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21. The Influence of RMB Internationalization on the Chinese Economy: Theory and Policy

Author:
Fan He and Qiyuan Xu
Publication Date:
02-2015
Content Type:
Working Paper
Institution:
Centre for International Governance Innovation
Abstract:
With a balance between radicalism and gradualism, renminbi (RMB) cross-border settlement covers all of the items in China's balance of payments (BoP), including financial accounts, although some of these accounts are still controlled by means of quotas and administrative approval. By the end of the first quarter in 2014, the amount of RMB trade settlement had reached ¥11 trillion since the pilot scheme was launched in July 2009. RMB cross-border settlement has become increasingly important for monetary authorities in terms of macroeconomic policy frameworks. This is especially the case with the more sophisticated conditions in global monetary markets, which result not only from the nontraditional monetary policies employed by the European Central Bank and the Bank of Japan, but also the ongoing quantitative easing (QE) tapering by the US Federal Reserve and the spillover effects on emerging economies. It is increasingly important to evaluate the potential influence of RMB internationalization on China's macroeconomy. A framework, which includes monetary supply and demand, was created to analyze the influences of RMB cross-border settlement on China's domestic interest rate, asset price and foreign exchange (forex) reserves. RMB settlement behaves in different ways with the various items in BoP, such as imports, exports, foreign direct investment (FDI), overseas direct investment (ODI), RMB Qualified Foreign Institutional Investor (RQFII), RMB Qualified Domestic Institutional Investor (RQDII) and cross-border loans. It was found that RMB settlement in different items leads to different effects on China's economy. For RMB export settlement, RMB overseas direct investment (RODI) and RQFII at the initial stage, RMB settlement does not affect China's interest rate and asset price. In addition, more favourable to the People's Bank of China (PBoC), foreign exchange reserves increase less with these reforms; therefore, they should be promoted with priority. However, it is necessary to stress that all settlements should be based on real transactions in order to prevent fake exports. For RMB import settlement, RODI and RQDII at the initial stage, these pilot schemes exert influences on China's economy through interest rate changes, causing an additional increase of forex reserves. Although other short-term items in the financial account could also impact the interest rate, the items in this group are either based on real business such as trade and investment or on financial transactions at the initial stage on a small scale. Therefore, this group has a relatively moderate influence on the interest rate. It is important to remember that this negative by-product is a result of the assumption that the PBoC targets exchange rate stability. If the PBoC sets the exchange rate system to be flexible enough, then such pilot schemes will not cause an increase of forex reserves. It is thus essential to advance exchange rate regime reforms to keep up with the steps of RMB internationalization. With the progress in RQDII and RQFII, the endorsement of issuing dim sum bonds for capital backflows and with the increase in lending from the offshore to the onshore market, these types of RMB cross-border settlements will not exert pressure on forex reserves; however, they do have an impact on the money market. If the amount of RMB flowing through these items is large enough, the interest rate and asset price will be significantly affected, and could be in conflict with the intended monetary policy. These types of transactions are the most risky to monetary authorities; therefore, they should be cautious regarding these items. In the short term, RMB settlements in these kinds of items should be regulated with quotas. In the medium to the longer term, these items should be opened in a gradual way.
Topic:
Foreign Exchange and Monetary Policy
Political Geography:
Japan, China, and Europe

22. China's Long March Toward Economic Rebalancing

Author:
Hongying Wang
Publication Date:
04-2014
Content Type:
Policy Brief
Institution:
Centre for International Governance Innovation
Abstract:
China's role in the global imbalance is closely linked to its domestic imbalance. Chinese policy makers have long been aware of the dual imbalance and the imperative to shift to economic growth driven by domestic consumption. They have taken limited steps in changing the development model, but political obstacles have slowed the pace of reform. The new leadership seems serious about deepening economic reform despite political resistance, but without political reform, the prospect of success remains dim.
Topic:
Economics, International Trade and Finance, Monetary Policy, and Governance
Political Geography:
China and Asia

23. From "Taoguang Yanghui" to "Yousuo Zuowei": China's Engagement in Financial Minilateralism

Author:
Hongying Wang
Publication Date:
12-2014
Content Type:
Working Paper
Institution:
Centre for International Governance Innovation
Abstract:
As part of a shift toward a more activist foreign policy, China has accelerated its engagement in minilateralism, which is the gathering of a sub-group of countries within or outside a multilateral institution to solve a problem when the multilateral institution is unable to reach agreements among its members. This paper examines China's minilateral diplomacy in the financial area. Although China has been involved in regional financial cooperation for the last 15 years, its recent minilateral initiatives, such as the New Development Bank (NDB), the Contingent Reserve Arrangement (CRA) and the Asian Infrastructure Investment Bank (AIIB), are far more China-centred. What are China's motivations? Will these minilateral schemes undermine the traditional multilateral institutions? This paper argues that the Chinese government seeks to use financial minilateralism to stimulate reform of global financial institutions, provide financial public goods for its regional neighbours and fellow developing countries, as well as directly promote China's economic and political interests. China's financial minilateralism is not meant to overthrow the existing multilateral institutions, but this could change depending on the interaction between how the world responds to China's new activism and the domestic political dynamics in China. Western countries should understand and accommodate China's aspirations and encourage China to keep its minilateralism open.
Political Geography:
China

24. Global Cybercrime: The Interplay of Politics and Law

Author:
Aaron Shull
Publication Date:
06-2014
Content Type:
Working Paper
Institution:
Centre for International Governance Innovation
Abstract:
Examining global cybercrime as solely a legal issue misses an important facet of the problem. Understanding the applicable legal rules, both domestically and internationally, is important. However, major state actors are using concerted efforts to engage in nefarious cyber activities with the intention of advancing their economic and geostrategic interests. This attempt to advance a narrow set of economic interests through cybercrime and economic cyber espionage holds to the potential to erode the trust in the digital economy that has been a necessary condition for the success of the Internet as an economic engine for innovation and growth. By pursuing these efforts, states are prioritizing short-term interests over long-term stability and a responsibly governed, safe and secure Internet platform. This paper explores the recent unsealing of a 31-count indictment against five Chinese government officials and a significant cyber breach, perpetrated by Chinese actors against Western oil, energy and petrochemical companies. The paper concludes by noting that increased cooperation among governments is necessary, but unlikely to occur as long as the discourse surrounding cybercrime remains so heavily politicized and securitized. If governments coalesced around the notion of trying to prevent the long-term degradation of trust in the online economy, they may profitably advance the dialogue away from mutual suspicion and toward mutual cooperation.
Topic:
Defense Policy, Crime, International Trade and Finance, Terrorism, and Bilateral Relations
Political Geography:
United States, China, and Asia

25. Power Shift and Renminbi Internationalization: Recommendations for the G20

Author:
Raluca Diana Ardelean and Mengun Zhang
Publication Date:
07-2014
Content Type:
Policy Brief
Institution:
Centre for International Governance Innovation
Abstract:
China has gained substantial economic power in recent years, becoming the second-largest trading nation after the United States and the largest goods-trading nation since 2012 (Eichengreen 2014). It is also currently the largest source of savings and the largest potential source of capital for international investment (ibid.). Measured by GDP, China is now the second-largest economy in the world (see Figure 1), and the World Bank surmises it is likely to surpass the United States in 2014 (World Bank 2014). Because of China's growing economic importance, a shift in power is reasonably assumed. As its economic power grows, internationalization of the RMB has become a key policy goal for China, especially after the 2008 financial crisis (Zhang 2009; Park 2010; China Securities Regulatory Commission [CSRC] 2014). This goal demonstrates China's desire for better integration and representation in the international economic community and signals its willingness to perform internal financial reforms and take more responsibility in global economic affairs.
Topic:
Economics, International Trade and Finance, and Monetary Policy
Political Geography:
United States, China, and Asia

26. Changing the Channel: Cultivating Security Cooperation in Northeast Asia

Author:
Alex Brouse and Dustin McDonald
Publication Date:
11-2014
Content Type:
Policy Brief
Institution:
Centre for International Governance Innovation
Abstract:
High tensions in Northeast Asia are cause for considerable alarm. Of particular concern for the maintenance of global security are the disputes over Senkaku/Diaoyu and Dokdo/Takeshima islands. Strong grievances rooted in history and rising nationalistic sentiment in China, South Korea and Japan have made the positions of the respective parties currently irreconcilable. The tension surrounding the issue of territorial control, particularly between China and Japan, has the potential to spark a military confrontation. Due to a lack of empathy and the propensity to overestimate threats from neighbours, the region is especially volatile. Public commitments by US President Barack Obama in support of the US-Japan Mutual Security Treaty could ensure that any military confrontation between China and Japan might quickly escalate and draw the United States into direct conflict with China. In order to improve empathy, a concerted effort must be made to change the channel and work on issues where interests do align. Nowhere do the interests of China, South Korea, Japan and the United States align more than on the issue of North Korean denuclearization. By working together on an issue of mutual concern, these four countries can counter the rapid erosion of trust. By cultivating a cooperative attitude, tensions can be lowered, increasing the prospects for peaceful management of current acute disputes.
Topic:
Conflict Prevention, Arms Control and Proliferation, Diplomacy, and Peacekeeping
Political Geography:
United States, Japan, China, and South Korea

27. The State-owned Enterprises Issue in China's Prospective Trade Negotiations

Author:
John Whalley and Hejing Chen
Publication Date:
10-2014
Content Type:
Working Paper
Institution:
Centre for International Governance Innovation
Abstract:
China, in the next few years, faces the prospect of major regional and bilateral trade negotiations possibly including the Trans-Pacific Partnership (TPP), the Regional Comprehensive Economic Partnership with the Association of Southeast Asian Nations (ASEAN) and Japan, Korea, India, Australia and New Zealand and separate negotiations with India, Korea and Japan, potentially the United States and even possibly the European Union. A likely key element in such negotiations, and one already raised by the United States in the TPP negotiations, is that of trade arrangements involving state-owned enterprises (SOEs). China is viewed from outside as having a large SOE sector, and large SOEs are viewed as having a protected monopoly position in domestic Chinese markets.
Topic:
International Trade and Finance, Markets, and World Trade Organization
Political Geography:
Japan, China, Europe, India, Asia, Australia, and Korea

28. China in the G20 Summitry: Review and Decision-making Process

Author:
Alex He
Publication Date:
10-2014
Content Type:
Working Paper
Institution:
Centre for International Governance Innovation
Abstract:
As the largest emerging economy, China believes that the Group of Twenty (G20), instead of the Group of Eight (G8), is the ideal platform for its participation in global governance. This paper examines the reasons why China joined the G20 rather than the G8, and then focuses on a detailed review of China's participation in G20 summits since the enhanced forum began in 2008. China took a very active and cooperative attitude in dealing with the global financial crisis in 2008-2009. The paper observes that China also insisted on its own agenda for reforms to the international monetary system, through reforms to the international financial institutions that manage it — in particular, raising the number of voting shares and the representation of developing countries at the IMF and the World Bank. Based on the reviews of China's performance in the G20 summits since 2008, the paper explores China's policy making through its participation in the G20, determining that it is shaped by several major economic departments in addition to the Ministry of Foreign Affairs, and coordinated by a vice premier responsible for economic and financial affairs. The paper concludes that China has gained immensely from its participation in the G20. Most importantly, China entered the centre stage of global economic governance through the G20, which allowed the country to demonstrate that it is a responsible great power, and communicate and maintain relations with other major powers. The main challenges China has faced since joining the G20, from the perspective of some Chinese scholars, are a lack of capacity for agenda setting and shaping initiatives, as well as inadequate communication and coordination among different government departments and between the Sherpa and financial tracks of the G20.
Topic:
Economics, International Political Economy, International Trade and Finance, International Monetary Fund, Global Recession, Financial Crisis, and World Bank
Political Geography:
China

29. The Effect of Index Futures Trading on Volatility: Three Markets for Chinese Stocks

Author:
Pierre Siklos, Martin T. Bohl, and Jeanne Diesteldorf
Publication Date:
09-2014
Content Type:
Policy Brief
Institution:
Centre for International Governance Innovation
Abstract:
This paper examines whether the introduction of Chinese stock index futures had an impact on the volatility of the underlying spot market. To this end, we estimate several Generalized Auto-Regressive Conditional Heteroscedasticity (GARCH) models and compare our findings for mainland China with Chinese index futures traded in Singapore and Hong Kong. Our results indicate that Chinese index futures decrease spot market volatility with all three spot markets considered. In contrast, we do not obtain the same results for the companion index futures markets in Hong Kong and Singapore. China's stock market is relatively young and largely dominated by private retail investors. Nevertheless, our evidence is favourable to the stabilization hypothesis usually confirmed in mature markets.
Topic:
Economics, International Trade and Finance, and Markets
Political Geography:
China and Singapore

30. China and Sovereign Debt Restructuring

Author:
Hongying Wang
Publication Date:
09-2014
Content Type:
Working Paper
Institution:
Centre for International Governance Innovation
Abstract:
More than a decade after it put forth the idea of the Sovereign Debt Restructuring Mechanism (SDRM) in the early 2000s, the International Monetary Fund (IMF) is again seeking to engage various stakeholders in a new round of discussions about improving sovereign debt restructuring. As a major international creditor, China is an important force to reckon with. So far, the Chinese government has said little publicly regarding the recent IMF reports on this issue. Chinese policy makers and analysts are supportive of the IMF's attempt to explore ways for earlier and more orderly debt restructuring, but they find the proposed reforms to be only marginally useful. From China's point of view, the most important question in debt management is how to prevent excessive borrowing and lending and reduce the likelihood of unsustainable debt. It sees discussions about the mechanisms of sovereign debt restructuring as having little effect on this question. As an international creditor, China's main concern has to do with safeguarding the value of its overseas assets from the detrimental effect of macroeconomic policies of Western countries, especially the United States. This is not an issue that can be addressed by improved debt restructuring mechanisms. China remains deeply concerned about the power imbalance between developed and developing countries in the international financial system. Going forward in the global dialogue over sovereign debt restructuring, China's priority will be to minimize international financial instability while protecting the development needs of developing countries.
Topic:
Debt and International Monetary Fund
Political Geography:
United States and China