https://orcid.org/0000-0002-8173-0763
![Sample our Politics & International Relations journals, sign in here to start your FREE access for 14 days]({"type":"image" , "src" : "/sda/5947/TOC-Subject-Sample-2021-Politics-International-Relations.jpg"})
ABSTRACT
Despite the slow process of RMB internationalisation over the last decade, we make an empirical argument that China has recently intensified the RMB’s international and domestic capacity to make it a formidable challenger to the dollar as a global currency in the medium and long-term range. We highlight that China has made substantial progress in expanding the RMB currency network and institutionalising a deep and open domestic financial market, the two most severe obstacles emphasised by the skeptics on RMB internationalisation. In developing this argument, we draw on the ‘credit theory’ of money and explain the global expansion of the RMB currency network in terms of the external and internal production of credit and debt relations denominated in the RMB across borders. Our empirical findings suggest that the pace of the growing foreign demand for RMB-denominated assets has recently taken off.
Acknowledgement
We deeply thank NPE editors and two anonymous reviewers for their constructive suggestions and comments. This article benefits immensely from their insights and erudition. Yong Wook Lee would like to thank Dayeon Jung and Jiyoung Kim for their excellent research assistance.
Disclosure statement
No potential conflict of interest was reported by the author(s).
Notes
1 In this article, the yuan and the RMB are interchangeably used.
2 See Appendix for the detailed data on the trends of RMB internalization in a time-series manner. As for ‘payment currency’, RMB internationalization is measured in terms of the RMB’s proportion in trade settlement in the global economy (and the proportion of RMB settlement in Chinese trade) and the number of offshore RMB clearing banks (Figures 1, 2, 3, 4). Regarding ‘reserve currency’, it is assessed by the ratio of the RMB in global foreign reserves as well as the number of RMB currency swap agreements and its total volume ( and ). Finally, when it comes to ‘base currency’, the RMB is evaluated by the issuance trends of foreign RMB-denominated bonds ().
3 Germain (Citation2021, p. 576) coins the concept of world money in contrast to the conventional concepts of international key currency or top currency (Strange 1971; Cohen 1998, Eichengreen et al. Citation2018) because the concept can more precisely capture a particular currency’s ‘weight in the organization and operation of the global political economy’. In this conceptual context, we make a modest attempt to show how the credit theory of money (this article’s theoretical base) can distinctively offer a theoretical frame of reference as to how we understand the existence of world money. In our view, a full discussion of this important issue requires a separate paper going well beyond the scope of this short work, whose primary task is to explicate the process of a currency network expansion.
4 Economic size, stability of currency value (currency trust), and military capability are additional determinants of currency status that are generally discussed in the existing literature.
5 Exceptions are a series of works by Murau and his collaborators (Citation2020, Citation2022, Citation2023). These works focus on analyzing and conceptualizing the growing importance of private credit money forms (particularly offshore dollar liquidity) in shaping international monetary system and national monetary sovereignty.
6 The credit theory of money is associated with the ‘Chartalist’ tradition of monetary thought. What is shared in the two money traditions is emphasis on the essence of money as ‘unit of account’. In his book, The Nature of Money (2004), Ingham combined the two theories in the historical development of modern credit money. The Chartalist school has recently attracted increasing attention across academic disciplines as alternative to the medium of exchange theory of money. See, for example, Stephanie Bell (Citation2001); David Fields and Matias Vernengo (Citation2013); Charles Goodhart (Citation1998); Miquel Otero-Iglesias (Citation2015).
7 We thank a reviewer for raising this point.
8 We would like to express our thanks to a reviewer who highlights this crucial point.
9 Some note that the US Fed’s concern with the digital yuan has more to do with the lack of transparency around the digital yuan-based transactions than its capacity to facilitate the RMB internationalization.
10 Of course, there remains the question of whether the Chinese government will fully implement the law it has enacted. But the chance is that as long as China keeps pursuing the RMB internationalization, it has to buy foreign investors’ trust in the Chinese policies. Otherwise, the RMB would almost have no chance to be a successful international currency. As detailed in this article, foreign institutions not only invest in China’s domestic financial markets but also contribute to expanding the RMB currency network externally.
11 The Third Belt and Road Forum, which just ended on October 18, 2023, shows that China is determined to promote RMB internationalization by using loans agreed through the BRI. According to Reuters (October 19, 2023), China’s policy banks signed a series of RMB-denominated loan contracts with its members states.
Additional information
Funding
Notes on contributors
Yong Wook Lee
Yong Wook Lee is Professor in the Department of Political Science and International Relations at Korea University (Seoul, Korea). His research examines East Asian financial regionalism and financial diplomacy of China, Japan, and Korea. Lee is the author, editor, and translator of seven books and has published numerous articles and book chapters in academic journals and edited volumes. Lee holds a Ph.D. in International Relations at the University of Southern California. Before coming to Korea University, Lee previously taught at the University of Oklahoma and Brown University.
Kyuteg Lim
Kyuteg Lim is Research Fellow at Peace and Democracy Institute, Korea University, and Lecturer at College of International Studies at Kyung Hee University. Before joining Korea University, he was Teaching Fellow in International Political Economy at the School of Government and International Affairs at Durham University. He held a PhD at Durham University in 2017. His scholarly articles have appeared in journals including Globalizations and the Korean Journal of International Studies.