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2014 | OriginalPaper | Chapter

4. Financial Repression and Currency Internationalization

Author : Sandra Heep

Published in: China in Global Finance

Publisher: Springer International Publishing

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Abstract

This chapter analyzes the potential of developmental states to internationalize their currencies. Section 4.1 looks into the literature on currency internationalization that identifies confidence in a currency’s stable value, open, deep and broad financial markets and extensive transactional networks in the global economy as the main factors determining a currency’s potential for internationalization. Section 4.2 examines the reasons for Japan’s failure to establish the yen as a global core currency. Section 4.3 draws on the determinants of currency internationalization identified in the first section of the chapter to assess China’s potential to establish the renminbi as a leading international currency. Against this backdrop, it sheds light on the steps towards currency internationalization that China has taken in reaction to the global financial crisis. It concludes with a reflection on China’s experiment of controlled currency internationalization. Section 4.4 compares China’s approach to currency internationalization with the Japanese approach.

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previous chapter Financial Repression and Structural Financial Power

next chapter Financial Repression and Relational Financial Power

Section 4.1 largely follows Helleiner (2008).

For a detailed analysis of the latter aspect see Helleiner (2003).

As Saori Katada (2008: 402) has pointed out, the increase in official holdings of the yen was to some extent the direct result of the yen’s appreciation.

The only exception from this development was the increase in the use of the yen in the settlement of Japanese imports from Southeast Asia which continued into the late 1990s (Katada 2002: 101).

The proposal to create an SDR-denominated fund is a revival of the substitution account idea that was negotiated in the IMF in the late 1970s (Bergsten 2009).

For an analysis of the global dollar shortage during the global financial crisis see McGuire and von Peter (2009).

Dobson and Masson (2009) provide a similar assessment.

This calculation is further based on the assumption of an inflation rate of 4 % in China and 2 % in the US and a 3 % annual appreciation of the CNY against the USD.

It goes without saying that the renminbi’s chances to internationalize are also heavily influenced by the development of the US dollar as the global core currency. For an analysis of the dollar’s current position in the international financial system, see the collection of essays in Helleiner and Kirshner (2009). On the political implications of a possible decline of the dollar see Kirshner (2008).

For a detailed analysis of the political economy of inflation in China see Shih (2007).

For an outlook of China’s political future that highlights the stability of China’s regime see Nathan (2003). For a more pessimistic outlook see Pei (2008).

Hong Kong’s offshore renminbi bond business has been challenged by London, Taiwan and Singapore who have already seen bonds issued in the Chinese currency.

China has also established programs that allow for the use of the renminbi in direct investment activities. In 2012, OFDI settled in renminbi amounted to CNY 30 billion, while FDI settled in renminbi reached CNY 254 billion (PBOC 2013b: 15).

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Title: Financial Repression and Currency Internationalization
Author: Sandra Heep
Publisher: Springer International Publishing
Book: China in Global Finance
Print ISBN: 978-3-319-02465-3

Electronic ISBN: 978-3-319-02466-0

Copyright Year: 2014
DOI: https://doi.org/10.1007/978-3-319-02466-0_4