Authoritarian Cooperation and Renminbi Reserve Currency Holdings

• In Event: China, Global Economic Engagement, and International Responses

Abstract

The Chinese renminbi has slowly gained importance as an international reserve currency, although its potential to replace existing reserve currencies, especially the US dollar, remains controversial. While the Chinese government has taken explicit steps to promote the renminbi as an international currency, it still constitutes only a small proportion of global reserve portfolios worldwide. Experts agree that a more widespread adoption of the renminbi would require major reforms to China’s domestic financial markets and opening of the capital account. Despite these obstacles, many countries have recently increased their reserve holdings of the Chinese currency. Notably, much of the recent international stockpiling of the renminbi has taken place in developing economies. Why are these countries adopting the renminbi? And how will this development shape the global monetary system? While increased trade with China may be one motivating factor for renminbi holdings, scholars such as Eichengreen have long noted that geopolitical considerations play as much of a role in the adoption of reserve currencies as economic considerations. I argue that this is particularly true for the renminbi. Developing economies are including the renminbi in their reserve currency portfolios in hopes of increased political and economic support from China. Politically, countries that are in security alliances with China and authoritarian countries are more likely to adopt the renminbi. In this sense, the spread of the renminbi as a reserve currency coincides with a broader trend of increased international cooperation between autocracies. Inclusion of the renminbi in reserve portfolios can also potentially help autocracies better withstand economic sanctions. Lastly, countries that are adopting the renminbi receive a greater share of Chinese aid. In this sense, increased renminbi holdings coincide with China’s increasing role in development finance. One difficulty in studying reserve currencies is that most countries are secretive about their precise reserve currency compositions. Instead, I make use of news reports and press releases by central banks that announce increases in renminbi holdings between 2010-2022. Studying the timing of these announcements, I find that these announcements frequently coincide with increased Chinese economic and political support for these countries.

Author

• Susanne M. Redwood, Montana State University