January 28, 2012
INTERVIEW/ Xia Bin: China’s senior economic advisor talks about strategy to promote renminbi
By KEIKO YOSHIOKA / Correspondent
The global currency market is in a state of flux, as the euro is in serious trouble and international confidence in the dollar is also eroding. The outlook for the yen, which has appreciated sharply against the two leading currencies, is also murky because of Japan's mounting economic woes.
Amid this currency turmoil, China's renminbi is attracting increasing international attention as the unit of a country expected to eventually become an economic superpower rivaling or even surpassing the United States. Is Beijing maneuvering to make the renminbi a world currency that challenges the greenback for world hegemony?
In a recent interview with The Asahi Shimbun, Xia Bin, a councilor of the State Council who served as top official at the country's central bank and securities regulatory body and is now advising Premier Wen Jiabao, discussed Beijing's strategy to raise the currency's international stature. Excerpts of the interview follow.
Q: Since the global financial crisis started in 2008, the Chinese government has been calling for reform of the international currency regime. What are your complaints?
Xia Bin: The problem is the instability of the dollar. Since the dollar is the key reserve currency, the United States can borrow as much money as it wants from the rest of the world. Unlike other debt-ridden countries, the U.S. doesn't go bankrupt because it can pay back its debt by printing dollars. Since the U.S has such an exclusive privilege it has the obligation to ensure the stability of the dollar. But the country has kept running a current-account deficit (which works to depress the value of the dollar), thereby undermining the stability of the entire world economy.
As the national power of the U.S. has declined, the world is becoming increasingly multipolar, not only economically but also politically. If China's economy becomes larger in size, expanding its cross-border linkages, the renminbi will gradually gain greater influence in the international market as a natural consequence.
Q: The U.S. current-account deficit is certainly huge, but its principal cause is excessive spending. Profligate spending by American consumers has been supporting China's export-driven economic growth. On the other hand, China has also been supporting the U.S. and global economies by using the money it has earned to buy U.S. government bonds.
A: China's dollar assets, which are the fruits of hard work by Chinese people, are now in danger of falling in value. Currently, excessive production capacity in China is supporting excessive consumption in the U.S. It can be argued that China has been dragged into this situation by a wrong-headed U.S. policy. Since the 1980s, China has been under pressure to build up its foreign reserves by expanding its exports in order to alleviate a shortage of capital (needed by its industries) at home. China has also been gripped by excitement about its growing national power. Now, however, we need to rethink our policy.
Q: What kind of options are available for fixing the situation?
A: Many countries, including China, have dollar assets. We don't want to see the dollar weaken rapidly. The U.S., which is bent on protecting its privilege, is resisting necessary reforms. The dollar is drawing strength from its widespread use. For the time being, several rival currencies will compete with each other (for supremacy), and a balance of power will emerge among them as they limit each other's power. Over the next two or three decades, the dollar will remain to be the leading currency, with many others battling with each other for greater influence in the world.
Q: And do you believe the renminbi will be one of these competing currencies?
A: Yes. Experts around the world see the Chinese currency as one of the players that will create a new balance of power (in the currency market). China is trying to expand its influence within international organizations like the International Monetary Fund and the World Bank so that the views and positions of emerging and developing countries will be more reflected in the process of developing international financial rules.
Q: But the Chinese government is keeping the renminbi artificially undervalued to promote the country's exports, isn't it?
A: We cannot liberalize at once flows of money that cross our borders, nor can we shift to a complete floating exchange rate system immediately. The primary lesson from the Asian financial crisis in the late 1990s is the danger of making a developing country's economy fully open to international flows of capital. Huge amounts of foreign capital suddenly flew into these Asian countries and then suddenly poured out of them, causing serious confusion.
Beijing should expand the renminbi's trading band gradually. This way, it can buy time for necessary reforms at home including reform of its financial markets while ensuring the stability of the currency's exchange rates by taking advantage of the relatively high international confidence in the dollar. In addition, more people will want to hold the renminbi if the currency is generally expected to rise in the future.
Q: There are many restrictions on trading in the renminbi, including controls on cross-border transactions and regulations on Chinese financial markets. It is said that China's foreign exchange rate system is as strictly controlled as Japan's was in the 1970s. Would the Chinese currency gain international popularity even if such restrictions remain?
A: The amount of the renminbi circulating in the world is growing through Chinese companies' investments overseas using the domestic currency and the Chinese government's financial aid to developing countries. We are receiving many proposals to create a market for trading in the renminbi from various foreign financial centers including London and Singapore.
China's approach to reform can be compared to Chinese herb medicine. Progress is made gradually through a holistic process with emphasis on the harmony of the whole. We are going to ease our currency regulations in line with the progress we make in reforming the domestic economy and financial markets. With as many as 1.3 billion people to feed, we put the top policy priority on creating jobs and maintaining social stability in our country. China is still a minor financial player. We cannot introduce systems in mature, industrial nations at a stroke.
Q: China's mainland financial markets are not yet sufficiently open to foreign investors. Opening these markets would facilitate renminbi-denominated investments, wouldn't it?
A: As long as we keep financial markets in the mainland closed, we will use Hong Kong, which is an international financial center. That way, we can undertake new initiatives in financial markets in the mainland while keeping them insulated from certain risks. In Hong Kong, not only a market for renminbi-denominated deposits but also markets for renminbi-based trading in bonds and stocks are growing. When China still restricted international trade in goods, Hong Kong served as the connection point between the mainland and the rest of the world. Hong Kong will play that role again in the area of financial transactions.
The United States is pressing China to ease its financial regulations in pursuit of new business opportunities for its financial institutions. We cannot simply play ball with Washington. The internationalization of the renminbi has barely begun. It would be amazing if the share of the renminbi in the foreign reserves of countries rise to several percent, on a par with the current shares of the yen and the British pound, in 10 years. We will take steps to internationalize the renminbi in stages, starting with efforts to reform domestic markets during a period of preparation that will probably last until around 2020. We will first try to make the renminbi a leading currency in Asia, where we have strong economic ties with other countries.
Q: Then will it be a key global currency?
A: It will depend on what kind of economic growth China will maintain in coming years. In addition, this is not a purely economic challenge. Even if a period of competing currencies will continue for the time being, it is possible for China to make the renminbi a major currency in the world through mutual cooperation with other countries without getting embroiled in international conflict.
A country's currency is an indicator of its power. The Chinese economy is expected to become the world's largest in the mid-21st century. But the difficulty of understanding China's policy positions and goals is creating anxiety among other countries. China needs to clearly explain its financial and currency policies to the world and make it clear it is trying to achieve economic growth together with other countries.
Q: In China, we often hear policymakers talk about lessons from the 1985 Plaza Accord, an agreement among the five leading economic powers at that time to devalue the dollar. They argue that the accord is the cause of Japan's economic problems. By succumbing to U.S. pressure and accepting the yen's appreciation, they say, Japan allowed its businesses to lose international competitiveness, its economy to lose steam and financial market bubbles to form and then burst.
A: I don't think Chinese bureaucrats involved in policymaking believe such a simplified theory. Back then, the era of Japan's rapid, emerging country-type economic growth was already over as the number of young workers was decreasing. After many years of double-digit economic growth, China will also see its economy slow gradually in coming years. A nation cannot maintain its economic growth without carrying out necessary economic and social reforms in response to its development. The yen's appreciation was not the only challenge facing Japan. This is the biggest lesson we should learn from Japan's experiences during that period.
Q: Japan and China have reached an agreement on financial cooperation featuring measures to promote trade settlements using the yen and the renminbi, to develop a Chinese bond market for Japanese investors and cross-holdings of government bonds. It was first proposed by Japan, wasn't it?
A: From China's strategic viewpoint, dealing with Japan, which was the first country to become a major economic power in Asia and has an international currency, is a delicate matter. It is uncomfortable for China to seek Japan's cooperation for efforts to internationalize the renminbi. It would be embarrassing for China to make such a proposal only to be rejected by Japan. If Japan makes such a proposal that is in line with China's policy direction, however, there is no reason for China to decline it.
The internationalization of the renminbi will only accelerate irrespective of Japan's will. The Japanese government probably realized that the yen could be marginalized or Japanese companies could miss out on important business opportunities unless it expanded such financial cooperation with China.
Q: So this is a mutually beneficial deal?
A: Both countries can reduce foreign exchange risks and costs by using their own currencies for trade instead of using the dollar. The development of a market for trading in bonds denominated in Asian currencies would make it easier to invest money earned through trade within the region. It would also make it unnecessary for both countries to hold a huge amount of dollars as part of their foreign reserves. This is definitely beneficial for both sides.
If this cooperation between Japan and China works out well, it would lay a foundation for regional financial cooperation. If China wins the trust of its neighbors by providing solid support to the efforts, it could also gain regional confidence in the renminbi and improve the environment for its currency's rise to the status as a major regional currency.
Q: The world is paying a lot of attention to whether China will help solve the sovereign debt crisis in Europe.
A: Since it is benefiting from the world economy, China is really hoping that Europe will regain financial stability quickly. Having said that, I would also say that whether or not China will help Europe with this problem is not an issue. Many European countries are in better fiscal health than Japan or the U.S. They are rich countries with per-capita gross domestic product far larger than China's. Europe has clearly the wherewithal to sort out the situation. In particular, the principal question is what Germany, which has been benefiting greatly from the euro's weakness, will do.
In case the Chinese government considers using part of its foreign reserves to make an investment in Europe, it will assess carefully whether the investment will yield a satisfactory return.
Q: What is your assessment of the probability of a common Asian currency?
A: It may be an ideal, but I don't see any possibility of such a currency becoming reality in the near future. In contrast with Europe, there are some historical problems among Asian countries, and the political systems and the levels of economic development greatly differ from country to country. But Asia is now at the center of global economic growth. There are many challenges Asian countries should tackle together in order to ensure stability in exchange rates and promote the development of financial markets in the region.
Xia Bin: Born in 1951, Xia Bin is currently counselor of China's State Council and honorary director of the Financial Research Institute of the State Council's Development Research Center. He is also a member of the People's Bank of China's Monetary Policy Committee. He graduated from the Graduate School of the People's Bank of China.
By KEIKO YOSHIOKA / Correspondent