Which foreign states support the global use of the Chinese renminbi? The international political economy of currency internationalisation

• Published date: 01 August 2019
• Author: Hyoung‐kyu Chey,Dong Hyun Lee,Geun‐Young Kim
• Date: 01 August 2019
• DOI: http://doi.org/10.1111/twec.12794

ORIGINAL ARTICLE

Which foreign states support the global use of the

Chinese renminbi? The international political

economy of currency internationalisation

Hyoung-kyu Chey

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Geun-Young Kim

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Dong Hyun Lee

3

1

National Graduate Institute for Policy Studies (GRIPS), Tokyo, Japan

2

Research Department, Bank of Korea, Seoul, South Korea

3

Bank of Korea, Seoul, South Korea

KEYWORDS

currency internationalisation, international currency, renminbi internationalisation

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INTRODUCTION

Despite the rapid growth of the Chinese economy over the past decades, the international status of

China's currency, the renminbi (RMB), had been almost nil until quite recently.

Since the global financial crisis of 2008–09, however, the internationalisation of the RMB has

begun to progress rapidly. For instance, according to the global payment services provider SWIFT,

the rank of the RMB among the world's payment currencies jumped from 35th in October 2010 to

fourth in August 2015, to even surpass that of the Japanese yen (although it has since fallen some-

what, fluctuating between fifth and seventh during 2017). Reflecting the rising international stand-

ing of the RMB, the International Monetary Fund (IMF) announced in November 2015 the

inclusion of the currency in the elite currency basket of the Special Drawing Right (SDR)—an

international reserve asset that it issues—along with the US dollar (hereafter the dollar), the euro,

the yen and the British pound, effective October 2016.

The process of RMB internationalisation (henceforth RMBI) has one remarkable characteristic:

whereas most of the previous cases of currency internationalisation, such as those of the yen and

the German mark, have been results mainly of market forces,

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RMBI has to date been driven lar-

gely by government policy measures that have deliberately promoted international use of the

RMB. The majority of these policy measures have of course been initiated by the Chinese authori-

ties, who have endeavoured to facilitate RMBI so as to reduce China's heavy reli ance on the dol-

lar, in addition to enhancing its international status and influence.

2

Yet, most of the policy

infrastructures that are helping to enhance the RMB's use (hereafter RMB policy infrastructures) in

foreign markets—such as bilateral RMB‐local currency swap agreements with China (henceforth

RMB swap lines), Renminbi Qualified Foreign Institutional Investor (RQFII) quotas, and RMB

1

See Eichengreen (2011) and Henning (1994).

2

See Bowles and Wang (2013) and Qu, Sun, and Kwok (2010).

Received: 27 August 2017

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Revised: 18 October 2018

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Accepted: 26 February 2019

DOI: 10.1111/twec.12794

World Econ. 2019;42:2403–2426. wileyonlinelibrary.com/journal/twec © 2019 John Wiley & Sons Ltd

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clearing banks—require the formal cooperation of foreign governments, since they must of course

agree to introduce those RMB policy infrastructures in their jurisdictions.

Which states have adopted RMB policy infrastructures, thereby helping to advance RMBI? This

is an issue crucial to an understanding of the factors that have driven RMBI to date. Countries that

have these RMB policy infrastructures do in fact show relatively high levels of RMB use. For

example, SWIFT data reveal that as of June 2018 all of the top nine economies in the world (ex-

cluding China) in terms of their volumes of RMB payments have RMB clearing banks. The

research by Chey (2015) of RMB use in South Korea (Korea hereafter) also demonstrates that

RMB use in that country has increased since its adoption of these policy measures. A recent cross‐

country analysis by Chey and Hsu (2019) also finds that the use of the RMB in foreign exchange

markets tends to be higher in a country that has major RMB policy infrastructures.

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Nonetheless,

the issue of which factors have led foreign governments to introduce RMB policy infrastructures,

in cooperation with the Chinese government, has been significantly underexplored in the literature,

despite the considerable growth in research on RMBI in recent years. Our study addresses this

issue.

In our analysis, we investigate relevant domestic factors in foreign countries, as well as their

bilateral relations, both economic and political, with China and the United States, the issuer of the

incumbent leading international currency the dollar. We find that a state holding RMB‐denomi-

nated assets in its reserves or having more developed financial markets tends to have a higher level

of RMB policy infrastructure established. Our analysis also suggests that a country's economic and

political relations with China may significantly affect its level of employment of RMB policy

infrastructures. These findings significantly advance our understanding of renminbi internationalisa-

tion, by identifying which non-Chinese factors have influenced it. They also make meaningful con-

tributions to the literature on currency internationalisation and international currencies in general,

by drawing attention to the roles of foreign governments in the process of a currency's internati on-

alisation.

The remainder of this paper is organised as follows. The following section reviews the literature

on RMBI. The subsequent sections explain our research design and the details of our empirical

analysis, and then report its findings. The final section concludes.

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THE LITERATURE

Together with the recent eye‐catching progress in RMBI, the research on this subject has grown

substantially over the past 10 years, in not just economics but also political economy scholarship.

Most studies ultimately deal with the issue of whether the RMB will become a consequential inter-

national currency, or will eventually challenge the dollar for the status as the dominant currency.

One group of studies forecasts future trajectories of the RMB as an international currency through

reliance on the Chinn and Frankel (2007) method. Examples include Subramanian (2011), who

projects that the RMB will challenge the dollar by the early 2020s, and Lee (2014), who estimates

that the RMB's share in total world reserves will rise to between 3% and 12% by 2035. These

studies place their analytic focuses on the economic conditions of China, such as its share in glo-

bal output and trade and its level of financial market development.

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There is little statistical cross‐country analysis of the actual use of the RMB in markets, owing largely to limitations in the

availability of necessary data. In this regard, the empirical research by Chey and Hsu (2019) is quite exceptional.

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CHEY ET AL.