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.