of capital and fall in the yuan would destabilize its $60 trillion (£49 trillion) domestic banking system in which the proliferation of bad debt is already a problem.”
Adrian, the IMF official, said that ramifications of China’s potential role in capital markets will depend on “the regulation and supervision of financial institutions” subject to Chinese communist jurisdiction.
“Of course, Chinese authorities are committed to the international standards for banking supervision and for capital markets,” Adrian said, “and I think that can really provide the foundation of deep and liquid capital markets around the renminbi that is addressing financial stability risks, appropriately.”
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The Chinese currency’s role in capital markets could expand with international help, the IMF official allowed.
“It is about the regulation and the plumbing of the financial system once convertibility is broadened,” Adrian said. “Lastly, I would mention that the [People’s Bank of China] also has a number of swap lines with foreign central banks, and that’s a quite extensive network that could, in principle, also serve as a backstop for any liquidity squeezes.”