policy from the prism of currency
Live Mint, June
By Pradeep S Mehta
It is the season of high-profile conferences. At the IISS
Shangri-La Dialogue held at Singapore recently, Prime Minister
Narendra Modi outlined his vision for the Indo-Pacific region,
extending from the shores of Africa to the Americas. Among other
things, Modi noted that infrastructure projects must empower
nations and should not place them under impossible debt burden.
This was a veiled criticism of China’s debt diplomacy.
Despite the threat of difficult debt burdens, 14 countries of
eastern and southern Africa joined a forum in Harare, Zimbabwe,
to consider the use of China’s yuan as a reserve currency in the
region. This was in recognition of the fact that most countries
in the region have availed loans from China and it may make
economic sense to repay them in yuan. Seventeen top central
bankers and officials from 14 countries participated in the
forum organized by the Macroeconomic and Financial Management
Institute of Eastern and Southern Africa.
The difference in the foreign policy strategies of India and
China is apparent. While the former is still articulating its
vision, the latter is busy ruthlessly executing it.
Paying back in yuan
It would be folly to view the Harare meeting in isolation. It is
a result of years of hard work and politicking by the Chinese
government to present the yuan as a credible alternative to the
US dollar. Not too long ago, in December 2015, the yuan was
inducted as one of the currencies in which special drawing
rights could be exercised—making it one of the most reliable
currencies in the world. Since then, Ghana, South Africa,
Zimbabwe and, most recently, Nigeria have entered into currency
swap agreements with China to reduce reliance on the US dollar.
After becoming the preferred trade partner for the African
continent, China’s ambitions have expanded to operate the
preferred reserve currency for nations in the region. This
strategy could have significant consequences at a time when
Africa is being touted as the “next factory of the world” after
China, being developed through Chinese loans which are likely to
be repaid in Chinese currency. To paraphrase a popular idiom,
one may take manufacturing out of China, but one cannot take
China out of manufacturing.
China paying for oil in yuan
Chinese yuan internationalization ambitions are not limited to
Africa, and it is targeting the core of modern economy: oil.
China recently began trading oil futures in its own currency and
is planning to launch a pilot programme to pay for oil in yuan.
Oil is the world’s most traded commodity, with an annual trade
value of around $14 trillion, roughly equivalent to China’s
gross domestic product.
Around 99% of crude trade happens in US dollars, giving the US
government unparalleled leverage in geopolitics and
geo-economics. China considers the push for the use of yuan for
payment and settlement natural, given that it is the biggest
buyer. Any shift in global trade towards the yuan will be a boon
for China. Yuan-dominated oil contracts offer added advantages
for Chinese companies looking for hedging opportunities, and
onshore and offshore investors.
Stepping up at the right time
China has chosen the right time to step up its efforts to make
the yuan a global currency. The world economy is retreating
towards protectionism, with the influence of the US in global
geopolitics gradually shrinking. The unpredictability of US
President Donald Trump’s actions, which include isolating the
country from the global trade order, is increasingly adding to
dollar volatility and global woes.
China, understandably, intends to present itself as a stable and
credible alternative to the US. However, it has been
traditionally known to devalue its currency to boost its exports
and economy. Global reliance on yuan is likely to boost its
value, requiring the Chinese government to cede more power to
market forces, something which may not be to its liking. For
China, the path to make its currency global is laced with the
challenge of making it flexible, broadening financial markets,
and introducing necessary banking reforms. However, China is not
one to be deterred.
Where does India stand?
India is likely to use a gradual approach in pursuit of
internationalization of the rupee, despite increasing
competition from the yuan. While India traditionally has had a
head start compared to China in terms of rule of law, it has its
own challenges in the areas of currency liberalization, exchange
controls and rupee risk management, among others.
A National Institute of Public Finance and Policy paper,
published in February 2018, throws cold water on any hopes of
action by the Indian government on this front. It notes that the
rupee currently accounts for approximately 1% of global foreign
exchange turnover. It has a smaller market size across most
trading instruments when compared to the top eight
The “wait and watch” policy of the Indian government on this
front reminds one of a similar broader foreign policy approach,
which has resulted in an agonizing long wait for India to find
its place in the emerging geo-economic and geo-political order
and achieve its true potential. India needs to learn from its
own and Chinese experiences, and consider rupee
internationalization integral to foreign policy strategy before
it’s too late.
Pradeep S. Mehta is secretary general of CUTS International.
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