But TJ, the exorbitant privilege is SO tempting! Surely there must be some notables among the Chinese officialdom with sufficient hubris and audacity to hatch the ultimate creature... :O)
The rise of the renminbi as international currency: Historical precedents
Jeffrey Frankel, 10 October 2011
voxeu.org
The dollar is one of three national currencies to have attained international status during the 20th century. The other two were the yen and the mark, which became major international currencies after the breakup of the Bretton Woods system in 1971-73. (The euro, of course, did so after 1999.) In the early 1990s, both were spoken of as potential rivals of the dollar for the number one slot. It is easy to forget that now, because Japan’s relative role has diminished since then and the mark has been superseded. In retrospect, the two currencies’ shares in central bank reserves peaked as the 1990s began.
The current renminbi phenomenon differs from the historical circumstances of the rise of the three earlier currencies in that the Chinese government is actively promoting the international use of its currency. This was something that neither Germany nor Japan, nor even the US, did – at least not at first. In all three cases, exporters, who stood to lose competitiveness if international demand for the currency were to rise, were much stronger than the financial sector, which might have supported internationalisation. We might expect the same fears of a stronger currency and its effects on manufacturing exports to dominate the calculations in China.
In the case of the mark and yen after 1973, internationalisation came despite the reluctance of the German and Japanese governments. In the case of the United States after 1914, a tiny elite promoted internationalisation of the dollar despite the indifference or hostility to such a project in the nation at large. These individuals, led by Benjamin Strong, the first president of the New York Fed, were the same ones who had conspired in 1910 to establish the Federal Reserve in the first place.
It is not yet clear that China’s new enthusiasm for internationalising its currency includes a willingness to end financial repression in the domestic financial system, remove cross-border capital controls, and allow the RMB to appreciate, thus helping to shift the economy away from its export-dependence. Perhaps a small elite will be able to accomplish these things, in the way that Strong did a century earlier. But so far the government is only promoting international use of the RMB offshore, walled off from the domestic financial system. That will not be enough to do it.
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