FILE PHOTO: RMB internationalization is conducive to stabilizing the international monetary system, but the process is arduous and full of challenges.

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The international monetary structure lies at the core of the international financial order, an important part of the post-WWII liberal international order. In history, the international order was propped up by a specific international monetary structure, so rebuilding the order usually first began with the reconstruction of the monetary structure. 

At present, however, changes in the international monetary system are caught in a “dilemma of equilibrium,” a relatively stable state in which reforms to the international monetary system stagnate before the system reaches or approaches the optimal state. At this moment, major state actors continue to maintain, accept, or are powerless to change the existing international monetary pattern independently, so many problems linger on. This dilemma is one of the crucial reasons for uncertainty in the international order, highlighting an urgent need to explore an innovation path for the international monetary pattern. 

Status quo and problems 

The current international monetary structure is in essence a continuation of the post-war Bretton Woods System. It is presented in a “1+1+X” model, consisting of a hegemonic currency (dollar), a predominant currency (euro), and a few major currencies, namely Chinese yuan or renminbi (RMB), British pound, Japanese yen, Canadian dollar, Australian dollar, and so forth. Different currencies with varying degrees of importance and clout constitute a “core-periphery” international monetary structure, in which the dollar is at the center alone, while other currencies are in different non-central positions in the structure. Despite its growing influence, the RMB remains a peripheral currency. 

Many problems in the Bretton Woods System persist with new changes. On a national level, domestic policies for internationalizing the sovereign currency still face a dilemma, but in the post-Bretton Woods System era, the dollar has freed itself from constraints of international institutions and become ever more unscrupulous. 

Between countries, exchange rate fluctuations and misalignment, cross-border speculation and disordered flow of capital have invited financial and economic risks to both the core and peripheral countries. Financial dependence has become a policy weapon at the core country’s disposal, while de-dollarization and domestic currency internationalization are becoming policy options for countries in the periphery. The monetary power game between countries is intensifying. 

Globally, payment imbalances are a longstanding problem in the international monetary system, but the degree of imbalance has become unprecedented. How to best rectify the imbalance and split the cost is a bone of contention among major countries. In the Bretton Woods System, the creditor logic has developed into a logic for debtors. In addition, related traditional international financial organizations, particularly the International Monetary Fund and the World Bank, are inefficient, basically perpetuating the previous operational model and power structure following WWII. 

These problems underscore the pressing need for reform, but many possible paths, such as resuming the gold standard or the Bretton Woods System and replacing the dollar with a non-sovereign currency as an international currency, are not truly feasible. In comparison, two other paths are more practical and deserve further study. 

The first is a path of progressive reforms to the international monetary system, which focuses on the system’s macroscopic aspects, trying to advance progressive adjustments to the international monetary pattern holistically. However, many difficulties remain in the implementation of this path. 

For one thing, international systems lean towards path dependence. Once a system is established, it becomes difficult to reform it substantively. Even the 2008 global financial crisis failed to effectuate revolutionary changes to the international monetary system. Related theories remain unable to clarify the ways and mechanisms for progressive institutional reforms. Furthermore, the US, dominant in the international monetary system, will thwart any reform that goes against its interests. Competition in the international system is getting fierce. 

The second path is country-specific. This path zooms in on specific currencies, emphasizing how these non-central currencies push ahead with adjustments to the international monetary structure through internationalization, from micro to macro levels, and from the bottom up. Historically, sovereign currency internationalization hasn’t come naturally with the growth of a country’s national strength. Proactive strategies are necessary. In terms of the RMB, its internationalization is conducive to stabilizing the international monetary system, but the process is arduous and full of challenges. How to effectively promote positive adjustments to the international monetary pattern through RMB internationalization has become a notable issue. 

Obstacles to RMB internationalization 

The internationalization of the RMB is being hindered in the following three ways. 

Dollar dependency poses the first hindrance to RMB internationalization. As a hegemonic currency, the dollar has long occupied the core position in the international economic and trade system, such that it tends to exclude other currencies. The exclusion not only stems from the US’s active defense of its global currency status, but has also shown network externality for international currencies. 

In other words, as more and more market actors and states opt for the dollar, the cost of switching it will increase. Therefore, whether countries have established close political and economic relations with the US or are peripheral nations without direct economic and trade bonds with the US, they are dependent on the dollar in one way or another after entering the international market. Consequently, the dollar has generated a giant sphere of influence around the globe. 

The second obstacle is brought by strong political relations’ spillover effects on monetary policies. Practices in international relations reveal an apparent inclination towards politics. When two countries are on good terms politically, their economic and trade relations—as well as monetary cooperation—will develop rather gratifyingly. Otherwise uncertainties will abound. 

However, economic and trade relations between two countries will not necessarily deepen bilateral political ties. Therefore strategies and policies for RMB internationalization are subject to changes in political relations. Especially amid a changing international order and escalating competition among major countries, political gaming will have an immediate negative impact on RMB internationalization. As such, an illogical phenomenon has arisen: despite their close economic and trade exchanges with China, RMB internationalization is still highly difficult in countries and regions like South Korea, Japan, and the European Union. 

Thirdly, the RMB internationalization foundation is weak within China due to multiple factors, including not fully open capital accounts, a financial market of insufficient depth and breadth, inadequate marketization of the exchange rate system, and blocked channels for the RMB’s international circulation. 

Country-specific strategies

To remove the above three obstacles, country-specific strategies are advisable. Regarding RMB internationalization, country-specific strategies can be understood as increasing the use of the RMB with differentiated and elaborative methods based on different conditions of countries or economies. The first priority is to sequence different countries or economies to determine the order of targets for RMB internationalization. The sequencing process can observe the following three steps. 

First is to analyze and delineate the spheres of influence of major countries’ currencies. There are many indicators for the delineation. It is likewise practical to build a comprehensive indicator system which is capable of precisely measuring the global spheres of influence of major currencies, the dollar and euro in particular. Currently a basic assumption is that priority should be given to peripheral areas of major currencies’ presence or non-major currencies’ sphere of influence in RMB internationalization. Countries or economies within prioritized areas should also be put into order. 

Second, efforts are needed to evaluate bilateral political relations. Within prioritized areas, countries or economies can generally be classified according to the closeness of their political relations with China in certain periods. Those with better political ties to China are more prone to help internationalize the RMB, a sovereign currency, through official strategies and policies. The evaluation indicator can be constructed using event data. 

The third step is to weigh bilateral economic and trade relations, and set priorities according to the degree of closeness when political relations are stable and it is not within the sphere of influence of other major currencies, especially the hegemonic currency. Considering this logic, quantitative research can facilitate the ranking of related countries or economies to advance the internationalization of the RMB in an orderly manner, thereby fueling reforms to the international monetary structure. While finance and economics place more emphases on defining currency internationalization targets based on economic conditions and factors, country-specific strategies value currencies’ sphere of influence and political relations even more, indicating an international political economy perspective.

In addition to prioritization, it is crucial to tailor the approaches to RMB internationalization to each country or economy. The shift from currency strength to currency power is not an automatic process; it necessitates proactive strategies. In the history of dollar internationalization, the US adopted many strategies, positive and negative, such as military threat and action, economic sanction, economic stimulus, and diplomatic negotiation, for different countries or economies. At least some positive strategies are of referential value to RMB internationalization.  

In conclusion, RMB internationalization will enter a new, more refined stage through country-specific strategies. Meanwhile, the internationalization of the RMB can provide a country-specific path and effective power for reforms to the international monetary pattern. Healthy adjustments to the  pattern will propel the peaceful evolution of the international order and promote the building of a community with a shared future for mankind.  

Zhang Falin is an associate professor from the Zhou Enlai School of Government at Nankai University. 

Edited by CHEN MIRONG