China long kept a tight hold on its currency as a way to control its economy and to help its factories sell their products overseas.
But China has grown in economic power and ambition, and the old restrictions are not helping a country that hopes to call more of the world’s financial shots.
In his new book, Gaining Currency: The Rise of the Renminbi, Eswar S.
Prasad describes how China’s view of its currency has evolved, starting from the Han dynasty — China invented paper money, of course — to today’s globally ambitious leadership.
Prasad)在自己的新书《不断升值的货币——人民币的崛起》(Gaining Currency: The Rise of the Renminbi)中，自汉朝——当然，纸币就是中国发明的——到希望雄心勃勃引领全球的今天，描述了中国对其货币看法的演化。
Mr Prasad, a professor at the Dyson School of Applied Economics and Management at Cornell University and senior fellow at the Brookings Institution, was formerly head of the International Monetary Fund’s China division.
In an interview, he explained China’s motivations, how money can be a back door to overhauling the country’s financial system and why some people fear a financially powerful China.
Why is China reconsidering the role of its currency?
China is increasing its dominance in the world economy.
But there was a sense that China wasn’t getting the respect that it felt it deserved.
One of the manifestations of that was that its currency was not quite seen as an elite currency.
Chinese policy makers, especially the more reformist-minded officials, recognized that China needs to do a lot of work to get its financial markets ready before the renminbi could become a prominent international currency.
Of course, there is a lot of opposition to such reforms because the system worked well for a lot of politically and economically powerful people.
About three or four years ago, these reformist-minded officials had a very important insight: If they could get the Chinese people and leadership to sign on to making the renminbi a great global currency, that could provide a very useful mechanism for getting around the opposition and putting in place a lot of reforms.
Ultimately it would be good for China, no matter what happened to the currency.
I view this as a sort of Trojan horse strategy.
Making the currency international requires meeting requirements from foreign institutions like the I.M.F.
At the same time, China is increasingly wary of what it calls Western influences.
Can those external pressures still help China overhaul its financial system?
These serve a very positive role, but they must come from the right sources in the right fashion.
When the US Treasury or the I.M.F. tells China to allow its currency to appreciate, that is seen as something that is not necessarily in China’s best interest.
When it comes to matters where the West has some sort of prize to offer, that changes the dynamic.
We’ve seen some examples of that over the last year and a half.
When China decided it wanted to get the renminbi into the I.M.F.’s elite basket of currencies, it felt that this would be a great way of getting more prestige for its currency in one fell swoop.
The I.M.F. and China came together and decided on a checklist of things that China needed to accomplish over the next year.
That checklist turned out to be very useful particularly for the People’s Bank of China [China’s central bank] in pushing out its reforms.
After the 2008 financial crisis, the United States pumped money into its financial system, which in effect lowered the value of China’s vast holdings of American debt.
How has that affected China’s ambitions for its currency?
It is a matter of enormous frustration for China that the US has such a dominant role in global finance.
Because of its old policies, China has become even more vulnerable to US policy, especially monetary policy.
Chinese are net creditors to the rest of the world.
That is, the world owes China a lot more than China owes to the world.
But the net income that China’s earning — the amount paid by foreign investors minus the amount it pays out to foreign investors — is in fact negative.
Foreign investors get pretty good returns in China.
But China, because most of its foreign assets are in the form of US Treasuries and the government securities of other advanced economies, is earning piddling rates of return.
The fact that the US dollar is so dominant in global finance, and also that the architecture of global finance is controlled by the US and the Western economies, frustrates the Chinese.
I think the Chinese feel that the system is stacked against them.
Many foreign economists say China should loosen its grip on its financial system — opening the capital account, as policy wonks call it.
But you quote one respected Chinese voice, Justin Lin Yifu, criticizing that view.