Internationalization of the Chinese renminbi (RMB) has stimulated a flood of commentary and analysis, much of it in the contemporary post-war context of a globalized world of cross-border movements of trade, capital, technology and people. In that context, the Chinese government is undertaking a series of reforms that allow the RMB to be used as a medium of exchange in foreign transactions, beginning with trade. Internationalization of a currency has both benefits and risks, so the process is gradual. Many of the benefits accrue to individuals using the currency as a medium of exchange, not least the reduction of transactions costs in cross-border trade and investment. Many of the risks accrue to public institutions, particularly to central banks that issue the currency and conduct monetary policy to stabilize short-term economic growth. Indeed both Germany and Japan have discouraged internationalization, assessing the risks of volatility in international capital markets as too costly. The Chinese authorities, however, are actively encouraging gradual RMB internationalization as a medium of exchange in trade but restricting the capital account convertibility.
Niv Horesh is associate professor of China studies at the University of West Sydney. Using a wide range of Chinese and Western sources he makes a readable and well-researched contribution to this literature that will interest historians of China and finance as well as economists interested in the history of metals as monetary anchors. This book has two parts. First, Horesh situates important periods and developments in Chinese monetary history in a global comparative context and, second, he focuses on money and its progression in China and other economies from metal coinage to paper bills to the present-day anchor of price stability targets adopted by central banks. He is quite explicit that the volume is neither a comprehensive history of money nor a new theory.
His analysis is motivated by his own previous work on Chinese finance and by the significance of modern-day currencies shedding their “metallic anchor” to gold in the 1971–73 period when the post-war Bretton Woods system of fixed exchange rates collapsed following speculative runs on the US dollar whose value had been expressed in gold at the policy-determined price of $35 an ounce. The established system of fixed parities between major foreign currencies and the US dollar was also abandoned at that time and after many months of market speculation and inter-governmental negotiations exchange rates were allowed to float.
Given his historical perspective, Horesh poses at the outset the question of whether current-day RMB internationalization confirms “…the nation state as the ultimate arbiter of money” or whether the risks of internationalization will return China to metal as the store of value. He argues that in the pre-modern world the quantity of money was determined by mining and metallurgy. The role of the state came later. Paper came still later (although China was six centuries ahead of Europe) and with it institutions that regulated its value – but paper money also permitted rulers in both geographies to satisfy their needs for revenue through inflationary practices. Independent central banks with mandates of price stability are a recent phenomenon.
Chinese Money in Global Context is divided into two main parts. The first part expands the scholarship on money in antiquity bringing out common factors in cross-community comparisons of coin production, technology and levels of monetization. The second part turns to China, providing a detailed and fascinating analysis of the political economy of practices of colonial European- (particularly British) and Japanese-owned banks issuing their own bank notes in China.
The final substantive chapter looks ahead, posing the question “Will the renminbi go global?” Horesh's answer begins with an historical perspective on the international use of Chinese money. He also reviews the growing literature on the development of China's domestic financial institutions. Further developments, many of which he recognizes, are still required. These include the rule of law, an independent central bank mandated to maintain price stability, flexible exchange rates, transparent capital markets, modernization of the state-owned bank-dominated financial system to manage risk effectively, and deep and liquid financial markets to intermediate volatile capital flows. All are essential prerequisites to full opening of the capital account necessary for the RMB to become a reserve currency and store of value accepted by foreign investors and central banks.
Horesh returns in the concluding chapter to his question of whether today's globalization might reverse with a return to metal. Using Chinese history as a guide, he observes this is possible. But he thinks the more likely (long-term) outcome for the RMB is that it will become a (or perhaps the) global currency accepted as a store of value by foreign investors and central banks – as long as the Chinese authorities maintain price stability and avoid public indebtedness.
