Source: China Securities Journal
Author: Orient Securities chief economist analyst Shao Yuhong view Chenda Fei
From the commodity currency to the credit currency, the value attribute of the currency itself is constantly compromised to the convenience of the transaction. However, the currency that was born with the mission of lowering transaction costs has become one of the sources of increased transaction costs. This is concentrated in international economic and financial trading activities. So, can digital currency solve, or can it alleviate the imbalance caused by the global economy, finance and monetary system? Can issuing digital currency (DC/EP) be a viable way to promote the internationalization of the RMB?
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Renminbi digitization and internationalization
China is probably the first country in the world to issue sovereign digital currencies. The current consensus is that it is a substitute for cash. From the current design and positioning, the main impact is the transaction clearing process.
From the consumer's point of view, DC/EP is not much subversive, whether it is to continue to use Alipay / WeChat / UnionPay, or directly use digital currency wallet. This article is mainly concerned with the meaning of the internationalization of the RMB, that is, the issue of digital currency, will it help to promote the internationalization of the RMB?
To answer these questions, we need to further clarify: What is the key to the internationalization of the RMB? Is it technology, or is it a currency? If not, to what extent is internationalization related to technology? The author believes that digitization will undoubtedly contribute to internationalization, but whether this positive relationship is significant or not is uncertain. In the language of measurement, if internationalization is the dependent variable and digitization is used as the explanatory variable to make a regression, then the digitized beta coefficient is assumed to be positive. What we want to know is, how big is the number, is it significant? These two dimensions are still a question mark. The author's point of view is that technology is a secondary factor for the internationalization of the renminbi.
Judging the international status of a country's currency can be assessed from its dimensions of trading, settlement, reserve, and pricing. In the past 10 years, the internationalization of the RMB has been a topic that has been widely discussed. The process of internationalization of the renminbi has progressed in an orderly manner and has achieved many achievements. For example, on December 1, 2015, the IMF announced that it will add RMB to SDR, and its weight is second only to the US dollar and the euro, exceeding the yen and the pound. But so far, the international level of the renminbi is still low.
The road to digitization is the right choice
According to the latest data, the US dollar accounted for 41% of global cross-border payments (SWIFT), accounting for 43% of global foreign exchange transactions (BIS), accounting for 62% of global reserve assets ( IMF). On the whole, after the financial crisis, the international status of the US dollar has not risen and risen. Although the international status of the RMB has strengthened, it is still at a low level that does not match China's comprehensive economic strength. This shows that even the financial crisis has not shaken the hegemony of the dollar.
At the end of the 19th century, the total industrial output value of the United States exceeded that of the United Kingdom, but the dollar remained weak. World War I and World War II hit Europe, and the United States was the only winner of the two world wars. After World War I, the dollar quickly replaced the pound and became the most important international currency.
From the perspective of history, the reason why the US dollar can replace the pound as the most important international currency in a relatively short period of time is that the United Kingdom made a big mistake in the choice of the monetary system, causing the pound to lose its "anchor" attribute. The Bretton Woods system established after the Second World War strengthened the authority of the US dollar and finally established the dollar hegemony. In 1971, Nixon closed the gold window. In 1973, the Bretton Woods system was completely disintegrated, and the dollar hegemony was strengthened again. The same is true after the 2008 financial crisis. It can be seen that the currency has a strong network externality, and the winner is all-in-one. The advantage of the position is very obvious. This is an exclusive power.
The experience of the internationalization of the US dollar shows that whether a country's currency can become an important international currency is not what it does right, but what others have done wrong. The author believes that in the ranking of the important issues of the internationalization of the renminbi, the most important thing is that the United States and Europe have done something wrong, and what is centered is what China has done wrong. China must make fewer mistakes and at the same time try to do the right thing.
The first manifestation of less mistakes is the issue of the RMB exchange rate. A basic principle is that the exchange rate is a tool, not a policy goal. The reform of the RMB exchange rate system is one of the tasks of reform.
The second manifestation of less mistakes is to open the capital account cautiously in accordance with the order of marketization. In the process of opening the capital account (or before), the risk isolation and buffer mechanism will be gradually established, and the capital flows (inflows and outflows) of different natures will be targeted, steadily advanced, and structured. Of course, the regulation policy should also be dominated by marketization. An optional measure is the Tobin tax, which minimizes the amount of measures and administrative interventions, because empirical experience shows that market-oriented adjustment measures cause less distortion.
The so-called correct thing, the author believes that due to the rigidity and drawbacks of the current monetary system, taking the road of digitization is undoubtedly a correct choice. Throughout the history of currency evolution, from the evolution of commodity currency to credit currency, the value attribute of money itself is constantly compromised to the convenience of trading. However, the currency that was born with the mission of lowering transaction costs has become one of the sources of increased transaction costs. This is not only reflected in international economic and financial trading activities, but also in financial crisis, security and confidentiality. The post-Bretton Woods system, the “US-dollar” system, has also exacerbated the structural imbalances in the global economy and finance while facilitating transactions. So far, the "Triffin Puzzle" has not been resolved. If the People's Bank of China takes the lead in issuing digital currency (DC/EP), it may be a way to promote the internationalization of the RMB, because it will improve the convenience of the transaction. Of course, we should also realize that the technical elements are not the main factor that the renminbi can become an international currency.
The author believes that the central bank's issuance of digital currency is more focused on domestic factors, because this is the general trend, and digital currency does have many advantages. The internationalization of the renminbi is more of a matter of course.