Demand-Side Renminbi Internationalisation
Assessing Reactive Currency Statecraft within the
BRICS coalition
Name: Evin Fay
Student Number: 12208892 Supervisor: Julian Gruin
Second Reader: Geoffrey Underhill Word Count: 17,143
M.Sc. Political Science (Political Economy)
Abstract
The emergence of the RMB as an international currency has been a key development in the global political economy over the course of the last decade, with a significant body of academic literature addressing this subject being subsequently established. A focus on domestic Chinese constraints on RMB internationalisation has been eminent alongside discussions on whether the RMB will supplant the USD. This thesis will instead attempt to examine the propensity for the increased international use of the RMB within foreign states through their interaction with policies and infrastructures which seek to increase the capacity of their domestic economies to conduct affairs using the RMB. Based on the theory of currency statecraft, which emphasises the political nature of state-level interactions with any internationalising currency, it assesses whether the BRICS as a coalition exhibit any abnormal interactions with Beijing’s RMB internationalisation strategy. Finally, this thesis concludes that there is no coordinated BRICS policy regarding RMB internationalisation; the political relationship of the individual members is the key factor in determining the level of integration of RMB related infrastructures and policies. High levels of divergence within the BRICS in regard to their rapport with China has resulted in varying degrees of such infrastructure being implemented across different members, curtailing any coordinated efforts to enhance the RMB’s international prevalence.
Acknowledgements
Peter and Marjan, for all your support and encouragement over the years Ian Hardie, for the exceptional teaching which inspired this thesis
Table of Contents Abstract ... i Acknowledgements ... ii Table of Contents ... iii List of Figures ... iv Chapter 1: Introduction ... 1
Chapter 2: Review of the literature pertinent to International Currencies, RMB internationalisation and the BRICS coalition. ... 5
International Currencies: Characterisation and features ... 5
Conflict in the International Currency arena: the USD and the RMB ... 8
Supply-side approach to RMB internationalisation ... 10
Demand-side approach to RMB internationalisation ... 12
Demand-side internationalisation across the BRICS coalition ... 15
Chapter 3: A Theoretical Framework of RMB proliferation within the BRICS ... 20
The implications of the RMB as a negotiated currency ... 20
A broader approach to demand-side RMB internationalisation ... 24
RMB internationalisation amongst the BRIS: a theoretical approach ... 26
Methodology and Hypotheses ... 28
Chapter 4: Analysis of RMB internationalisation across the BRIS members ... 30
Demand-side RMBI within Brazil: The moderate case ... 30
Demand-side RMBI within Russia: The anti-US axis ... 32
Demand Side-RMBI within India: The non-participant ... 34
Demand-side RMBI within South Africa: The ambivalent propagator ... 37
Demand-Side RMBI across the BRIS: Competing interests, motivations and integration ... 38
Chapter 5: Conclusion ... 40
Works Cited ... 43
List of Figures
Figure 2.1: Functions and Uses of International Currencies ... 6
Chapter 1: Introduction
“China has made important contribution[s] to the world economy in terms of total economic output and trade, and the RMB has played a role in the world[s] economic development. But making the RMB an international currency will be a fairly long process.” (Washington Post, 2011)
These words from former Chinese President Hu Jintao at the beginning of the decade might have resonated at the time that they were recorded; however, the concept that the Chinese national currency, the Renminbi (RMB), will only play ascend into an international role in the future is no longer truly feasible. Its inclusion in the IMF’s Special Drawing Right (DSR) basket in 2017 (IMF, 2016) acts as a testament to the increased international role of the RMB over the course of the last decade; the argument that the RMB is now an international currency is further supported by its growing inclusion of RMB across global foreign exchange reserves, with the RMB accounting for 1.8% of total global reserves at the end of 2018 (IMF, 2019a). The entry of the RMB into this function of an international currency is highly relevant considering that entry into such a role has often been considered a criterion to determining whether or not any given currency can be considered one which has reached the milestone of internationalisation (Strange, 1971).
Though the fact that the RMB has ascended to the position of an international currency has been widely accepted, its unique promotion into this role merits significant analysis considering the unprecedented nature of how Beijing has opted to increase the scope for use of its currency within the global economy. The controlled nature of this internationalisation has severely restricted the international use of the RMB, with a lack of political will to open Chinese capital accounts leading to illiquid domestic markets and underdeveloped financial institutions which have left actors unwilling to increase the scope of their RMB usage. Though liberalisations within China in regard to the use of RMB will almost certainly need to be implemented in order to foster a level of internationalisation which might allow it to challenge the currency monetary dominance of the US Dollar (USD), it appears to be China’s policy to maintain control over the RMB by restricting access to their domestic financial markets in order to prevent currency speculation and capital outflows which may damage growth; tentative steps toward liberalisation are best explained by Beijing’s attempts to modernise the
domestic Chinese economy rather than foster increase RMB internationalisation. The studies of domestic Chinese constraints on RMB internationalisation fall under the umbrella of ‘supply-side’ RMB analyses; though internal Chinese financial affairs are likely to play a significant role in the long run for RMB internationalisation, such hypothetical investigations fail to tackle to nuanced manner in which China has opted to increase the RMB’s use globally in the short run.
Departing from the perspective that ‘supply-side’ RMB investigations fail to address the restrained policy-led approach which Beijing has adopted in order to nurture the RMB’s position internationally in the short-run, then the ‘demand-side’ perspective rises in priority. This approach focuses on the manner in which foreign actors and states have opted to interact with nascent RMB internationalisation, and how through the implementation of RMB related policies and infrastructures will be key to determining the pace at which such internationalisation will take place. Considering that China is avoiding a market-led berth of the RMB based on the attractiveness of its domestic economy in regard to its size, then how other states interact with RMB policy tools and infrastructures becomes crucial to supporting the RMB in its bourgeoning state of internationalisation.
This subsequent thesis will attempt to analyse the current state demand-side RMB internationalisation across a limited political cleavage, this being that of the BRICS. In the current nascent condition of the RMB’s entry into the international monetary sphere, how other states react to RMB related policy tools and infrastructures is key. Nevertheless, it is not solely economic considerations which factor into decisions made by foreign states apropos the introduction of infrastructures which might promote a greater depth on international RMB markets. Currency statecraft, which is any state’s intentional and purposive management of their own currency instrument (Cohen, 2018) and its reactive counterpart, which is a foreign state’s strategic reaction to an international currency issued by a foreign state (Chey, 2018) are features of currency internationalisation which introduce the concept that interactions between the issuing state and foreign states in regard to an international currency are subject to political considerations and relationships. The political nature of currency internationalisation is grounded in the power which it bestows upon the issuing state in the form of the benefits which it may accrue through issuing such a currency in the form of seigniorage and the ability to finance balance of payment (BoP) deficits (Chey, 2014); additionally, it bestows political
leverage in the form of autonomy for the issuing state granted by the ability do deflect BoP burdens (Cohen, 2006).
If the political benefits of currency internationalisation for the issuing state are posited next to the concept of reactive currency statecraft, then it can be understood that participation by follower states in a nascent internationalisation through the introduction of infrastructures and policies which increase the international depth of the issued IC incorporates a distinctly political dimension. The political relationships between China and follower states, these either individually or as a bloc, are likely to influence the level of RMB infrastructure establishment; it is this form of diplomatic mediation which reactive currency statecraft addresses.
The role of the BRICS in RMB internationalisation was chosen as a relevant case due to the unique nature of the coalition; each individual BRICS member currency shows high levels of co-movement alongside the value of the RMB (Tovar and Nor, 2018), indicating potential support for an increased use of the RMB across the functions which define an international currency. In addition to such support, and despite their political differences, the BRICS have been effective in reaching consensus regarding financial and economic affairs which is reflected in the successful founding of the New Development Bank and the Contingency Reserve Arrangement. These factors in conjunction provide a compelling case to investigate whether or not the BRICS as a coalition exhibit abnormal levels of integration of RMB related infrastructures.
By looking at the extent to which the individual BRICS members have introduced RMB infrastructures and policies in the form of a) a bilateral RMB-local currency swap line; (b) an RMB clearing bank; and (c) RQFII access, the level of participation of these states in demand-side RMB internationalisation will be determined; their level of integration will be posited against the strength of their political alliance with China. Though there is potential for a coordinated BRICS policy in regard to fostering RMB internationalisation, it was found that individual policy goals alongside the relationship of the individual members with Beijing prevented any such coordination across the BRICS. India has implemented none of the above RMB related infrastructure, with this likely explained by their tumultuous political relationship with China; Brazil has established a bilateral currency swap which is beneficial for them due to their strong trade dependency on China but has integrated no further RMB related infrastructure, with this likely explained by the lack of broader political coordination and
convergence between these two states. Both Russia and South Africa both have established currency swaps and a designated RMB clearing bank; Russia’s political motives for establishing an ability to improve their capacity to perform transactions using the RMB is motivated by its desire to distance itself from the US, and therefore the USD. South Africa’s higher-than-average level of integration is due to a lack of competition with China, and the lack of geographical proximity; they have benefitted from Chinese investment and have made concessions in line with Chinese foreign policy, indicating a stronger political relationship which subsequently influenced their implementation of RMB related infrastructures.
There appears to be no policy coordination across the BRICS in regard to demand-side RMB internationalisation; individual BRICS members’ engagement with RMB related infrastructures and policies are primarily determined by their bilateral political relationship with China and positive reactive currency statecraft is influenced more by the political relationship which these states have with Beijing rather than vice versa, in that BRICS do not use such statecraft in order to improve their relationship with the burgeoning hegemon.
Chapter 2: Review of the literature pertinent to International Currencies,
RMB internationalisation and the BRICS coalition.
The first port-of-call to analyse the potential for RMB internationalisation being propagated by the BRICS as a coalition is an evaluation of the current academic state of the art regarding currency internationalisation within the broader academic debate, how research in RMB internationalisation has developed and the current state of affairs of the BRICS as a coalition.
International Currencies: Characterisation and features
The rise of the RMB within the international monetary realm since the onset of the global financial crisis in 2008 has arguably been the definitive shift within the international monetary system over the last decade. Though the first tentative steps in the direction of Renminbi internationalisation (RMBI) were taken in the mid-2000s (Prasad, 2017, p. 103), the global financial crisis heralded the implementation of the first significant liberalisations and policy reforms by Beijing which sought to increase the international use of the RMB. The active promotion of RMB use within trade settlements was initiated with the launch of a pilot project in 2009 (Shasha, 2009) and this project and others which followed suit resulted in such settlements reaching a value of $1.1 Trillion by 2015 (Prasad, 2017). Simultaneously the RMB’s role as a payment currency for the clearance of cross-border financial transactions proliferated to the extent that for interbank transactions in 2015 it fell behind only the USD, the Euros, the Yen and the Sterling, having increased in volume from 0.3% in 2008 of total interbank trades to a peak of 2.8% in 2015 (Prasad, 2017). Additionally, the inclusion of the RMB within the IMF’s SDR basket in 2015 (IMF, 2016) is further testament to the rise of the RMB as an international currency (IC). This inclusion is reflective of policies implemented by Beijing in order to foster an increased share of the RMB within global foreign reserves and resulted in its share increasing to 1.2% in 2017, less than 10 years after the first currency swaps which initiated the RMB’s entrance into this function were established (Chosunilbo, 2008). The increased use of RMB across these different international roles has been a significant change within the international currency realm since the global financial crisis of 2008. However, despite the increase of its use across a number of economic metrics which might be used to determine whether or not any given currency can be considered to be international, the broader definition and characteristics of any such currency must also be specified in order to
conduct any analysis of the RMB’s position within the international monetary system. The standard characterisation of the various role of an international currency is based on the conceptual framework as designed by Cohen (1971) who sets out the three central functions of any IC with distinctions between public and private use, totalling up to six individual capacities.
Source: Cohen, 1971
Whether a currency performs any of these functions within the international monetary system, and the extent to which it does so relative to other currencies is fundamental to determining the degree of its internationalisation. There are however a number of currencies which fulfil at least some of these roles, and it is the nuances between these different currencies which this functional economic characterisation fails to address. Though Cohen’s framework provides a stable structure to determine whether or not any currency can be considered ‘internationalised’ and the economic characteristics which endow the currency in question with this status, it fails to address a host of queries related to IC selection, emergence, and decline. How divergent currencies should be categorised, how the political facet of IC selection and proliferation propagates, and the causal mechanisms behind the fluctuations in the respective currency’s international position are dynamics which Cohen’s 6 functions fail to tackle.
In regard to more specifically characterising different international currencies and the implications of their current position within the broader IC network, the seminal work by Strange (1971) provides a malleable framework based around her conception of the “political theory of international currencies” (Ibid., p. 305). Beyond a framework of IC’s based on their economic functions, Strange attempts to create a model which explains the origin, divergence
Figure 2.1: Functions and Uses of International Currencies
Function Private Use Public (Government) Use
Medium of Exchange Settling of international transactions
Fiscal policy: to intervene in foreign exchange markets
Store of Value Held as an asset for
investment purposes
Held as a foreign exchange reserve
Unit of Account Quotation currency for
invoicing trade and investment transactions
Quotation currency for transactions; Price level setting by pegging
and policy influence which any IC might have for the issuing state and those actors which use it across the economic functions outlined by Cohen. In her attempt to answer the queries of origin, divergence and policy influence of international currencies Strange sets out the notion that any national currency can come to be used internationally through 3 distinct mechanisms, two of which are chiefly economic and one which is dependent on political factors. Top currencies are those which rely on the economic primacy of their issuing state in regard to capital accumulation and trade dominance; passive currencies are those which are internationally attractive due to the specific virtues of the currency itself regardless of the economic and political relevance of the issuing state; and master currencies are those which are used within a limited set of states or territories due to the issuing state’s position of power over those states.
However, the RMB fails to exclusively conform to any of these above characterisations. The size of the Chinese economy in regard to its share in global GDP which currently stands at 19.24% of the total at PPP (IMF, 2019b), and the vast volume of its trade sector in which it is the current largest global exporter and second largest global importer in terms of value of goods (OEC, 2018) means that in the future the Chinese issued currency seems likely to ascend to a position of top currency. Nevertheless, the current unattractiveness of the RMB to private actors and the conservative policies of Beijing in regard to domestic financial liberalisation have meant that the despite the size and weight of the Chinese economy within the broader global system the RMB is yet some distance from supplanting the USD from this position. The nature of Strange’s ‘top currency’ is however dependent on an outdated typology of international currencies; at the time that she synthesised her international currency framework, the concept of an economically dominant state being proactive in curtailing the internationalisation of its currency had not yet been encountered. The fact that China has opted to assume such a position is the reason that it cannot fall under the auspices of being a top currency vis-a-vis Strange’s definition. Though the economic backing for the RMB as a top currency is present, it currently fails to meet the basic required expectations of a passive currency in that it does not yet maintain the innate properties required to make it attractive in and of itself. A top currency backed by an issuing state which is averse to a market-led internationalisation is a category of IC which is left untended by Strange. The fact that the RMB fails to strictly meet any of the sets of criteria of conventional international currencies indicates the abnormal nature of its features as an IC as well as the unprecedented
internationalisation path which Beijing has opted to implement. These two features act in tandem to ensure that orthodox IC frameworks fail to correctly characterise its rise.
In fact, it is a subcategory of the 3 main IC’s which Strange defines to which the RMB can best be ascribed. What Strange (1971) calls a ‘negotiated currency’ is one which has slipped from its former status as either a top or master currency, but in order to prevent further decline of its currency, the issuing state opts to offer economic or political inducements in order to halt its international decay. Though the RMB is not in decline but is instead rising in its international use, this has been driven by state policies and interactions with foreign states who seek to benefit from embracing the assumed future path of the RMB (Chey, 2015). The most appropriate characterisation of the RMB is if the original classification of the negotiated currency is expanded to include those currencies which are on the rise but are supported for political reasons that do not relate to the inherent economic attractiveness of the currency (Helleiner, 2008). Amongst potential categorisations this position is most apt, considering that Beijing has opted for a distinct policy led berth in regard to RMB internationalisation. Considering that the rise and decline of any currency within the international realm can be fostered through either market preference of private actors, geopolitical stature of the issuing state, or the existence of currency blocs based on the currency in question (Helleiner and Kirshner, 2009) the ‘geopolitical’ nature of the rise of any negotiated currency ensures that such a categorisation best encapsulates the RMB and its features as an IC.
Conflict in the International Currency arena: the USD and the RMB
The modern academic discourse regarding currency internationalisation in the 21st century has
traditionally been conducted within the framework of the supposed decline of the US Dollar as the international key currency (Eichengreen, 2011). From the outset of its use the Euro was perceived as a potential challenger to hegemony of the USD within the international monetary realm (Chinn and Frankel, 2008), but following the 2008 financial crisis and the subsequent Eurozone crisis of the early 2010’s this debate quickly drew to its conclusion with the structural flaws which affected and continue to affect the Euro exposed. However, as mentioned prior, the 2008 financial crisis played a further role in regard to the future of international currencies, as it heralded the implementation by Beijing and the People’s Bank of China (PBOC) of a series of policies geared towards increasing the international use of the Renminbi. Though the RMB has made exponential strides in regard to increasing its international use, the consensus
regarding the USD’s position is that their ‘exorbitant privilege’ (Eichengreen, 2011) has not yet been significantly challenged. Within the international monetary sphere, despite the potential for a slow decline the USD’s current position, it is still dominant across Cohen’s six economic metrics which can be employed to make judgments regarding the hierarchy of international currencies. The USD still maintains its position as the global vehicle currency, it being on one side of 88% of all FOREX trades in April 2016 (BIS, 2016) and almost 40% of global debt is still issued in USD (Amadeo, 2019). Alongside the 61.7% share in total global reserves (IMF, 2018) which are held in USD and the fact that 33% of total global GDP is generated by states which peg their own national currencies to the USD highlight the enduring strength of the USD as an international currency despite the rhetoric that its decline is imminent (Subramanian and Kessler, 2013). Though the rise of the RMB is not a phenomenon which should be discarded and perceived as irrelevant, the USD still currently dominates internationally across all the functions of any given international currency in relation to the Chinese issued currency. Additionally, if the nature of how a top currency shift may manifest can be inferred from previous shifts in the international currency arena then any such transition is best understood as being an enduring process subject to gradual change over significant periods of time (Eichengreen and Flandreau, 2009). In regard to the decline of the previous top currency, which before the USD was the Sterling, not only has it been stressed that the two-pronged process of the decline of the Sterling at the same time as the simultaneous rise of the USD was one which occurred gradually, but the time period within which this transition took place has also been defined as hosting a ‘multi-currency international system’ (De Cecco, 2009, p. 116). Though the rise of the RMB is taking place within a different economic and historical context to the rise of the USD, the key feature of incumbent IC transitions which is likely to also affect the current shift and which can be identified within the swing between the Sterling and the USD is that of dominant currency inertia. Circular causation in global financial networks, which alludes to the concept that actors benefit from using a currency which is pervasive within the system (Krugman, 1984) is the root cause of such inertia. Those currencies which exhibit high levels of use across the economic functions of an IC are subject to such pressures as by virtue of their prevalence other actors will be prompted to adopt it and subsequently propagate its use. The previous shift in dominant IC occurred within a context of the sluggish diminishment of the Sterling even though the UK’s position within the global economy had already greatly contracted (Bergsten and Williamson, 2005). Though the synonymous rise of the USD did not occur within the same limited internationalisation frame which has been imposed on the RMB through policies implemented by Beijing, it is likely that
if there is to be a decline in the international use of the USD it will occur gradually due to its current irrefutable importance to the global economy. As this decline is likely to be subject to dominant currency inertia the notion of a swift decline of the importance of the USD generating a vacuum within which the RMB can rapidly rise in relevance seems unlikely. Such an observation places a limit on academic investigations into the RMB’s imminent rise and instead emphasises the importance of analysing the slighter steps which are being taken by Beijing in order to make the RMB a feasible option as an international currency.
Supply-side approach to RMB internationalisation
Thought the rise of the RMB being driven by a declining USD seems to be a narrative which might only bear fruit in the future, there is a further field of literature which attempts to discern the RMB’s current position and future trajectory outside of the supposed decline of the USD. Within the investigations to discern the potential for the increased international use of the RMB, there is a significant body of literature, led by the Chinn and Frankel (2008) method which rely on economic data to project the future trajectory of the RMB. Within this quantitative approach, Lee (2014) predicts that the share of RMB within international reserves will rise by between 3 and 12 percent by 2035, and Subramanian (2011) forecasts that the RMB will be in a position to challenge the dollar by the 2020s. Thought the validity of these predictions have been questioned due to either their reliance on politicised data (Tovar and Nor, 2018) or the narrow nature of their conclusions as they solely address the RMB’s increased use across a limited range of Cohen’s six criteria for IC’s they still serve some purpose. These quantitative forays into the prospects of an internationalised RMB based largely on the economic conditions surrounding China and its future within the global political economy are nonetheless relevant in regard to illustrating how the sheer economic weight of China in regard to its share in global output and trade might induce a shift in international monetary affairs.A further group of research which grounds itself within the quantitative realm is that which addresses the ‘instrumental’ approach to currency internationalisation as characterised by Helleiner and Kirshner (2009), where this is the propensity for the support of the rise of an international currency based on the pegging of foreign currencies to it, the extent of which can be measured by the level of co-movement between foreign currencies and the IC in question. The focus on co-movements between the RMB and foreign currencies, which if present is indicative of exchange rate pegging has been used to highlight the regional importance of the RMB sets forth that within South-East Asia an RMB bloc has already been
established with notably Subramanian and Kessler (2012) supporting this perspective. This was previously and subsequently corroborated by Fratzcher and Mehl (2011) and Ito (2017). The fact that the RMB is the most significant currency within the issuing state’s region is significant as without such a foothold any claim to internationalisation seems unfounded, but it can not simply be interpreted as an indicator of an internationalisation which will continue to expand in scope. Such regional eminence is also present in regard to the Euro and countries on the EU’s periphery (Slavov, 2017) but it has not led to further internationalisation of the Euro. The literature investigating the extent to which foreign currencies have pegged to the RMB instead serve the purpose of emphasising how internationalisation is a gradual process, and that regional IC preference is a facet which must be considered when looking at the rise of an international currency.
Despite the salience of quantitative analyses into the potential for a broadly used and internationalised RMB, the most significant and notable investigations into the conditions necessary for RMB internationalisation (RMBI) instead opt to use analyses grounded in qualitative methods in order to determine and project the future of the Chinese currency within the international monetary realm. A large body of literature focuses specifically on internal Chinese affairs and conditions which might need to be met in order to further promote RMBI, and the limitations of the current state of domestic financial affairs and governance which might dissuade increased RMBI. Such an approach to determining the propensity for RMBI falls under the guise of ‘supply-side internationalisation’, where domestic Chinese conditions are the relevant variables which may curtail or increase the use of the RMB as an IC. From this perspective, there are a series of both economic and political facets related to domestic Chinese affairs which are central to determining the level of international use which may be exhibited by the RMB. Transactional networks, which relate to the scale of the issuing state’s economy and share within global economic output can be considered to be a driving force behind RMB internationalisation; predictions that the Chinese economy will account for 28% of global GDP by 2030 (Johansson et al., 2012) alongside the position of China as the worlds largest exporter and 2nd largest importer (OEC, 2018) are vital considerations which are likely to increase the use of the RMB internationally as the volume of transactions with China increase. However, the RMB faces concerns in regard to confidence in Beijing’s governance and the liquidity of RMB markets. The opaque nature of Chinese governance and lack of accountability of the CCP due to China not being a democracy act as a barricade to actors being confident in maintaining significant RMB portfolios; the lack of political accountability as a factor contributing to
restraining RMBI is made more relevant by the fact that even prior to the modern era the issuing state of the world’s key currency has been either a democracy or a federal state (Troutman, 2010). In addition, the political structure of China acting to the detriment of RMBI, the lack of capital account convertibility greatly limits the international potential of the RMB. Restrictions on the ability to move assets in and out of the Chinese market has a two-fold implication, in the regard that it prevents investors from being able to liquidate and invest efficiently but also ensures that these markets will be restricted in size and liquidity (Prasad, 2017). Though tentative steps have been made towards liberalisation of domestic Chinese financial markets, these have largely been driven by Beijing’s attempts to modernise its domestic economy, with PBC governor Zhou even explicitly stating that in the near future China will not have free convertibility (Xiaotian, 2012). These domestic concerns are those which are addressed by ‘supply-side’ investigations into the potential for increased RMBI, and from this perspective, it is these factors which will determine the extent to which this phenomenon will propagate in the near future. The managed nature of RMBI where China seemingly has no intentions to open their capital accounts, plus the illiquid nature of their internal markets and underdeveloped nature of domestic financial institutions are all barriers to the RMB’s ascendance to the role of globally dominant currency.
Demand-side approach to RMB internationalisation
In fact, the majority of the academic investigations into RMBI in its various guises have been focused on the aforementioned ‘supply-side’ RMBI, with domestic Chinese conditions and constraints considered as the relevant metric for understanding and estimating the propensity for the increased international use of the RMB due to the importance the depth of the issuing states financial markets for significant internationalisation (Frankel, 2012) and the reputation of its political structure. In this sub-field of the study of currency internationalisation foreign states play a minimal role, and the actions and preferences of foreign private actors are only understood from their interactions with domestic Chinese markets. Though there are significant roadblocks to increased RMBI which will require domestic reform coming from within China in order to be overcome, the singular focus on the domestic constraints on RMBI fails to tackle and account for the significance of the increased use of RMB in foreign economies, and how foreign states are responding to the policy tools and instruments which have been made available to them by Beijing in order to foster increased RMB use within their economies. Considering that China is actively attempting to avoid RMBI being dictated by market
preferences, how other states interact with the tools made available to them to increase their domestic RMB use becomes a particularly important aspect and feature of the nascent RMBI (Chey, Kim and Lee, 2019). The academic forays into the ‘demand-side’ internationalisation seek to address this vacuum specifically, where ‘demand-side’ internationalisation refers to how foreign states and actors may increase the international scope of any currency by increasing the level of its use within their own domestic markets, and the ability of these same markets to conduct affairs using the IC in question (Chey, 2015).
The reality of RMBI still being in its initial stages lends further importance to the study of policy determined demand-side RMBI. At the outset of any currency becoming one of international significance it will lack the transactional networks necessary to make it a viable alternative to the incumbent dominant currency (Chey, Kim and Lee, 2016); the lack of such networks will prevent the newly internationalising currency from benefitting from circular causation in the global economy (Krugman, 1984). Furthermore, the nature of currency shifts being subject to incumbency inertia and tending to occur gradually lends further weight to the implications of how foreign states interact with nascent RMBI. It is those foreign actors which move first to utilise a newly internationalising currency who bear the costs of the lack of transactional networks and financial depth in the newly internationalising currency but will subsequently propagate its internationalisation (Chey, Kim and Lee, 2016). It is the combination of the distinct policy led berth of the RMB and the first mover significance which elevate the relevance of demand-side RMBI studies, as the pathways available to Renminbi internationalisation have been limited to being dependent on key policy infrastructures designed by Beijing and the PBOC in order to enhance RMB use within non-domestic markets. Bilateral RMB-Local currency swap agreements, access to the Qualified Investor schemes and RMB clearing banks are all essential financial infrastructures which have been proposed by Beijing and implemented within foreign states in order to increase RMBI, but in order to secure their enactment all require the cooperation of foreign governments (Chey Kim and Lee, 2019). Not only do such initiatives require the explicit cooperation of foreign states, but such policies have a profound effect on the use of the RMB by private financial actors within the cooperating states, with such causation being visible within the growth of London as a leading offshore RMB financial centre being precipitated by policies seeking to achieve this goal being pursued by Westminster (Hall, 2017a, 2017b).
If the cooperation of foreign states is deemed a significant factor in the early stages of RMB internationalisation, then the manner in how these states decide to act in regard to RMBI can be perceived as a potential foreign policy tool in their relations with China. It is this management of foreign relations with a state issuing an international currency which Chey (2018) calls ‘reactive currency statecraft’. This concept is one which expands on Cohen’s theory of ‘currency statecraft” which alludes to the “government’s management of its currency instrument” (Cohen, 2018). This original definition is an abstract concept which is solely focused on how any issuing state of an international currency intentionally and purposively manages its currency; as such it is the wilful and deliberate management by the issuing state of its currency in order to achieve political goals (Chey, 2018). Within the context of RMBI, such statecraft would be exhibited by Beijing if it attempted to use its currency as a vehicle for managing diplomatic relations with foreign states. The concept of ‘reactive currency statecraft’ contains the same characteristics as that of Cohen’s original notion but instead focuses on how any state might act in regard to a currency issued by a foreign state (Ibid.). Hence such statecraft consists of intentional action (or non-action) pursued by states with clear policy goals which involves the management of a foreign IC (Ibid.). This thesis will adopt the definition as set out by Chey in order to provide a succinct classification of how such statecraft is best characterised: “Reactive Currency Statecraft is a state’s strategic reaction to an international currency issued by a foreign state, in order to achieve its own policy goals” (Chey, 2018, p. 5)
Within this context, any state’s strategic reaction can be understood as positive or negative engagement with the internationalisation of a foreign currency, or deliberate non-action (Ibid.). From the above definition, the most important corollary is the notion that any state can use its reactive currency statecraft as a means to mediate its diplomatic relationship with the issuing state. Essentially, in the context of the RMB this would manifest as states either opting (or not) into establishing currency swaps with China, establishing RMB clearing banks, participating in the Qualified Foreign Institutional Investor schemes and being open to introducing the instruments and financial infrastructures required to increase the RMB’s use within their domestic markets. Another manner in which such reactive currency statecraft could manifest is in the pegging of a foreign state’s currency to the IC in question. It is at this juncture that the notion the there is a support group for RMBI within the broader BRICS coalition becomes relevant, as all the respective currencies of these state show high levels of co-movement with the RMB (Tovar and Nor, 2018).
Demand-side internationalisation across the BRICS coalition
The notion that the BRIS’ (BRICS without China) respective national currencies each individually exhibit high levels of co-movement with the RMB compared to other international reserve currencies (Tovar and Nor, 2018) is an outcome which exposes potential new avenues for the research into demand-side RMB internationalisation. Through the virtue of their co-movement with the RMB, the BRIS currencies thereby support a de facto Renminbi ‘bloc’ which has established itself as an apparent feature of the modern global economy. Such movement is likely explained by the importance of Chinese trade to each of the individual BRIS members, with China being the largest single trading partner for each of these individual states (Liu, 2016). However, it does raise subsequent queries regarding whether or not the BRIS can be considered a political alliance which might either collectively or individually act in other ways which contribute to the nascent internationalisation of the RMB. Essentially, do the BRIS exhibit behaviour and policy choices which help deepen the international use of the RMB? If we incorporate the set-out definition of reactive currency statecraft in regard to RMBI as being a purposive means at the disposal of the governments of the BRIS members to manage their diplomatic relationship with China, then a further political facet of any RMB internationalisation efforts also becomes apparent. If it is maintained that the broader policy towards a foreign state’s international currency can be understood as an approach through which to manage the relationship with the issuing state as set forth by the concept of reactive currency statecraft, then how the BRIS interact with RMB internationalisation efforts reveals itself a relevant indicator of their relationship with China, with the inverse also holding true. It must, however, be posited that the notion of the BRIS acting as a coherent bloc which acts in a unique fashion to increase the international scope of the RMB is grounded within the perspective of the BRICS as a relevant political collective whose members actively co-operate to further collective goals; the political alliance maintained between these 5 major developing economies is in fact far more ambiguous. The loose and unstructured nature of the BRICS as a political coalition has been a prevalent theme across its existence from the outset of its conception as a formal political alliance. This unstructured nature can be traced back to the creation of the BRICS as a political alliance, with the acronym first being coined in 2001 by O’Neill, a researcher for Goldman Sachs (Thirlwell, 2014). At the time it was forecast that these large developing economies would become the driving force behind global capitalism, but they were not considered to be a set of states who might share political goals due to their
divergence in political systems, economic goals and relationships with incumbent hegemons (Oropeza Garcia, 2014). The original characterisation of the BRICS as a set of economically similar developing economies did, however, morph into a formal political coalition, with representatives of these states initiating backroom meetings at the UN General Assembly in the mid 2000s. These meetings ultimately resulted in dignitaries from China, Russia, India and Brazil participating in the inaugural BRIC summit Yekaterinburg in 2009 (Thirlwell, 2014). South Africa was accepted as a member the following year, leading to the first 5-member BRICS summit in 2010. Though annual meetings have become the key nexus along which the BRICS as an organisation function alongside cooperation on the founding of a couple of chiefly financial initiatives, the origins of the group as being united principally due to their economic prospects as developing states still resonates in the current multilateral relationship which these states share. Similarly, to China’s RMBI efforts, the global financial crisis also had an impact on the nature of the BRICS as it highlighted the need for reform within the current global economy alongside the demand for protective policies and measures to prevent future financial crises from adversely affecting BRICS members as they deepened their integration with the global economy (Thirlwell, 2014).
Though discussions addressing the concept of the BRICS have a tendency to invoke a sense of unity amongst its members, this group of states is, in fact, best characterised by their divergence as opposed to their similarities. The main obstacle to their coherent cooperation outside of the current scope of development and economic contingency collaboration is the heterogeneous nature of the five members (Liu, 2016). Across metrics such as population, GDP per capita and average GDP growth rate the BRICS exhibit large disparities, limiting their ability to build consensus and strengthen their cohesive force of cooperation (Ibid.). Alongside these more fundamental differences, the lack of geographical proximity (bar Russia-China and China-India), the difference in position across global production chains and the great disparity across the members’ geopolitical interests and political structures are further inherent structural problems which act to constrain the BRICS ability to deepen their strategic cooperation (Ibid.). In fact, it is the political differences which generate the most friction between the individual members of the BRICS and thereby limits cooperation across the coalition to solely encompassing economic and financial branches. Principally the political and ideological cleavage across its members are of salience, with there being 2 broad camps which share different perspectives on the goals of cooperation. Brazil, South Africa and India are the constituent members of one of these camps, and before the formal coagulation of the BRICS
were already members the IBSA dialogue group, a political alliance created with these three states as members. IBSA is based on soft balancing through value-driven discourse (Flemes, 2009) which sought to promote south-south cooperation. Though the economic and financial scope of IBSA is not on par with that of the BRICS due to in part the lack of economic complementarities across its members in regard to trade, its scope of cooperation across issues which its member states deem as internationally relevant is based on consensus building across a host of issues including health, education, social development and agriculture also includes biennial naval exercises which makes IBSA’s scope as a political alliance far broader than that of the BRICS (Liu, 2016).
Outside of the existence of a salient political alliance built on political homogeneity, the geopolitical concerns of the individual BRICS members also starkly differ, with Russia and China tending to advocate using the BRICS as a grouping which advocates the building of a multilateral world order with South-South cooperation across strategic issues to balance against the power of the USA and the West (Liu, 2016), whilst IBSA exhibit a preference to act within current international frameworks and institutions. However, it must be stressed that there is still divergence across the IBSA grouping itself regarding perspectives on global governance (Flemes, 2009). Arguably more relevant inherent structural issues which hamper BRICS cooperation are the existing geopolitical divergences amongst the BRICS themselves; specifically, between China and India. As 2 of the major powers in South-East Asia, China and India are often portrayed as strategic rivals and their military preferences align with this perspective (Frankel, 2011). India has supported the pivot of US military power into Asia and also expanded its military relationship with Japan and Australia in the West Pacific and Indian Oceans, with the apparent objective of such collaboration being to curb the rising regional power of China (Liu, 2016). Adding further tension to the relationship between these two neighbouring rivals are the legacy of border disputes, these starting in the second half of the 20th century but which continue to manifest themselves today and endure as issues which exert strain on the relationship of these BRICS members specifically. Though the Sino-Indian rivalry is but one example of the strategic differences between the BRICS as a whole, it is indicative of the divergent nature of the strategic goals of its members and highlights the extent to which the BRICS relationship needs to develop before it can be considered a ‘full-fledged mechanism of strategic collaboration on key issues of world politics and economy’ (Khomyakov et al. 2015)
There are evidently structural issues faced by the BRICS in regard to their cooperation and development as a coalition which enhances strategic cooperation between its members, partially due to a lack of a permanent secretariat through which it may manage its affairs outside of the various summits (Liu, 2016). The coalition has nonetheless succeeded in recent years in setting up two key financial institutions which indicate a potential for increasing cooperation in the future, specifically in regard to development finance and shielding from exogenous economic shocks and financial outflows. The New Development Bank (NDB) and the Contingency Reserve Arrangement (CRA) are the most concrete achievements which have been secured by the group, with the status of all five members well distributed across the respective power structures of these institutions. However, the NDB addresses one of the ‘paths of least resistance’ as development financing is an area where the BRICS can feasibly expand cooperation due to their similar perspectives on South-South economic cooperation (Abdenur, 2014). The CRA follows suit in the regard that its singular role is to act as an economic backstop for the BRICS members if their economies suddenly experience large scale capital flight due to a domestic economic slowdown or a broader global crisis, which is a key economic concern for all five states involved. Essentially BRICS cooperation is currently most salient in matters of finance and economic security, an area where consensus-building between these divergent states is not overtly affected by the structural differences between them.
The willingness within the BRICS to cooperate on matters which relate to global finance and monetary affairs adds further weight to the issue of BRICS led RMB internationalisation. The high levels of co-movement of the BRIS currencies with the RMB indicate the penchant for a similar relationship in regard to support for increasing use of the RMB, and a more internationally prevalent RMB would also increase the ease of trading for the BRIS members considering that for each of these states China is their primary trade partner (Liu, 2016). Furthermore, the main impetus for the group’s formation should also be noted, this being reform of the global governance architecture, but this goal has been hampered by the divergence across the BRICS as outlined above. However, a key facet of such reform could take shape of an organised attempt to elevate the international standing of the RMB in order to foster a tri-polar international monetary order, with the RMB alongside the Euro and the USD. Considering the success of the BRICS in fostering finance and development cooperation in the form of the NDB and the CRA in tandem with a potential political will across individual members to elevate the RMB as an international currency as a manner in which to reduce the dominance of the USD as the anchor currency for the global economy (Abdenur, 2014) the
question of the role of the BRIS within demand-side led internationalisation of the RMB becomes one of significance.
Chapter 3: A Theoretical Framework of RMB proliferation within the
BRICS
In order to assess the potential for the BRICS grouping exhibiting policy coordination in regard to demand-side RMB internationalisation, a theoretical framework is required which can drive an analysis of this given question. Starting from the perspective of the RMB as a rising negotiated currency, a broader framework for analysing the influence of follower states’ political relationship with China on RMB internationalisation will be set out, and this will subsequently inform the framework for determining how the BRIS interact with demand-side RMBI and whether they can be considered a bloc which displays a coordinated policy in regard to their interactions with nascent RMB internationalisation.
The implications of the RMB as a negotiated currency
Key to developing any feasible theoretical framework which might seek to contain and address the issue of demand-side RMB internationalisation within the BRICS is the characterisation of the RMB itself. The causal pathways and innate reasons for its increased adoption amongst not only members of the BRIS but also exterior states will be greatly influenced by the properties of the RMB and how it is perceived by other actors within the international monetary order. Beijing’s predisposition to opt for an internationalisation of the RMB which is not determined by market preferences through limiting capital convertibility and access to domestic Chinese financial markets (Eichengreen, 2013) differentiates it from other IC’s. Despite China being an eminent economic power in terms of global production and trade, Beijing’s approach omits it from adhering to Strange’s conventional characterisations of international currencies and also highlights the unprecedented nature of the RMB’s rise as an IC. The RMB is, in fact, best described as a ‘negotiated currency’ (Strange, 1971), with this being an international currency which has slipped from its former status. This results in its international position being unsustainable and leads to a scenario where the “currency’s role as IC is supported by foreign governments for reasons that do not stem from inherent economic attractiveness of the currency” (Strange, 1971, p. 306). The government of the issuing state subsequently offers economic or political inducements to prevent further decline of its issued currency’s international use, behaviour which was exhibited by Westminster in regard to the Sterling following its decline in international relevance in the 25 years after World War II (Ibid.).
Though the international position of the RMB is not in decline, the preference of Beijing to offer foreign states access to mechanisms and financial infrastructures which deepen the international liquidity of the RMB is an important feature of the broader Chinese internationalisation strategy. Foreign states’ implementation of such mechanisms and financial infrastructures within their respective domestic markets can be understood as a form of bestowing inducements to introduce these through improved access to a currency which is likely to see strong increases in international use in the future. The original characterisation of a negotiated currency posits that the issuing state maintains defensive posturing in regard to its currency as the issuing state seeks to maintain the IC’s global relevance; Helleiner (2008) expands this characterisation to include those currencies which are in the ascendency. This accounts set forth that the issuing state exhibits offensive posturing in regard to its currency, with the motive for offering inducements for its increased use being that the issuing state seeks for their currency to internationalise at a quicker rate than market forces would allow (Helleiner, 2008). However, though China is seeking a policy led RMB berth into the IC arena its motives seem poorly explained by the notion that it seeks a faster internationalisation than market forces would allow considering that it is actively avoiding a market-led internationalisation. Beijing fears the risk of capital flight and speculation on the RMB’s value if it opens its capital account and allows a free-floating RMB (Prasad, 2017) and is also wary of damaging its export sector if the RMB witnessed an appreciation in value. Conversely, Beijing’s policy regarding RMB internationalisation does actually seek to achieve RMBI faster than market forces would allow, but solely due to the fact that it has strongly curtailed the ability of global markets to increase the international prevalence of the RMB. Such a two-pronged approach ensures that control over the RMB’s internationalisation pathway remains under the control of Beijing.
The inducements and concessions that China has offered other states can be categorised as a form of pursuing ‘formal leadership’ within the international monetary order, which alludes to the attempts of the internationalising money’s issuing state to alter currency choices at the official level within foreign states (Cohen, 2004/2007). From this perspective, the RMB would be characterised as rising negotiated currency with Beijing being proactive in regard to increasing its rate of internationalisation by encouraging foreign states to introduce policies and measures which seek to increase the use of the RMB within their domestic markets. This appears to distinctly be the case for the RMB. A key example is that those policies and infrastructures which would increase the use of the RMB within any state’s domestic economy
were pursued actively by Korea once they were made available. This led to an increase in the capacity for private actors within its domestic economy to use the RMB by reducing the costs associated with using a nascent international currency over the incumbent USD (Chey, 2015) erstwhile increasing the ability of Korean actors to expand their market access to domestic Chinese markets. For a rising negotiated currency, the political choices and relationships between the issuing state and follower states will be significant in regard to how such rapports influence the propensity of foreign states to adopt and implement the policies and financial infrastructures made available to them to increase the use of the IC within their domestic markets. The motives for any follower state to switch monetary allegiance or support the increased use of an IC which is not the incumbent can be influenced by economic considerations but also by domestic, state and system level political factors: “The position of this kind of international currency (negotiated) is directly dependent on the political choices of the issuing state and following states, as well as the political relationships between them” (Helleiner, 2008, p. 366)
If the RMB is posited as a rising negotiated currency where the political relationship between the issuer state (China) and the follower states is a relevant variable in extent to whether the followers implement the infrastructures and policies required for the RMB’s increased use and thereby increase the viability for market actors to utilise the RMB in the given foreign state then any research into the causal mechanisms and influencing factors of such behaviour falls strictly under the guise of demand-side internationalisation. Instead of focusing on domestic policies within China which might increase foreign actors’ access to RMB, the onus of RMBI from such a perspective instead falls on follower states. The key variables from this perspective are the potential benefits that can be accrued within the follower states’ domestic economies through introducing the inducements offered by China and the political relationship which these states have with Beijing. Specifically, the political relationship between the respective follower state and China rises in relevance as highlighted by Helleiner’s categorisation of the determinants of the international position of a rising negotiated currency.
From this perspective, the RMB’s role as an IC is supported by foreign governments for reasons outside of its inherent economic attractiveness (Strange, 1971), which subsequently places importance on the political relationship between China and the follower state. However, not only the following state’s relationship with China is relevant in regard to how it might interact with RMBI; also pertinent from such a perspective will be its relationship with the issuing state
of the incumbent IC. Hence in addition to the follower state’s relationship with China, the follower states relationship with the US is also of relevance. This set of relationships is all the more relevant due to the hegemonic nature of both of these hegemonic states and their conflictive relationship within the global political order (Blumenthal and Swagel, 2012). The importance of the political relationship of China with potential follower states garners further consequence when the notion of reactive currency statecraft is introduced, where this is “a state’s strategic reaction to an international currency issued by a foreign state, in order to achieve its own policy goals” (Chey, 2018, p. 5). Additionally, it should be taken into account that China is likely to exhibit currency statecraft of its own in that it ought to wilfully and intentionally manage its currency in order to achieve political goals (Cohen, 2018), where RMBI can be considered a facet of such management. If demand-side RMBI is best understood as political in nature from its outset due to the pathways through which it has proceeded since its rise after the Global Financial Crisis and the ‘negotiated’ attributes of the RMB as an international currency, then the addition of the theoretical concept of currency statecraft in both its original and reactive form provides further justification for the perspective that currency internationalisation efforts at the state level are fundamentally affected by political relationships, incentives and policy goals.
Figure 2.1 highlights the basic configuration of the set of interactions that occur in regard to politically motivated demand-side RMBI as described. China can influence such demand-side RMBI by offering concessions and inducements, thereby increasing the scope of internationalisation; follower states can decide whether or not to interact with these inducements to increase or decrease RMB use within their domestic economies and thereby influence its global position as an international currency. However, between China and potential RMBI follower states there exists a feedback loop between the political relationship between the 2 states and currency statecraft. Currency statecraft can influence the political relationship between China and the other set of actors, whilst simultaneously the political relationship between the two actors can influence how currency statecraft is wielded as a diplomatic tool. This subsequently filters down into how both actors interact with RMBI between the 2 states; a state with a positive political relationship with China which exhibits progressive reactive currency statecraft will interact more with RMBI than states which do not have such a relationship with the issuing state of the RMB. Though such a characterisation leaves certain relationships and causal pathways unaddressed, as a map of the set of associations between China, follower states and their potential activities in regard to RMBI it serves the purpose of highlighting relevant factors which ought to be taken into consideration.
A broader approach to demand-side RMB internationalisation
What can be specifically understood by the notion of inducements which may be offered by China to those states who exhibit positive interaction with RMBI? Though the political relationship and currency statecraft between China and follower states are best understood as distinctly political concepts, the inducements offered by the issuing state to potential followers can be both economic and political in nature (Cohen, 2008); these can also be understood as either coercive or persuasive in nature. Within this thesis the coercive facet of currency internationalisation will be discarded due to the introduction of the previously proposed notion of currency statecraft; if RMBI is being propelled by engagement or non-engagement by foreign states through inducements offered by China then the concept that these states are forced to interact within this framework can be discarded due to the potential for non-action. Furthermore, China’s RMBI strategy is not geared towards securing a short-term dominant position of the RMB within the international monetary sphere, as highlighted by its unwillingness to open domestic capital markets and to authorise a free-floating RMB
(Eichengreen, 2013) which discounts coercive measures as a policy tool in regard to Beijing’s approach to this end.
Subsequently, to comprehensively analyse the introduction of the necessary RMB related policy infrastructures within follower states these should be understood as those which rely on cooperation by the government of these countries. Specifically, the existence of (a) an RMB swap line, (b) an RMB clearing bank and (c) RQFII access are key infrastructures which require action (or in-action in case of their absence) by foreign states in order to increase the capacity of their domestic economy to handle transactions using the RMB (Chey, 2019); it is these infrastructures which can also be considered to be inducements offered to these states on behalf of Beijing. Specifically, by establishing these key financial infrastructures follower states can expect to benefit in regard to reducing the costs of trading with China in the future as there will be no need to purchase USD and utilise it as a vehicle currency as is the present paradigm (Chey, 2015). Essentially, as increased RMB circulation in future periods is likely to drive down the transactions costs currently associated with settling trade in RMB, and considering the already vast size of the Chinese economy and global share of trade, then the production of a capacity to increase such settlements is likely to benefit actors within foreign states, and in lieu these foreign states themselves. This potential benefit is highlighted by the fact the Chinese exporters are often willing to offer discounts of between 3 and 5 percent to foreign importers who settle their trade in RMB due to the decreased exchange rate risks that the exporters are subsequently exposed to (Chey, 2018). China offers inducements to follower states in the form of the policies and financial infrastructures which they can choose to implement within their own economies on the basis that these will benefit their own domestic economies as RMBI matures. Also relevant is the notion of the follower states foreign currency reserves; by implementing bilateral currency swaps follower states will more easily be able to finance trade settlement in RMB and avoid short term balance of payment issues.
With the economic inducements set out as above, what remains to be explained is how the diplomatic relationship between China and any follower states remains of consequence. The potential economic benefits of participating in RMBI as outlined above could be considered just cause to implement such infrastructures without any political motivation. However, it is at this juncture that the broader political implications must be taken into consideration. Though the introduction of the listed financial infrastructures and measures may benefit the follower state, they will do the same for China. Not only will their domestic exporters face less risk from
exchange rate exposure, but the Chinese economy will begin to benefit from seigniorage and an ability to finance balance of payment deficits. Furthermore, China’s geopolitical standing as an international power will also be strengthened as their currency gains international validity (Helleiner and Kirshner, 2009) whilst such action simultaneously challenges the international monetary paradigm as the RMB is still a rising currency. It is because of the detail that the economic inducements are reciprocal in their benefits that the political dimension rises in importance, alongside the fact that it has a larger scope for nuance. The political relationship and existence of currency statecraft produces a more complex relationship between China and follower states in regard to RMBI. China can opt to refuse to offer such inducements to foreign states based on their political relationship, where this can be considered a form of currency statecraft whilst follower states can implement or refuse these financial infrastructures if they are offered dependent on their political relationship with Beijing. If this is understood as a form of political interaction between these 2 states, then this would constitute a case of reactive currency statecraft. In addition to this, currency statecraft could be utilised by both actors to strengthen their political relationship. Conversely, such statecraft could be used negatively by both sides to politically distance themselves from each other.
From such a theoretical framework it can be expected that follower states which can expect to disproportionally benefit from the economic inducements and which have an amicable relationship with Beijing will exhibit deeper integration of RMB linked policy infrastructures. Meanwhile, those states with which China has a poor diplomatic relationship and which would not benefit significantly from improved RMB handling infrastructures will not interact with China’s RMBI efforts. Additional factors which are also likely to influence the interactions between China and potential follower states are the follower states economic and political relationship with the USA, this being the issuer of the dominant IC and whether such states might be seeking to ingratiate or distance themselves from China politically.
RMB internationalisation amongst the BRIS: a theoretical approach
As stated, the innate support of the RMB as an international currency by the BRIS in the form of co-movement of their respective currencies with the Chinese issued currency highlights the potential existence of an RMBI enabling group within this group of states (Tovar and Nor, 2018). However, this lone fact does not necessarily indicate that broader support from the BRIS as a group or as individual states for RMBI is present. The divergent nature of the individual
