Written by Muhammad Zulfikar Rakhmat.

Image credit:  Dennis Sylvester Hurd/Flick, license CC BY-NC-ND 2.0

In recent years there seems to have been an ongoing effort on the part of China to globalise its currency – the renminbi – through, among others, opening and developing bond markets, signing currency swap agreements, and opening renminbi clearing centres in many parts of the world. The launch of the Belt and Road Initiative (BRI) along with the Asian Investment Infrastructure Bank (AIIB) is also expected to help the process of renminbi internationalisation. Nonetheless, if we look below the surface, we see that China does not actually want the process to speed up or to get out of control.

It is important to note that alongside China’s apparent endeavours to spread the use of the renminbi in many parts of the world, the country’s export-led growth model has also generated imbalances in its economy. Its double surpluses in both current and capital accounts have led to growing foreign exchange reserves, which have been invested back into the Chinese economy.

In order to mediate the country’s economic imbalances, the process of internationalising the renminbi needs to be slowed down temporarily

However, learning from the global financial crisis, the government in Beijing has indicated that investing these foreign exchange reserves into the domestic economy is of no benefit in mediating the economic instabilities of an export-oriented production model. It has realised that it needs to search for alternative outlets to reinvest these reserves. From the Chinese government’s perspective, infrastructure investments such as those needed for the BRI have the double advantage of resolving overaccumulation while identifying potential new economic activities.

At the same time, however, President Xi Jinping has acknowledged that in order to help this process, it is also necessary to depreciate the Chinese currency. The administration of Hu Jintao (2002–2012) suspended the renminbi appreciation process during the 2008–2010 crisis, and Xi has decided to uphold this policy. The rationale is that internationalisation of the renminbi will lessen China’s trading competitiveness as well as the policy autonomy of the Chinese Communist Party to use exchange rates as one of its mechanisms for relief.

China’s failed efforts to reform its economic system through consumer spending and accumulation in the domestic financial markets have also put pressure on Xi’s currency policy as a solution to relieve the country’s overaccumulation. It is against this background that, despite the stated objective of the BRI to spread the use of the renminbi, the AIIB, as the financial arm of the initiative, is not rejecting the US dollar but even using it as its main currency.

The reason is that in the short-term the initiative is primarily intended as a mechanism to resolve China’s overaccumulation. Nevertheless, this does not rule out the possibility that the initiative could still be used as a mechanism for the internationalisation of the Chinese currency, as reiterated in the government’s blueprint.

The Xi administration simply does not want the process to accelerate, as it will be counterproductive to Xi’s efforts to resolve overaccumulation. To mediate Chinese imbalances, he first needs to reinvest foreign exchange reserves, rather than pursuing a long-term strategy to increase domestic consumption, and also to depend less on the US dollar. As the AIIB’s President Jin Liqun asserted, to use the US dollar is ‘less practical’. This is because in order to resolve the economic instabilities that China faces quickly, the surplus of foreign exchange reserves needs to be reinvested in the US dollar.

Xi realises that the global status of China’s currency will not contribute to stability in capital accumulation, nor serve as a form of relief. In order to mediate the country’s economic imbalances, the process of internationalising the renminbi needs to be slowed down temporarily. Given that Xi also acknowledges the potentially significant ability of the BRI and the AIIB to widen the use of the renminbi, which would in turn contrast with the strategy to lessen imbalances, he has decided to proceed gradually with the currency expansion policy and not use the renminbi as the primary currency of the AIIB.

The use of the US dollar in the AIIB and the decision not to use the Bank as a means for currency internationalisation are only short-term strategies, however, as Xi and his team have not ruled out using capital raised in the Chinese currency in the future. AIIB President Jin has stated that in the future the AIIB will use the renminbi in its operations.

Overall, since the strategies initiated by previous administrations have not been able to provide profitable outlets for reinvestment, Xi needed to search for alternative strategies to diversify re-investments, mainly because the foreign exchange reserves continue to rise rapidly.

For now, initiatives such as the BRI and the AIIB provide a mechanism through which Xi can diversify reinvestment strategies and solve the imbalances in capital accumulation which are inherent in China’s export-oriented growth production model. These problems cannot be resolved via domestic investments or a strategy of financialising accumulation and have therefore resulted in an overaccumulation crisis and the inability to absorb significant amounts of capital.

The BRI and the AIIB provide geographical and profitable variability for capital investments. The gradualist strategies of currency expansion and the use of the US dollar in the AIIB are intended to help with the reinvestment of China’s foreign exchange reserves. Nonetheless, this does not rule out the possibility of the initiative changing course in the future.

Dr Muhammad Zulfikar Rakhmat is a Lecturer at Universitas Islam Indonesia and a Research Associate at the Institute for Development of Economics and Finance.

*Articles published by The Asia Dialogue represent the views of the author(s) and not necessarily those of The Asia Dialogue or affiliated institutions.