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The political economy of currency internationalisation: the case of the RMB

Published online by Cambridge University Press:  03 April 2017

Randall Germain  and
Herman Mark Schwartz
Randall Germain*
Affiliation:
Department of Political Science, Carleton University
Herman Mark Schwartz*
Affiliation:
Department of Politics, University of Virginia
*
*Correspondence to: Randall Germain, Department of Political Science, Carleton University, 1125 Colonel By Drive, Ottawa, ON K1S 5B6, Canada. Author’s email: [email protected]
**Correspondence to: Herman Mark Schwartz, Department of Politics, University of Virginia, PO Box 400487, Charlottesville, VA, 22904-4787, US. Author’s email: [email protected]
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Abstract

The rise of China has sparked a debate about the economic and political consequences for the global economy of the internationalisation of the renminbi. We argue that the dominant focus of this literature – primarily the external conditions and requirements for a national currency to become an international currency – misspecifies the connections between the international and domestic requirements for currency internationalisation, as well as the potential to become the dominant international reserve currency. We correct this oversight by developing an integrated theoretical framework that highlights the domestic adjustment costs which a state must accommodate before its currency can carry the weight of internationalisation. These costs constitute a critical element of an international currency’s ‘political economy’, and they force states to negotiate contentious social trade-offs among competing domestic claims on finite public resources in a sustainable manner. Our analysis suggests that the likelihood of China being able to successfully negotiate the social costs associated with running a fully internationalised currency is currently very low, precisely because this will place unacceptable pressure on groups benefiting from the economic and political status quo. This further suggests that the American dollar will remain unchallenged as the global economy’s pre-eminent international currency for the foreseeable future.

Keywords

Currency InternationalisationDollar HegemonyGlobal Political EconomyInternational CurrencyInternational Financial and Monetary SystemRenminbi (RMB)Sterling
Type
Articles
Information
Review of International Studies , Volume 43 , Issue 4 , October 2017 , pp. 765 - 787
Copyright
© British International Studies Association 2017 

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References

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78 It is worth noting here that a critical feature of China’s current role in the global monetary and financial system – as compared with Britain in the late nineteenth century and the US in the mid-twentieth century – is that it is running a surplus not only on its trade and current account, but also on its capital account. Since 2004 China has absorbed billions of dollars per year in capital flows, posting surpluses (that is, inflows) of over US $3 billion each year until 2014. Unlike its British and American comparators, there are no capital outflows to offset the enormous current account surpluses it has earned since 2004, which have fluctuated between US $200–400 billion per year. Data from World Bank DataBank, ‘Net Capital Account Databank’, available at: {http://data.worldbank.org/indicator/BN.TRF.KOGT.CD?locations=CN} accessed 21 February 2017.

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88 Cohen, Currency Power, pp. 96–7.

89 This link is noted in passing by many scholars, but without connecting democratisation to currency internationalisation as we do here. See, for example, B. Eichengreen and M. Kawai, ‘Issues for Renminbi Internationalization: An Overview’, ADBI Working Paper, No. 454 (Tokyo: Asian Development Bank Institute, 2014), available at: {http://www.adbi.org/working-paper/2014/01/20/6112.issues.renminbi.internationalization.overview/} accessed 19 June 2016.

90 See Seabrooke, Social Sources of Financial Power; Schwartz, ‘Banking on the FED’.

91 Otero-Iglesias and Vermeiren, ‘China’s state-permeated market economy’.

92 SWIFT, ‘RMB Strengthens its Position’; Cohen and Benney, ‘International currency system’; Wang, Huang, and Fan, ‘Renminbi’.

93 D. Shambaugh, ‘The coming Chinese crack-up’, The Wall Street Journal (6 March 2015), available at: {www.wsj.com/articles/the-coming-chinese-crack-up-1425659198} accessed 29 May 2015.

94 We rather see our work as attempting to bridge the gap in IPE discourse first identified by Benjamin Cohen a decade ago. See Cohen, B. J., International Political Economy: An intellectual history (Princeton: Princeton University Press, 2008)Google Scholar. For critical interrogations of open economy politics, see Lake, D., ‘Open economy politics: a critical review’, Review of International Organization, 4:2 (2009), pp. 219–241 Google Scholar and Oatley, T., ‘The reductionist gamble: Open economy politics in the global economy’, International Organization, 65:2 (2011), pp. 311–341 Google Scholar.