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Abstract
Although it is commonly assumed that there are no precedents against which to benchmark Renminbi (RMB), this study argues that the People’s Republic of China (PRC) own development experience provides a useful perspective on the internationalisation debate. This study indicates that lessons can be learnt from both the successes and the shortcomings of efforts to internationalise the RMB in the 1970s. During this period, state-owned banks in Hong Kong played a central role in mobilising finance for foreign trade. Access to Hong Kong’s financial institutions allowed the PRC to maximise international trade receipts while minimising the risk of undue swings in capital flows. This study shows that although China no longer faces foreign exchange scarcity, economic reforms have not yet resolved vulnerabilities in China’s financial institutions. As a consequence, Hong Kong has retained its role in mitigating the risks of internationalisation and as a globalising force for China’s banking sector more generally.
Acknowledgement
The author would like to acknowledge the assistance of Professor Laixiang Sun (SOAS) and Professor Leo F. Goodstadt (Trinity College Dublin).
Notes
1. Reported Xinhua (New China News Agency, NCNA hereafter) 21 September 2012.
2. See for example ‘Meeting with Deng’ Kyodo 20 January 1975 in which Japanese media reported on trade negotiations between Japan and China where China’s then vice premier Deng was forced to deny that China’s foreign exchange reserves had dropped dramatically. He went on to make an oblique warning that future Sino-Japanese trade deals may fall through if Japan believed that China did not have the capacity to pay.
3. The efforts also included a normalisation of the foreign trade sectors by increasing certain exports and reducing imports. See Reardon Citation2002, 174–175.
4. During the period 1971–1979 the PRC re-valued the RMB steadily upwards from 2.46/US$ to 1.49/US$ (Lardy Citation1992, 66).
5. ‘PRC remains free of inflation, currency stable’ NCNA 21 September 1974.
6. See for example ‘Soviet’s “Materialisation of Détente” viewed’ NCNA 1 March 1976.
7. For an outline of the risks associated with a combination of revaluation pressures, credit tightening and the holding of RMB offshore see ‘Renminbi Internationalisation a one-way street’ (Hong Kong) Economic Journal Insight 18 February 2011.
8. Large international banks have in the past used complex and elaborate schemes to allow clients in such countries facing US sanctions as Iran, Libya, Sudan, Myanmar and Cuba to trade in US dollars. See ‘Tallying Up US Regulators’ Money-Laundering Fines’ New York Times 15 August 2012.
9. Such exchange transactions were only illegal because the Hong Kong government had not granted a licence or simply forgot. It had proposed legalising the trade in 1958 but London objected on account of US concerns.
10. The authors also point out that to be effective such controls should where possible internalize the systemic dangers that could result from a widespread adoption of such controls.
11. See for example China Monetary Policy Report Quarter 1, 2011 (PBC, 3 May Citation2011).
12. See the comments of Hans Genberg South China Morning Post (SCMP) 18 November 2010.
13. Although there has been much positive comment about London’s potential role as an off-shore settlement centre, London’s potential is limited by the lack of the a combination of a currency swap agreement and a RMB clearing bank. See ‘London becoming international RMB trade hub still a long way off’ China Securities Journal 21 February 2012.
14. NCNA 29 September 2012.
15. NCNA: Many US, W European Banks in Financial Straits 24 October 1974.
16. Chou Chen-Hsing, Bank of China (Citation1978, 97).
17. Hong Kong Hansard 26 April 1967.
18. These concerns are outlined in circulars from the Secretary of State for the Colonies during the early 1950s: CR19-2321-52 Import Licensing Policy for Dollar Imports (Hong Kong Records Service (HKRS hereafter) 163-9-98).
19. Remarks by Hong Kong’s Governor in 1948. Recorded in a Savingram to Secretary of State for the Colonies from Governor of Hong Kong in files on Cotton Textiles 29-12-1948 (HKRS 41-1-3378).
20. Files on Cotton Textiles 29-12-1948 (HKRS 41-1-3378).
21. Cotton yarn from China tended to be more expensive as shipping was shared with China on a 50:50 basis thereby lessening the foreign exchange benefit to China; and also because of the tendency for Japanese yarn to be of a higher quality and yarn bales overweight as opposed to Chinese bales, which tended to be underweight. Savingram to Secretary of State for the Colonies from Governor of Hong Kong in files on Cotton Textiles 29-12-1948 (HKRS 41-1-3378).
22. ‘As Peking Saw It’ Far Eastern Economic Review, 11 April 1968.
23. Far Eastern Economic Review 11 April 1968.
24. Far Eastern Economic Review 76 (14), 1 April 1972.
25. An account of Mr Zheng’s background and affinity to the CCP can be found in the memoirs of the economist Qian Jiaju. Hong Kong Mingpao Yuekan (Ming Pao Monthly) No. 227 January 1989 (29–35).
26. A confidential letter from Mr. Zheng to the Hong Kong Government on 12 July 1948 outlined concerns regarding political developments in Mainland China and their implications for the Bank of China in Hong Kong. See HKRS163-1-756 Correspondence regarding the modification and design of the BOC building.
27. ‘Bank of China manager dies’ SCMP 18 September 1974.
28. ‘PRC remains free of inflation, currency stable’ NCNA (Peking) 21 September 1974.
29. See file HKRS 411-2-45(2).
30. see file: HKRS 70-6-91 Banks and Banking.
31. Chia Shu-Fan PRC Foreign Trade Official denies Deficit financing La Stampa (Italy) 18 May 1975.
32. Far Eastern Economic Review 76 (14), 1 April 1972.
33. See Deng Xiaoping ‘Some Comments on Industrial Development’, 18 August 1975.
34. Deng highlighted the case of the coal industry where he suggested the import of advanced mining technology under long term contract to be repaid using coal exports.
35. Polyester Fibre Plant, Kyodo (Tokyo) 8 February 1974.
36. The China National Chemicals Import and Export Corporation signed a deal to purchase some 500,000 tons of urea and 220,000 tons of ammonium sulphate for US$100 million based on 60 deferred payments in August 1975. ‘Japan, PRC reach accord on Fertilizers’ Kyodo 21 August 1975.
37. Li Hsien-nien (Chinese Vice-Premier) reported in London Financial Times, 30 June 1978.
38. Possible Loan Request, Kyodo (Tokyo) 2 September 1979.
39. ‘Strengthen Foreign Exchange Control to Promote the Four Modernisations’ Renmin Ribao, Editorial, 30 December 1980.
40. The statistics that follow are taken from the State Statistical Bureau, Statistical Yearbook of China 1983, 17, 420, 455, 490.
41. See China Monetary Policy Report (2010, 44).
42. NCNA 23 February 2012.