Chinese Institutional Considerations for the Internationalization of the Renminbi: A Network Effect Perspective

Abstract

The article discusses the internationalization of the Chinese renminbi (RMB) in light of a redefined network effects framework to incorporate an original institutionalist perspective. Contradicting common wisdom, this approach shows that rather than slowing down in 2015, the strategy to internationalize the RMB has been redirected towards the creation of network effects, thereby directly challenging the institutions—such as the petrodollar system, creditworthiness, among others—that support the United States dollar’s hegemony.

Keywords:

• network effects
• network externalities
• RMB internationalization
• currency hegemony

JEL Classification Codes:

• B52
• E02
• E42. N22
• N25

Notes

1 While the formal name of the Chinese currency is renminbi (RMB), it is more commonly known as the Chinese yuan. In this article, we use the two names interchangeably.

2 This paradox is not historically novel, similar studies have been done on the relationship between the USD and the pound sterling (Eichengreen 2014), the yen (Katada 2008), and the euro (McNamara 2008).

3 In December 2020, a bibliometric search was conducted in Web of Science’s database for titles published from 1990 to 2020 that include the following two strings: (i) “‘renminbi’ or ‘yuan’ or ‘international currency’ or ‘currency internationalization’ or ‘international monetary system’ or ‘monetary theory’ or ‘network externalities’ or ‘network effects’”; and (2) “‘Journal of Economic Issues’ or “Journal of Institutional Economics’ or ‘Evolutionary and Institutional Economics Review” or ‘Journal of Evolutionary Economics’” has resulted in no articles about currency internationalization. These four journals were selected as they comprise the list of institutional economics journal listed at the Association for Evolutionary Economics website. The search resulted in thirty-two papers, sixteen of which discussed monetary theory, and only four of which deals with currency internationalization and the international monetary system. It is true that most heterodox economists discussing money publish at the Journal of Post Keynesian Economics and the Cambridge Journal of Economics. When these two journals are included in the search, we find an additional forty-nine publications on monetary theory, thirteen of which deals with the international monetary system. None of the papers in either search focus on the renminbi, in particular. There is, thus, plenty of space and relevance for discussions of this nature in the heterodox economic literature.

4 This is not to say that the authors ignore the other functions of money, however, either the medium of exchange function appears as the determining factor for qualifying a “sound” international currency, while the other two functions unfold as a consequence of these qualities, or it is presented as the only justification for the inertia when historical facts do not fit the model.

5 Notably, between the 1910s and 1930s the sterling and the dollar shared played on and off as duopolists (Eichengreen and Flandreau 2009; Eichengreen and Flandreau 2012; Eichengreen 2014).

6 The terms command of money and control of money are used in this article in reference to the sovereign power of a state to issue and print a national currency; that is, it is not related to debates pertaining to central banks’ control, or lack thereof, over the money supply.

7 Evidence indicates that OPEC initially planned to tariff oil trade in Special Drawing Rights, then use the IMF to recycle the surpluses (Leverett and Leverett 2015); that is, link the price of oil to a basket of currencies (Kamel and Wang 2019, 1141)

8 “Closed” economy here is used in the macroeconomic sense of the term, standing in opposition to an internationally open economy rather than to a non-teleological framework.

Additional information

Notes on contributors

Irène Berthonnet

Irène Berthonnet is at the University of Paris VII-Diderot.

Natalia Bracarense

Natalia Bracarense is at SciencesPo Toulouse