There has been a lot of doom and gloom about the Chinese role in the world economy, especially about China's propensity to record large trade surpluses and its alleged refusal to espouse a policy of raising the value of the renminbi and boosting domestic demand. This has been criticised as holding back the development of the world economy.
To heap all the blame on to China for world payment imbalances is unfair, and counter-productive. The Americans – particularly the politicians in Congress over whom the administration in Washington does not have a much control – are behaving somewhat childishly over this important question. What we have seen lately, in the American campaign to have the Chinese labelled as “manipulators” of the currency, is the politics of the school playground rather than of the superpower. Adopting the politics of name-calling and finger-pointing does not seem the right way of resolving this dispute and indeed may hamper opportunities of reaching a settlement.
Over time China will move to a more flexible policy for the renminbi exchange rate that will allow the Chinese monetary authorities to enjoy greater autonomy over monetary policy at home. But this will be at a time of China's own choosing, rather than in a manner and on a timetable set by foreign politicians.
Intervention to hold down the renminbi, necessitating huge operations to sterilise foreign exchange inflows to prevent an unhealthy rise in money supply and a further build-up of inflationary pressures, is an enormously complicating factor in Chinese monetary policy.
There is a clear link between the factors driving the liberalisation of domestic financial services and the financial markets, and the internationalisation of the renminbi. These processes need to go step in step.
The reasons for the big rise in Chinese monetary reserves include a build-up of trade leads and lags of the sort that we saw in the old days before the break-up of the Bretton Woods system in the early 1970s.
Numerous statements by People's Bank of China Governor Zhou on the prospects eventually for a shift in the policy of pegging the renminbi the dollar, although meant to calm down the situation, have frequently been counterproductive by encouraging precisely the opposite outcome. Certainly the People's Bank needs to pay attention to its international communications policy and will need to articulate for international consumption a much more thoughtful, cohesive and comprehensible policy on the renminbi. This is a very important challenge for the central bank, and one where we would all like to see progress in coming months.
In the meantime, we can look to important smaller-scale steps in Chinese policies that will themselves, over time, drive healthy liberalisation and internationalisation of policies governing the renminbi.
• There are modest steps afoot to encourage central banks in Asia and further afield to hold renminbi in their foreign exchange reserves. These are practical measures to promote a move away from undue international dominance of the dollar and towards a genuine multi-currency reserve asset system.
• We see an increase in renminbi use in bond issues in Hong King – a reminder that the Chinese currency is becoming a greater force on world capital markets.
• Use of the renminbi in payment for internationally-traded raw materials is being stepped up. Perhaps we will even see a move over time towards the Chinese currency playing a role in a basket of currencies used for oil pricing, or indeed in a redefinition of the Special Drawing Rights that could be used not just for monetary transactions but also for payment and settlement of commodities.
