THE INTERNATIONALIZATION OF RENMINBI AND THE ROLE OF LATIN AMERICA
Luís Antonio Paulino[*]
ABSTRACT: The process of internationalization of the renminbi gained a great boost at the end of 2008, thanks to the increasing importance that China has acquired in the world. Also contributing to this was the crisis of 2008, which revealed to China the enormous risk of having its international operations pegged to the US dollar and therefore to the turbulence of US economic policy. Although China has the main conditions to internationalize its currency, i.e. a large economy with high and stable growth rate, a stable political system, low inflation rates and a stable exchange rate, the full internationalization of its currency still faces obstacles the most important being the small breadth and depth of the Chinese financial system and the government's control over capital flows, interest rates and the exchange rate. China has been taking important steps to overcome these obstacles, although it is unclear to what extent the Chinese government wants the full internationalization of the renminbi, which could hamper the handling of its macroeconomic policy aimed at stimulating growth. The fact is that there is already an important offshore renminbi market and the area of circulation of the Chinese currency is expanding more and more. Currently limited to its immediate surroundings in East and Southeast Asia, the renminbi area tends to expand to other regions of the world, thanks to regional integration projects such as the "One Belt, One Route" and the strong Chinese presence in Africa and in Latin America. In Latin America, however, the creation of a renminbi area is somewhat distant due to the strong presence of the dollar in the region, not only as an international currency, but as a local currency in some countries that have replaced their currencies with the dollar.
KEYWORDS: Renminbi, Internationalization, China, Latin America
In an increasingly globalized world, the national borders, as well as everything within them – laws, taxes, political systems, and customs – represent obstacles to be circumvented by companies in their daily effort to compete globally. Among such obstacles we can include national currencies, because for those who do business internationally, the contingency of having to carry out different steps of the same business using different currencies is always a risk.
Considering the ubiquity of global value chains in almost all sectors and the consequent increase in foreign direct investment by multinational corporations, the issue of the currency used in international transactions turns out to be an increasingly important element. When we speak about the global value chains, it is quite common to highlight the existence of free trade agreements as a preponderant factor for its installation. Thus, although they are called global, such chains tend to be preferentially established within regions with free movement of goods, as in the case of the European Union and NAFTA. The reasons why value chains settle in free trade areas are obvious: the payment of import taxes along productive chains raises the final cost of the product and can ruin the cost advantage that would be obtained by the relocation of the productive activity.
We do not talk much, however, about currencies, which are equally important, once, just like the existence of free trade agreements, the existence of currency zones where business can be done using the same currency as measure of value is fundamental to reduce transaction costs. Perhaps, the least importance given to this is due to the fact that until very recently the only truly international currency was the US dollar and almost all businesses were done in that currency. It has been changed, however. After the creation of the Euro in 1992, most trades within the European Union are denominated in euros. According to Chai (2016, p. 86), "the rate of use of the euro in Spain's exports increased from 48.9% in 1998 to 62.6% in 2004".
As China becomes a major world power and builds around itself an increasingly dense network of economic and commercial relations, especially in Asia, it is natural for a "renminbi area" to emerge, within which the Chinese currency will act as a medium of exchange, measure of value and store of value. As China-centered value chains deepen, the renminbi will of course be more widely used in bilateral trade with China.
The issue that we want to discuss in this article is how these changes in the "geography of money" are occurring in this first quarter of the 21st century, and above all, how the Chinese currency - the renminbi - is internationalizing. We are particularly interested in discussing to what extent this "renminbi zone" can extrapolate China's immediate area of influence in East and Southeast Asia and expand to other regions of the planet, specifically Latin America.
For this purpose, this article, in addition to this introduction, is divided into three parts. In the first part we will discuss the general conditions for a currency to fulfill the role of international currency, highlighting the advantages and disadvantages associated with this process. In the second part, we will specifically discuss the process of internationalization of the renminbi, the advantages and disadvantages for China and what factors make difficult or facilitate this process. Finally, in the third part of the article, we will discuss the evolution of economic relations between China and Latin America and how the region may be a "renminbi area" instead of to be a "dollar area" in a not too remote future.
I - Conditions for the internationalization of a currency: advantages and disadvantages.
The money market, like any other good, can be analyzed both from the point of view of supply and the perspective of demand. The fact that its use is not confined within the territorial limits of the emitting states obliges us to understand the mechanisms by which this special commodity called money is internationalized and what are the consequences of this internationalization for the issuing State.
A. The money supply
In current monetary systems, the production and supply of money is a state monopoly. Even in the case of the European Union, where 19 of the 28 member-states have adopted the euro as common currency, the European Central Bank is governed by the presidents of the respective national central banks and has a monopoly on the issuance of money in that currency area. In this case, even if there are limitations on the national states having their own monetary policies, the ECB's monopoly on the issuance of currency guarantees the issuers of the euro the same privileges as any country issuing currency.
To this model, Cohen (1998, p.4) calls the "Westphalian model of monetary geography". According to the author:
One Nation/One Money is derived from the conventions of standard political geography which, ever since the seventeenth-century Peace of Westphalia, has celebrated the nation-state, absolutely sovereign within its own territory, as the basic unit of governance in world politics. Just as political space was conceived in terms of those fixed and mutually exclusive entities we call states, so currency spaces came to be visualized in terms of the separate sovereign territories where each money originated. I call this the Westphalian model of monetary geography.
Moreover, according to Cohen, this Westphalian model is no longer the most reliable representation of world monetary spaces, since "Today, market-driven competition has greatly altered the spatial organization of monetary relations, significantly eroding the monopoly powers of the state" (Cohen, 1998, p.4). On the same subject, Salin (1980, p. 3) states: "The production of money, like the production of law, is not an essential attribute of state sovereignty, despite what mythology says". According to the view of these authors, currencies have effectively become deterritorialized, since they are increasingly being used outside their country of origin, penetrating into other monetary spaces. According to Cohen (1998, p.5):
States remain influential, of course, through their continuing jurisdiction over the supply of national moneys. But its role in monetary governance has been transformed, evolving in effect from Westphalian monopolist, to something more akin an industrial oligopolist. Now authority must be shared with other market agents, in particular the users on the demand side of the market.
At its inception, money production was a private activity and nations gradually used their coercive power to monopolize the money production, since, according to Salin (1980, p. 4), "the nationalization of the production of money is easy and profitable". Indeed, within a given national space, the State has never been the only entity capable of creating currency, since commercial banks can do so through the credit system. But even this ability of private banks to create scriptural money is under the control of the State, which, by requiring compulsory deposits and other mechanisms of control over demand deposits, may, in the limit, totally prevent the creation Obviously, these same commercial banks that are subject to state control when it is about to creating money in the national territories are not subject to this kind of embarrassment when they produce money in the so-called offshore markets, that is, outside their territories. This is the case, for example, of the Eurodollar market, where dollars are deposited in foreign banks or foreign branches of US banks. Once they are outside the United States, such banks can create money, borrowing in Eurodollars without having to subject them to the regulation of the Federal Reserve Board, the United States central bank, including reserve requirements. By the way, it is precisely by means of such mechanisms that the monetary systems are deterritorializing and eroding the state monopoly of the currencies.
In any case, even with the progressive reduction of their ability to exercise sovereignty over national monetary areas, States try to maintain their ability to exercise monopoly over the production of money in their territories for a number of reasons. Cohen (1988, p.7) lists the main benefits derived from a territorial currency:
1) potent political symbol to promote a sense of national identity; 2) a potentially powerful source to finance public spending through; 3) a possible instrument to manage macroeconomic performance; and 4) a practical means to insulate the nation against foreign influences and restrictions. Let us briefly examine each one of them:
a) Political Symbolism
The classical definition of state is based on three traditional criteria: a territory, a population and a government. The national independence is characterized by the ability to defend its borders, make its own laws and issue currency. As the national monetary areas are now occupied by currency issued by other States, the legitimacy of the national State itself is questioned. "The more a foreign currency is used domestically in place of the national, the less citizens will feel inherently connected with the state or as part of the same social entity"(Cohen, 2010, p. 166). States that fail to impose a monopoly on the use of their currency in their territory are seen as weak States. In the opposite sense, States that are able to expand the area of influence of their currency beyond their own borders are considered strong States.
In Latin America we have already seen several episodes of currency substitution. In 2001, the colón, until then the official currency of El Salvador, was replaced by the US dollar. In Ecuador, the local currency, the sucre, which circulated between 1884 and 2000, was also replaced by the US dollar. Less acute but equally significant events were the cases of Brazil and Argentina that also anchored their respective currencies to the dollar with the aim of overcoming hyperinflationary processes. By tying their currencies to the dollar by means of a fixed exchange rate and committing to exchange one real, in the case of Brazil, or one peso, in the case of Argentina, for one US dollar, for those who wish or need to do so, sought to lend the prestige of the American currency to the local currencies. Argentina did more than Brazil by inscribing in its own national constitution this fixed parity of the peso against the US dollar and giving the US dollar the status of legal currency within its territory. Unlike simple currency substitution, in this case the goal was to restore the prestige of the local currency by convincing people that one real or one peso was as good as one dollar. But even then, the prestige of the currency derived only secondarily from the reliance on the issuing state of the local currency, since the commitment was not exactly to maintain the value of the currency but only to maintain a fixed exchange rate to the US dollar. The primary source of confidence was in the US dollar and, therefore, in its issuing State, the United States.
The fact that Latin America is seen as the "dollar area" does not only reveal the local preference for the use of the US currency. It reveals, above all, the economic predominance of the United States and the subordinate status of the States of the region in the international hierarchy. Thus, the so-called international monetary pyramid, at the apex of which is the US dollar, followed below by other convertible currencies such as the euro, the sterling, the yen, the Swiss franc and, on the basis, the non-convertible currencies, little demand in the international market, is much more than a hierarchy of currencies. It is a hierarchy between States, the currency being only a reflection of the political, military and international economic strength of each one. "Great powers have great currency" (Mundell, 1993, p.10, apud Cohen, 2010, p.167).
Seigniorage is defined as the gain for the issuing State of a currency arising from the difference between the face value of the currency and the cost of producing it. As the cost of producing money is decreasing and tends to zero as the volume of money production increases, since variable production costs are negligible, the face value of the currencies produced becomes purchasing power for the issuer that can use it to finance its own expenses. Seigniorage is thus an alternative source of income for the state. In the absence of competition from other currencies in that territory, or even if there are no close substitutes that can perform the functions of money, the issuing State may even abuse its monopoly. "Public spending financed by moneymaking actually appropriates real resources at the expense of the private sector whose purchasing power is correspondingly reduced by subsequent inflation - a privilege for the government if ever there was one" (Cohen, 2010, p. 55).
c) Macroeconomic management
In the real economy there are goods and services flows and money flows. These flows turn in the opposite direction of each other: goods and services are exchanged for money and vice versa. The speed of these flows depends on how much the economic system is more or less lubricated. Money is the lubricant of the economy. When there is more money, the real economy gets more lubricated and spins faster; when money becomes scarce, the speed of circulation of goods decreases and the gears of the economic machine jam. Thus, when the state has a monopoly on the production of money, it can influence the performance of the real economy. When the government expands the money supply, its scarcity, and therefore its cost, that is, interest rates, tends to decline, expanding credit, consumption, and investment. In the opposite direction, when the government takes money out of the economy, the interest rate increases and the demand for credit decreases, negatively affecting investment and consumption.
Another instrument through which government can influence the real side of the economy through monetary policy is the exchange rate: the price in local currency for which the foreign currency is bought. Changes in the exchange rates may make imports more expensive or cheaper and exports more or less competitive in the external market.
As in the case of seigniorage, the condition for the State to use its ability to produce money as an instrument of macroeconomic policy management is that there is no convenient substitute for the domestic currency. Take the example of China. For years the Chinese government has used so-called "financial repression" – paying low interest to savers to offer cheap credit to enterprises – as an economic policy tool to accelerate growth. In the meantime, when the so-called "shadow banks" that came to offer more attractive interest rates to the savers emerged, the effectiveness of this economic policy instrument was no longer effective. In Latin America, when Brazil and Argentina adopted the exchange-rate anchor mechanism to stabilize their currencies, linking them to the dollar, they were, in practice, unable to have an active monetary policy, since, with a fixed exchange rate and free flow of capital, monetary policy can only be passive, i.e. accommodate the supply of money according to outflows or inflows of foreign exchange. It is what Nobel Prize Robert Mundell called the "impossible trinity".
d) Monetary isolation
Just as physical borders delimit the territory over which a country exercises its sovereignty, the existence of a national currency establishes a clear economic boundary between a country and the rest of the world. The invasion of the country by a foreign currency can be compared to the military occupation of its territory, since the effects can be devastating for the country in one case as in another. When a country allows the replacement of its own currency by a foreign currency, it becomes entirely vulnerable to the will of the issuing country of the currency that can use that condition to (1) coerce the country into doing what is better for it; (2) extract advantages and appropriate their natural resources; (3) imprison the country in monetary and financial traps from which it cannot leave without serious losses.
B. The demand for currency
Currency is not defined by what it is, but by its functions. For anything to be considered currency, it must simultaneously fulfill three functions: to be medium of exchange, measure of value and store of value. As economic systems developed from subsistence economies to market economies, where most commodities were produced for sale, the use of money became widespread and economies became monetary economies. In the early days, the currency was private and competed with each other, but gradually the States realized the advantages of monopolizing their production. Another important change that occurred in the historical trajectory of the currency is that, initially, the currency was only a means to facilitate the exchange of commodities, but at some point this equation was reversed. The production of commodities is what has become a means to increase the amount of money in the hands of their owners. That's when money turned into capital.
In the beginning, when the States were still in formation, it was common to have several currencies circulating in the same territory. With the advent of the Nation-state and, above all, the rise of the bourgeoisie to power, the need to preserve the national territories for their enterprises meant that not only each state adopted its own currency, but also measures to exclude the others of its territory. While economic activities were limited to the national territory and international exchanges were only a few, this model of one nation/one currency worked well, but once the international trade increased and capital began to look for profit opportunities outside its territories, it was created the need for currencies to be commercialized internationally. Naturally the currencies that became to fulfill this role were the currencies of the main commercial powers of that time, which were called convertible currencies, to distinguish them from currencies that were not accepted, the inconvertible. In the early phase of capitalism, world trade was dominated by England and naturally the sterling came to fulfill this function. With the decline of the British Empire and the rise of the United States after World War II, the US dollar took its place. With the dollar crisis in the late 1960s, other currencies went even marginally to be used for these same transactions, such as the German marco and the Japanese yen, and, of course, the sterling, which has never ceased to be recognized as an international currency in spite of the fact that the dollar continues to dominate the currency to this day. With China's rise to the status of the world's largest commercial power, it is natural that more and more international transactions will be carried out in renminbi and that it will also be internationalized.
It is important to note in the trajectory described above that the internationalization of a currency, if on one hand is due to the economic, military and political force of the country that emits it, on the other hand, it depends on how much it is demanded by its potential users. In a national territory the State may require the local currency be used compulsorily by excluding the legal use of any other, but the same does not occur at the international level, since there will always be the possibility of competing currencies that aspire to fulfill the same function. That is, in order to a currency become internationalized, the demand matters as much as the offer. The US dollar is not at the apex of the world monetary pyramid only by the strength of the American economy, but also because it is the currency most demanded for international transactions.
But, why do countries demand international currency? Basically for three reasons that correspond exactly to the three basic functions of money mentioned above, namely: to serve as a medium of exchange in trade and other international financial transactions; to serve as international reserves that countries can use to keep their external balance of payments balanced; and to serve as a measure of value in international trade and finance (Chai, 2016, p.85).
The reasons we mentioned above for the demand for foreign currency are basically related to international business: trade and investment. But there are other reasons for countries to demand the use of international currencies: the formation of reserves and, eventually, the substitution of local currencies. And what leads a country to replace its own currency with a currency issued by another State? It is not so frequent, even because renouncing the use of the own currency is kind of renouncing the use of its own national flag, but it occurs, especially in countries that undergo hyperinflationary processes. In these situations, the local currencies fail to fulfill their three basic functions and the use of a foreign currency with stable value and international prestige may be the quickest alternative to contain inflation. This was the case of Ecuador, which in 2001 exchanged its currency, the sucre, for the US dollar. There may also be other reasons for this, such as the large turnover of a particular foreign currency in a small country or total political dependence on another country. An example of this last situation is Panama, where despite having a local currency called Balboa, most of the money supply, including manual money and monetary deposits, are in US dollars (Cohen, 2010, p. 62).
C. Advantages and disadvantages of internationalization
Currency is a special commodity that gives its owner the right to claim its value in any other commodities. Its legal currency condition requires that everybody accepts it, if it is offered in payment of any debt in the national territory where it is issued. This way, if the person who produced it can obtain something in exchange for who bought it or borrowed it, whether it is commodities or interest, its new owner may, in the future, demand the same from the one who produced it. That is, the advantage of the issuer of an international currency is maximum while the currency remains circulating outside its territory. But when the currency returns to the territory of the issuing country in the hands of a non-resident, he has the legal right to claim its face value on goods or property in the issuing country or even lend it to some resident, who may be the own government, and charge interest on the loan.
In order to exemplify this reasoning, let us take the case of China. The United States maintains huge commercial deficits with China. This is only possible because the United States produces the US dollars that China accepts in exchange for the goods it sends to the Americans. We could, therefore, consider the amount of these deficits as the value of the "international seigniorage" of the United States in relation to China, since the United States residents are taking possession of Chinese goods using a currency that cost them nothing to be produced, to pay them.
What does China do with those dollars it receives from Americans? It uses a portion of this to buy goods in the United States and elsewhere in the world that accept the American currency and keep what is left in the form of reserves, which is now over US$ 3 billion. While the Chinese are willing to keep this money circulating outside the United States in the form of investments or acquiring goods in other countries, this is no problem for Americans. But when the Chinese decide to apply them to US Treasuries, it already represents a cost in the form of interest that the United States will have to pay to China. If such interest is less than the price at which the Chinese paid for the American currency, whether in the form of commodities or in the form of interest, the final outcome of the transaction would have been advantageous to the Americans.
Chinese importers may also want to use these US dollars to buy goods from the United States or make investments in the United States. In that case, this currency, upon returning to the United States, will oblige the Americans to give the Chinese goods or properties in an amount equivalent to that currency.
As long as this surplus recycling mechanism keeps working, the international monetary system will remain stable. But when that mechanism stops working, either because the United States refuses to export the products the Chinese want (high-tech products, for example) or if they refuse to transfer ownership of American assets to the Chinese, that huge mass of money the United States sold to the Chinese could become a problem for both China and the United States. Imagine the situation of someone who has issued a mountain of checks that are circulating around in the hands of creditors and who may want to cash them at any time. If, therefore, the fact that the United States issues an international currency is at first extremely advantageous, because of the international seigniorage that this issue of money provides, later this mass of money, in the hands of foreigners, can be a problem, since each foreign currency note abroad is a credit security against the United States.
The fact is that, sooner or later, this reckoning will have to be done and while it does not occur, this huge mass of money will continue to hover over the American economy like a huge cloud of locusts, a modern plague of Egypt that, when to land on the American territory, will cause enormous damage. No international currency is eternal. Fatally, one day, it is not known when, the US dollar will lose its position at the apex of the world monetary pyramid and, when that day comes, that mass of dollars outside the United States will turn into a huge liability. This has happened before with England. As Cohen (2013, p 172) remembers:
For London, the availability of leftover surplus in pounds since World War II was a concern for decades, until the sterling area was finally closed in the 1970s. For Washington, a comparable "projection" of dollar liabilities continues being to this day a chronic forehead of concern.
Despite the frequent obituaries that have been written of the American currency, the US dollar remains the preferred international currency, not only because of its intrinsic qualities – the opening of the American financial system and its great stability – but because the transnational network of dollar use is so well established that it "tends to discourage shifting to other, less widely circulating currencies" (Cohen, 2013, p.210). It does not mean, however, that the dominance of the US dollar in the international financial system will be eternal. As the center of gravity of the global economy shifts towards Asia, the US dollar's attractiveness for many users of the international currency decreases, and as we have already noted, in the case of an international currency, the demand side should never be underestimated. No matter how great American power is, especially in the military field, the economic hegemony of the United States is no longer so clear and it is becoming increasingly questioned as Americans adopt increasingly protectionist policies. It is in the shadows of the twilight of the dollar that the renminbi is preparing for a new dawn. In Latin America, for example, the loss of importance of the United States vis-à-vis China is evident.
II. The internationalization of renminbi
In order to a currency to be internationalized, it has to be considered both the supply side and the demand side. By the supply side, it is necessary to observe the conditions that allow a country to issue a currency whose use extends beyond its own territory. By the demand side, it is necessary to observe the extent to which this currency is desired by non-residents as a medium of exchange, medium of exchange, measure of value and store of value. There is also a third aspect that needs to be considered: to what extent does the country want to promote the full internationalization of its currency
In order to analyze the process of internationalization of the renminbi, it is necessary to take into consideration these three aspects: does China meet the conditions for its currency to internationalize? Is there demand from non-residents for the Chinese currency? Is China's interest in promoting the full internationalization of its currency?
A. Conditions for the renminbi internationalization
One of the conditions for the internationalization of the currency is the economic, political and military power of the country issuing it. The transformation of the dollar into an international currency, for example, was only possible because, at the end of World War II, the United States emerged as the most powerful economy in the world, in which a large number of countries, notably Europe and Japan, maintained trade deficits that need to be financed by dollar-denominated loans made by the United States itself with surpluses generated by its trade surplus. This economic power, while at the same time was contributing to the increase in political influence and military power in the United States, was also depended on them to be able to maintain and expand. There is not a single United States military intervention in the world after World War II or a behind-the-scenes maneuver to overthrow or sustain governments that have no defense of American economic interests.
Does China meet these conditions to ensure that the use of its currency extends beyond its national territory? Let us see: China alone accounts for 14% of global GDP, and the United States for 19%. According to the IMF, China's GDP in 2018 will be 69% of United States GDP, rising to 88% over the next five years (The Economist, 7/21/2018). In recent years, China's GDP growth has accounted for about 15% of world growth (Chai, 2017, p.91). Maintaining the pace of GDP growth at around 6.5% annually, in a few years China will surpass the United States. In addition to the size of the Chinese economy, it is necessary to consider how much it is connected with the world economy in commercial and financial terms. Here too, China's position is exceptional: China is now the world's leading exporter, having overtaken Germany in 2009 and the second largest importer in the world, after the United States, which only maintains the first place due to its exorbitant privilege of issuing the currency used in most international commercial and financial transactions, which allows it to maintain chronic trade deficits with the rest of the world without compromising its balance of payments. In addition, China is about to become the world's largest foreign investor by the end of the decade, with its overseas assets – which includes foreign currency reserves, portfolio investments and foreign direct investment – tripling from US$ 6.4 trillion in 2015 to US$ 20 trillion in 2020. With an annual flow of foreign direct investment around US$ 100 billion a year, China's direct investment stocks in the world is expected to grow from US$ 744 billion in 2015 to US$ 2 trillion by 2020 (ANDERLINI, 2015).
While a significant part of China's interests turns into outside of its territory, it is essential that China be able to defend them. Without it, it would be like a giant with clay feet. This defense capability includes the so-called hard power, with its economic and military strength, and soft power, which translates into the ability to convince, influence, and construct a positive external view of its purposes and its values.
Would China be able to defend its economic interests around the world? The answer is a qualified yes. Yes, because as it was seen with China position in numerous recent events, such as the disputed territories in the East Sea and the South China Sea, involving Japan, the United States and its allies in East and Southeast Asia, China let it clear that will not bow down when the interests that it considers vital are threatened. Qualified because, compared to the United States, although China is already the third largest military power in the world, behind only the United States and Russia, both the military capacity and the investments being made in the area of defense are only a small fraction of that that the United States owns and invests. China's defense policy has a defensive character, aimed at defending its territorial integrity and guaranteeing free access to the main external supply routes.
A second relevant aspect to be considered as a condition for a currency to be internationalized is stability: both the political stability of the country and the stability of its own currency. As for the first aspect there is no doubt that China is now one of the most politically stable countries in the world. The institutional arrangement that combines political centralization under the leadership of the Chinese Communist Party with public ownership of land and part of the means of production, and market economy has proved to be functional for China's conditions, ensuring stable growth, continuous improvement in general living conditions of the people, without inhibiting the entrepreneurial spirit of Chinese businessmen. As for currency stability, China's inflation rate in the last 10 years has remained below 8% (CHAI, 2017, p.98). Although the Chinese government tries to maintain a more or less fixed parity against the US dollar – the so-called Bretton Woods hypothesis II  – the fact is that the renminbi has presented over the years a clear trend of appreciation against the US dollar. The exchange rate of the renminbi against the US dollar felt from 8.28 CNY / US$ to 6.46 in 2011, and, in 2018, it is 6.86. If we consider that the final stage of internationalization of a currency is its use as a store of value by non-residents, this trend of appreciation represents an additional attraction, as long as it does not compromise the other macroeconomic objectives, namely the stability of economic growth.
A third condition for the internationalization of a currency concerns the breadth, depth and opening of the country's financial system. By breadth we refer to the diversification of investment vehicles and products. By depth, we refer to the level of financial intermediation in relation to the total economic activities carried out in a territory. Openings refers to the freedom that capitals have to enter and leave one country. It is not enough for a country to have a large economy relative to the others, a stable political system and a stable currency. It is necessary also to have a sufficiently broad, diversified, opened and well-regulated financial system in order to o provide the necessary conditions for the proper functioning of the currency market. Speaking about the renminbi, although there have been important advances in this direction such as the creation in 2007 of the Dim Sum bonds - RMB-denominated bonds issued in Hong Kong - and the consequent creation of a renminbi offshore market and the signing, since 2009, a large number of currency swap arrangements with several countries such as Argentina, the European Central Bank, Belarus, Brazil, Canada, Hong Kong, Iceland, Indonesia, Malaysia, Singapore, South Korea, United Kingdom, Thailand, Tajikistan and Uzbekistan, the fulfillment of this condition still faces difficulties to overcome now, such as the small development of China's financial market and, above all, the control of interest rates and exchange rates exercised by the government (Zhai, 2012) .
In order for investors to retain part of their renminbi-denominated assets, in addition to the above conditions, there must be ample freedom of entry and exit of capital, as well as the free floating of interest and exchange rates. This, however, runs counter to the Chinese government's practice of using interest rates and capital controls actively to leverage its economic development. Low interest financing of investments by Chinese companies has been based on a certain level of financial repression - the maintenance of low interest rates paid to savers. There is no way to isolate the local currency market from your offshore market. Or remains a limited offshore market to maintain control over monetary policy, or a large offshore currency market will necessarily affect the local market by limiting the government's ability to control interest rates and exchange rates. The internationalization of the currency brings countless advantages to the issuing country, but there is a price to pay. At the current stage of development in China, the full internationalization of the renminbi does not seem to be the best option
B. International demand for renminbi
The international demand for a currency depends on its area of circulation and the supply of financial products denominated in it. The path to the internationalization of a currency, on the demand side, goes through three steps: its use for trade finance, for investments and, in the long term, as a store of value. As we noted above, China's leading position as the world’s largest exporter and second largest importer of commodities and also as a major international investor greatly enhances the circulation space of the renminbi and consequently its demand. Besides Hong Kong and Shanghai, China's major financial centers, other financial hubs around the world try to become renminbi trading centers. In 2013, London accounted for 62% of all Chinese currency trading outside China and Hong Kong and 28% of all international renminbi payments were made in the UK overtaking Singapore (GOV.UK, 2013).
According to Chai (2017, p. 95-98), China is actively participating in regional financial mechanisms, which tend to increase the demand for renminbi. Among these mechanisms is the Chiang Mai Initiative, "which is a multilateral swap arrangement, in which the renminbi is used both as the payment currency in the bilateral swap agreements and as the currency of the pricing of the securities issued by the Asian Securities Fund" (Chai, 2017, p.96). The author also mentions renminbi deposit, exchange and loan services offered by Hong Kong financial institutions. Between 2012 and 2015, renminbi deposits in Hong Kong increased from US$ 1 trillion to US$ 3.2 trillion and the share of renminbi deposits in the total deposit in Hong Kong increased from 9% to 30%. Finally, the author points out that the use of renminbi in the payment of cross-border trade is increasingly expanding. Since 2009, commercial transactions between China, Hong Kong, Macao and the Asean (Association of Southeast Asian Nations) countries can be paid in Chinese currency.
In fact, in the neighboring countries of China, for example, Mongolia, Vietnam, Laos, Cambodia, Nepal, Myanmar, and Hong Kong, Macao and Taiwan regions of China, a renminbi marketing network marketi is already forming, and circulation area of Chinese currency is so large that it has attracted much attention (Chai, 2017, p. 96).
In addition, since that, after 2004, China started to allow the use of renminbi outside China and, especially after 2008, when the Chinese government started to allow, through a pilot project, that some Chinese provinces could export and import in renminbi, several exchange swap agreements were signed with several countries. Probably, with the implementation of the "One Belt, One Road" project, which aims to connect China to more than 65 countries in Southeast China, Eurasia, Europe and Africa through dozens of land and maritime infrastructure projects, aiming to foster economic cooperation, particularly inter-industry, the use of renminbi for the settlement of trade and investment contracts between the countries involved is even further expanded.
C. Is China interested in the full internationalization of its currency?
As we have already noted, one of the conditions for the full internationalization of the renminbi would be the elimination of controls on capital flows, interest rates and the exchange rate, which, at least in the short term, seems to be in disagreement with the China's macroeconomic policy.
But if the full internationalization of the renminbi seems to be discarded at the moment, it does not mean that there would be no advantages for China in promoting even in a limited way, the internationalization of its currency. Actually, there would be countless advantages: gains in international seigniorage, reduction of transaction costs and increase in international prestige. But perhaps this is not the main issue behind the internationalization movement of the renminbi. It is important to note that China's efforts to internationalize its currency gained strength after the 2008 crisis, when it became clear that the use of the US dollar as an international currency also entailed linking its economy to United States economic policy.
Many people wonder how a localized crisis in real estate sector in the United States can turn out to be the huge international crisis that hit the whole world. Part of the answer is that the omnipresence of the US dollar in the international financial system was an important vector of spreading the crisis out of the United States. Reducing dependence on the US dollar means that China is less subject to the succession of changes in United States economic policy and the pressures associated with it. The internationalization of the renminbi has, therefore, a defensive character, since it aims, above all, to protect the country from crises and instability of US dollar.
Anyway, on the other hand, it is necessary to take into consideration that China has been the main beneficiary of the current process of globalization of the world economy under the command of the United States. The huge trade surpluses that China has accumulated against the United States and which have contributed to maintain a high rate of growth in recent years - as China's domestic consumption is not sufficient to maintain a high effective demand - have only been possible thanks to the current international monetary system. Because of the dollar's dominance in the international monetary system, the United States may incur chronic deficits in its trade balance, which are largely financed by China itself by acquiring United States Treasury Bonds with the US dollar balances accumulated by the bilateral relationship. In a way, this model of recycling of economic surpluses – in fact the opposite of what had been established in the immediate postwar period when the United States recycled its trade surpluses by financing the rest of the world trade deficit – although prone to generate recurrent crises due to the pressures for the devaluation of the US dollar and the appreciation of other currencies, has been, until now, favorable for China
It does not seem, therefore, that China is interested in putting it down because it would itself be doubly impaired: China would sell less to the United States, reducing its growth, and still have the value of its international reserves depreciated, since it is today the world's largest holder of dollar-denominated reserves. Accordingly, China is working to ensure greater international circulation of its currency, which can bring some of the advantages of reducing transaction costs in the international trade and the creation of a renminbi off-shore market, without necessarily meaning the complete internationalization of its currency.
III. The role of Latin America in the internationalization of the Renminbi
The natural way for the internationalization of any currency is the expansion of its circulation area. In the specific case of the renminbi, its area of circulation outside mainland China is restricted to the regions of Hong Kong, Macao, Taiwan and to the countries of its surroundings, mainly in Southeast Asia. With the implementation of the "One belt, One Road" project, which covers about 65 countries in Southeast Asia, Eurasia, Africa and Europe, it is likely that the renminbi circulation area expands further as a result of increased trade, investment and construction contracts with Chinese companies. In the case of Africa, financial cooperation with China has already reached quite advanced levels (Chai, 2017, p.132).
In Latin America, however, the financial cooperation remains quite limited, although China's importance in the region is increasing both as a trading partner and as an investor. According to Chai (2017, p. 123), between 2000 and 2009, Latin American exports to the United States in total exports felt from 59.7% to around 30%, a decrease of almost 50% while the region's exports to China rose from 1% in 2000 to 10% in 2010. As the author points out, "The decline in the importance of the United States in imports from Latin America is already an indisputable fact. Moreover, it is predicted that this trend will remain, unless there are abrupt changes in the world economic scenario" (CHAI, 2017, p 123). According to the report of the CSIC (Center for Strategic & International Studies):
While the United States and other European countries have historically been the main sources of FDI, China leads the world in mergers and acquisitions in the region. According to the Economic Commission for Latin America and the Caribbean (ECLAC), the United States and European countries together represent more than 65% of total incomes in 2017, being the United States responsible for 28.1% of investments. In terms of mergers and acquisitions completed in 2017, however, China was the largest investor in LAC, with deals totaling US$ 18 billion (42% of the total). Abundant natural resources make LAC a highly desirable investment destination for China, with about 57.6% (US$ 62.7 billion) of China's FDI to LAC since 2005, flowing into the energy sector. Although totaling only US$ 1.85 billion between 2005 and 2009, China's energy investment in South America rose to US$ 18.97 billion in 2010, with 57% of the increase flowing to Brazil. The main acquisitions, such as the purchase of US$ 7.1 billion by Sinopec of the Brazilian arm of Repsol, constitute a significant portion of this flow (CSIC, 2018).
The main reason for the low use of renminbi in bilateral transactions between Latin America and China is the preference for the use of the US dollar as the international currency in the region. Some countries in the region – Ecuador, El Salvador and Panama – replaced their local currencies with the US dollar, either as an expedient to control political and economic crises, as in the case of Ecuador, or to strengthen their ties with the United States, such as El Salvador and Panama. Other countries in the region, such as Brazil and Argentina, which were hit by strong hyperinflationary crises in the late 1980s and early 1990s, also used indexing mechanisms for their local currencies against the dollar, but avoided full dollarization of their economies. In the case of Argentina, although the dollar cannot be used internally to make payments, residents are allowed to keep savings accounts in dollars at local banks.
The trade agenda between China and the countries of the region also contributes to the preference for the US dollar for the settlement of trade operations, In general, Latin American countries export mineral and agricultural commodities to China, which prices are quoted in US dollars. Certainly, for China, it would be much more convenient to use the renminbi for commodity pricing and contract settlement, thereby reducing the negative impacts on its economy stemming from the instability of the US economy and its reflections on the US dollar exchange rate. But we must take into consideration, on the other hand, that the export of these commodities is largely done by trading companies and multinationals based in the United States. China has made huge investments in the region, both to acquire control over the production of these inputs (mines, farms, steel mills) and the infrastructure of transports (ports, railroads) and distribution channels (trading companies), but there isn’t the less chance that the renminbi will replace the US dollar as the international currency in the region or be adopted as a substitute for the local currency in the short term. As Chai points out (2017, p. 130):
At the moment, the conditions for the renminbi to become an alternative currency in Latin American countries are still insufficient, which is why we must continue to closely monitor the region's new economic development trends and the opportunities that may arise over time. A viable strategy would be to seek greater competitiveness and scale effect of the renminbi in Latin America by expanding the scope of monetary cooperation between China and Latin America, expanding and deepening the renminbi transactions network in the region in order to increase, step by step, the area of currency circulation. It is expected that when conditions are ripe, the renminbi can play the role of a public product in the region.
The internationalization of the renminbi is an ongoing process that has accelerated since the late 2000s, partly because the demand for the Chinese currency has been widening worldwide, partly because China seeks to reduce the use of the dollar in its international business. In order to accelerate this process, China has taken a series of measures since 2007 to create an offshore renminbi market, allowing it to be used in foreign trade operations and offering foreign investors securities denominated in their own currency. The full internationalization of the renminbi faces some obstacles and, apparently, it is not in China's interest to achieve such stage immediately. Although China has the essential conditions for the internationalization of its currency, the size of its economy, economic and political stability, low rates of inflation and stability in the exchange rate, it still lacks all the institutional conditions that allow its complete internationalization, such as the low breadth and depth of its financial market and the controls that the Chinese government exercises on interest, foreign exchange rates and on capital flows. Nonetheless, the use of renminbi outside Chinese territory is advancing, thanks to the enormous weight of the Chinese economy in the world and the measures that the Chinese government has been taking to create a Chinese currency offshore market. There is already an area of circulation of renminbi outside China, which today is restricted to the regions of Hong Kong, Macao and Taiwan and to the countries of the Asia, but this area tends to towards Eurasia, thanks to the project "One Belt, One Road", and also towards Africa and Latin America. The creation of a renminbi circulation area on the African continent is a more advanced process than in Latin America. In Latin America, despite its growing importance as a trading partner and investor, the creation of a renminbi circulation area is still impracticable at the moment, especially because of the dollar's strength in the region and strong political and economic ties of the countries of the region with the United States. The current structure of trade with China, based on the export of commodities, also make more difficult the use of the renminbi in the foreign trade of the region. But the decrease in the relative importance of the United States both as a trading partner and as a source of investment is a reality, which points to a growing demand for the Chinese currency, a necessary condition for Latin America to become in the future in an area of circulation of the renminbi.
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[*] Associate Professor of Economy and International Trade - Course of International Relations - Faculty of Philosophy and Sciences - Unesp, Brazil; Honorary Council Member - Confucius Institute Headquarters/Hanban, Beijing, China; Director - Brazilian Union of Writers - Brazil and Short Term Consultant - World Bank, USA. Chief of Staff - Ministry of Sports, Brazil (2012-2014); Vice-Minister - Secretary of Political Coordination and Institutional Relations of the Presidency of Republic, Brazil (2003-2005); Special Adviser, Ministry of Finance, Brazil (2003).
 In this system, called the Bretton Woods II Hypothesis, emerging Asia economies maintains its currencies linked to the dollar, in a similar way of what used to Japan and Europe in the original Bretton Woods model, and this system of semifixed parities would be stable. The intervention of the central banks would avoid appreciating the Asian currencies and would allow them to continue to finance the huge current account deficit of the United States. Cf. Nadal, A. The Prisoner's Dilemma. The Bretton Woods II hypothesis.
https://resistir.info/eua/bretton_woods_ii.html. Access on 08/30/2018