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Where is the real obstacle to the internationalization of the renminbi?

2024-06-06

Recently, the topic of the internationalization of the Renminbi (RMB) has gained heat again. Let me talk about it casually, not discussing economics, but some common sense from daily life. Of course, as always, what I say may not be right, so please take it with a grain of salt.

Regarding the internationalization of currency, there is a common sense that everyone must understand: if you want others to use your currency, you must first let them have RMB in hand. For example, if China wants to buy oil from Saudi Arabia or iron ore from Australia with US dollars, it must first obtain US dollars from trade with the United States.

So, how can they get it?

There are generally only two ways:

1. When you buy their products, they will have your money. China's foreign exchange is earned from foreign trade with the United States.

2. Borrowing money. When we first opened up for reform, we wanted to introduce an entire production line. Part of the money was raised by selling oil from Daqing, and the other part was borrowed from Japan.

Some may ask, is it possible to engage in currency swaps?

Of course, it is possible, but it does not solve the big problem. For example, if we made a swap with a certain country, both sides put 10 billion US dollars of each other's currency into their own accounts. After the expiration, we return their currency, and they return the RMB.

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Moreover, many countries do not have mines or any products that we are interested in. Otherwise, we would not have a trade surplus with those countries. They can use RMB to buy our products, but we have nothing to buy from them. Currency swaps have become a disguised form of loans.

So, we are back to the same question: there are only two ways to let others have our money, trade deficit and loans.The first method is that we buy more from others and let others buy less from us. In this way, a portion of the RMB will be retained in the hands of others, and then they can use the RMB to buy goods from other countries. In other words, we continue to have a trade deficit.

At this time, the old question comes up, what will happen if we continue to have a trade deficit? Of course, it is deindustrialization. This is almost the fate of the international currency hegemon. You can't have all the benefits and not want any of the problems.

In addition, it's not just about the trade deficit. For example, we all hope that the purchasing power of the RMB is strong, like the US dollar, where one dollar can exchange for seven or eight others. But if that were the case, the cost in China would be very high, and in the end, only high-end manufacturing and services would remain, with the transfer of low-end manufacturing.

Japan has also done this before. Everyone knows that after the Plaza Accord, the yen appreciated significantly. Japan's consideration was to cooperate with the internationalization of the yen, and then there were problems with exports, which led to a series of subsequent troubles.

The current problem of industrial hollowing out in the United States, in a sense, is a backlash from the "international currency."

Can we lend money to other countries?

Understanding this issue is not complicated. There is a wealthy man in the village who opened a factory, but everyone has no money to buy his products. So he lends money to the poor in the village to let them buy his things. It can work at first, but as everyone owes him more and more money, they may not even be able to pay the interest in the end, and the debt will eventually explode. At that time, others can't pay back the money they owe to the wealthy man, and the products in the wealthy man's factory can't be sold, and everyone will be in trouble.

Speaking of this, people may ask, does the blogger mean that we can't lend money to others?It's not really about the act of borrowing money itself; the key is to see what the borrowed money is used for. If I lend you 100 yuan, and you buy 100 yuan worth of bread from me and eat it, then it's over, because this debt is clearly a lost cause.

However, if I lend you 100 yuan, and you buy an excavator from me, go back and dig out minerals, or invest in a farm, sell the products to me, and then get RMB, buy bread and excavators from me again, this is a virtuous cycle.

In fact, the core of the Marshall Plan was not about lending money, but about using the borrowed money to restore the economy of others. A lot of money that the United States lent out in the past has become a dead account, only Europe and Japan and South Korea have played a role, because these regions, except for South Korea, have a very good foundation, as long as they are given money, they can quickly expand.

That is to say, borrowing money that is not aimed at developing the economy will most likely become a bad debt in the end.

Moreover, many countries are not good at managing their economies, and the country is unstable, with a change of leadership and a change in governance methods, which is very troublesome. The group of countries in South America almost all have this problem. When the economy is not good, they introduce foreign capital, and when the economy is slightly better, the newly elected leader will start to settle accounts with foreign capital plundering the country's interests, and then there will be another sharp decline. In the past hundred years, they have almost been spinning in place. In the past, we supported them to fight against foreign capital, but now it is not possible, now we are foreign capital.

The United States has also suffered a lot in the past, don't look at many people saying that South America is the backyard of the United States, but it has still been trapped countless times. The most obvious is Iran, which invested so much in Iran, and all the investments were lost overnight due to a revolution. Before that, there was also a large investment in Pakistan, which was useless. In recent years, there has been investment in India.

Finally, it is the over-discussed issue that if you want to internationalize the RMB, you must first relax foreign exchange control. Why is foreign exchange control being carried out now? The main reason is that the general public is easily frightened, and they may exchange all the foreign exchange, causing a man-made disaster for no reason, which is not necessary.

In addition, there are some pragmatic considerations. We are a foreign trade country, so we must maintain the RMB from appreciating too much, otherwise our foreign trade advantage will be lost. However, if you want to control the exchange rate, you cannot relax control. The Mundell-Fleming impossible trinity, I won't go into detail, just search for it, and you will find it.

This also reveals a problem. In the eyes of many people, the credit of the RMB is not as good as that of the US dollar, otherwise, people should be scrambling to exchange US dollars for RMB, and we don't need to worry about the loss of foreign exchange. As long as we worry about the loss of foreign exchange for a day, it means that our "credit road" is still under construction.

To put it more directly, even among our own people, many people would rather believe in the US dollar than the RMB. Can you expect others? I forgot who said that if the RMB cannot be 100% accepted by our own people, then don't expect others to accept it.In other words, if we want others to recognize the creditworthiness of the renminbi, we must act with confidence.

What methods can we use to internationalize quickly?

There are no shortcuts; it can only be a slow process, gradually infiltrating international trade, first increasing our settlement ratio. Currently, it's less than 3%, and it will be easier once it reaches 30% like the euro. Gradually, we can use credit to impress others, telling the world, "The renminbi never defaults." Over time, people will naturally be willing to use it and store it in safes. In case of any emergency, they can run away with renminbi because everyone recognizes this currency, and they can spend it with this currency.

This deep-rooted trust can only be established slowly through repeated transactions. Just like in the movie "The Wild Ride," both the righteous and the villains trust Anxin, not because Anxin is exceptionally strong, but because after going through so many things, everyone finds that only this person is reliable. Anxin is extremely predictable; his abilities are average, but his credit is very strong. Next time you encounter a problem, you still want to find Anxin. The currency also follows this logic; these principles are interconnected.

As for what many people say about military power, it is indeed a factor, but not the key factor. I have repeatedly cited an example: at the peak of the Soviet Union, the currency credit was far less than the Swiss franc. Was it because the Soviet Union's nuclear bombs were fewer than Switzerland's, or because the Soviet Union's tank clusters couldn't defeat Switzerland? Of course not, it's just that through repeated transactions, people found that the Swiss franc had more credit, and the Swiss franc was issued less indiscriminately.

Credit is something that exists in people's hearts, and you cannot force others to believe in you.

As for the long-discussed petrodollar, I recently read a large volume published by CITIC Press, "The Age of Oil." The author's point is that the choice of the dollar for oil settlement is not a conspiracy but a historical inevitability because it cannot choose other currencies.

For example, if the Saudis settle in yen, they cannot buy British Land Rovers. If they settle in pounds, they cannot buy American F-16s. The United States has a more critical "medical" advantage, that is, a leading position in the pharmaceutical industry. People from other countries who are in high positions, no matter how powerful, still need to be treated, right? They need to treat their families, and they always have to take medicine, don't they? The United States is almost unique in high-end drugs, and many countries can do without American iPhones but cannot do without those drugs.

Similarly, Kissinger did not sign a "petro-dollar agreement" with the Soviets, so why did the Soviets also settle in dollars? Was it because the Soviet leaders had a unique way of thinking, wanting to strengthen the status of the dollar? Of course not, the Soviet Union needed dollars to buy Canadian grain and European and American technology. Similarly, why do we care so much about foreign exchange reserves and foreign trade scale? Isn't it because earning dollars can be spent everywhere?

Understanding this will help you understand if Saudi Arabia can now settle oil in renminbi?Of course it's possible, because the Chinese yuan can be used to purchase Chinese industrial products and Dongfeng Express.

But can all transactions be settled in yuan? That's not feasible, because it also needs to purchase goods from other countries, and many countries do not recognize the yuan in international trade.

By now, everyone should understand that you can't make everyone accept your currency overnight. Increasing the transaction volume from 3% to 30% is obviously not something that can be achieved in the short term.

It can only be gradually penetrated, waiting until everyone has yuan in their hands and accepts yuan settlement, then our currency will be internationalized.

This is a slow process of improvement, which can't be fast, but it won't be too slow either. Because the scale is here, with China's scale, it's abnormal to only account for less than 3% of the global settlement currency, and it will definitely increase significantly. But everyone intuitively and based on common sense also feels that it won't be too fast, and there should be big changes in a few years.

Moreover, many people are talking about the collapse of the US dollar system, and I also think it can't be rushed.

On the one hand, as we mentioned above, the troubles brought by being an international currency will not be less than the benefits, just take your time.

On the other hand, I tend to think this matter can't be rushed either. The collapse of the US dollar has been talked about since the Bretton Woods system was established. There have been several crises of the US dollar in history, but it has become more solid instead, why?

Because despite its flaws, there was indeed no currency more reliable than it before, even though it was over-issued, but other currencies were even more unreliable.

And there is a "momentum" to maintain its status.Firstly, it's the psychological inertia. Everyone loves the US dollar; when you have dollars, you feel at ease because there is a consensus that dollars can buy anything, and others think the same way, so everyone is willing to accept them.

Secondly, there's the infrastructure inertia. The financial systems, trading systems, and pricing systems of the world are all based on the US dollar. It's almost impossible to quickly replace them, but it is indeed possible to gradually infiltrate.

This is akin to how China's power grid has spent decades building the most complex and largest power system in human history. If a wealthy person says they want to build a new system to compete with the power grid, do you think they can set it up in a short time? It's uncertain in the long term, but almost impossible in the short term.

So, the key for the future is to endure and slowly persevere, to have strength, credibility, and not to overissue, to do better than the US dollar, and gradually everyone will trust our currency. When the day comes that foreign exchange controls are lifted, and people don't want to exchange their money for dollars, and people in other countries are eager to exchange their own currency for the renminbi, then our currency's status will be truly established. Some people will definitely say I'm dreaming, but the reality is that if the renminbi wants to be internationalized, this is just the most basic requirement.

That is to say, as long as our trade scale with the world continues to grow and China's international status becomes more important, the more our currency will be needed by everyone. Of course, there is also the issue of appreciation. International currencies will definitely appreciate, and appreciation will lead to industrial outflow, which is also inevitable. In the world of adults, you can't have all the benefits.

Let me say a few more words at the end.

Some people will definitely think that I should not talk about these things that dampen our spirit, but should talk about how the US dollar is about to collapse, and we are about to be internationalized.

But I don't think so. I asked a few industry experts, and they also think this is a long-term thing. I think rationality is the greatest confidence. The essence of the theory of quick victory and the theory of surrender is the same. Many people accept the theory of quick victory, and then they don't see the results quickly, and then they collapse and switch camps. In the past two years, everyone can clearly feel this atmosphere.

In fact, those who pursue quick victory must have tried to become top students in a week in high school, and then made a million in three years at work. The final result is definitely a mess in learning and a loss of heart, and wanting to make money quickly, they end up gambling and losing everything.

Only by knowing that the road ahead is long can we have sustained confidence. The truly determined people are those who view problems objectively, not arrogant or impatient, not intoxicated by temporary victories, and not completely knocked down by temporary setbacks. Take it slow, and everything you should have will come.The full text is complete. If you think it's well-written, then give it a thumbs up.

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