商業計劃 : 買一隻蜜蜂 - 政大學術集成

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(1)國立政治大學商學院國際經營管理英語碩士學位學程 International MBA Program College of Commerce National Chengchi University. 立. 政治大. ‧ 國. 學. 碩士論文. ‧. Master’s Thesis. sit. y. Nat. er. io. 人民幣國際化:中國地緣政治和經濟之必要走向 al. n. v i n C hof the RMBU: a geopolitics and an The internationalization engchi economic necessity for China. Student: Maxime Monier Advisor: Professor Leng Tse-Kang. 中華民國一〇七年七月 July 2018 1. DOI:10.6814/THE.NCCU.IMBA.027.2018.F08.

(2) 人民幣國際化:中國地緣政治和經濟之必要走向 The internationalization of the RMB : a geopolitics and an economic necessity for China. 研究生：銅馬西指導教授：冷則剛. 立. Student: Maxime Monier. 政治大 Advisor: Leng Tse-Kang. ‧ 國. 學. 國立政治大學. 商學院國際經營管理英語碩士學位學程. A Thesis. sit. Nat. y. ‧. 碩士論文. er. io. Submitted to International MBA Program. n. aNational iv l C Chengchi University n h e n g cofhthe i U in partial fulfillment Requirements for the degree of Master in Business Administration. 中華民國一〇七年七月 July 2018. 2. DOI:10.6814/THE.NCCU.IMBA.027.2018.F08.

(3) Abstract The internationalization of the RMB : a geopolitics and an economic necessity for China By Maxime Monier China is currently gradually opening and liberalizing its financial market in order to internationalize its currency. A global currency will have several positive aspects as it will lower. 政治大. China’s exposure to foreign currencies and its dependency to the US dollar, lower the currency. 立. risks Chinese exporters and importers are facing, improve the efficiency of its financial system. ‧ 國. 學. by exposing its currency to market forces, and help them challenge the hegemony of the United States. To achieve the internationalization of the RMB, China has been gradually opening its financial and capital market since 2005 and the RMB is starting to be adopted as a reserve. ‧. currency in the central banks and international institutions. They first created an offshore RMB. sit. y. Nat. market in Hong-Kong before gradually letting foreigners invest into mainland China. In spite of some challenging issues such as high level of debt, the 2015 market shock, or bad credit. io. er. quality, the Chinese government seems resolved to lower its implication in the financial markets. al. n. v i n C h of its currency. This catalyzer for the internationalization e n g c h i U project will bring massive RMB-. and liberalizing the capital markets. Instead, it plans to use the Belt and Road Initiative as a. denominated investments outside of China, as well as improve the integration of the Chinese economy among its neighbors. This would create new market for the RMB and increase its usage globally. The BRI initiative will present new challenges to China, as it is mainly leveraged and could lead some countries to default. It will also require a change in China foreign affairs policy, as the BRI investments might require China to be more involved in domestic affairs of foreign countries.. Keywords: global currency, RMB, liberalization, Belt and Road Initiative. i. DOI:10.6814/THE.NCCU.IMBA.027.2018.F08.

(4) TABLE OF CONTENTS 1. Introduction .......................................................................................................................... 1 2. What Makes a Currency a Global Currency ? .................................................................. 3 2.1. History of Global Currencies........................................................................................ 3 2.2. What Makes the US Dollar the Current Global Currency ? ..................................... 4 3. The RMB: the Domestic Currency of a Global Actor ....................................................... 6 3.1. Objectives of the Chinese Government ....................................................................... 7. 政治大. 3.2. History of the RMB ..................................................................................................... 10 3.3. Dim Sum Bonds vs Panda Bonds ............................................................................... 13. 立. 4. Internationalizing the RMB: How Will It Be Done ? ...................................................... 16. ‧ 國. 學. 4.1. A Big Bang Coming ? .................................................................................................. 16 4.2. Is the RenMinBi Taking More Place in the Financial World ? ............................... 20. ‧. 4.3. What are the Limits to the Financial Industry Liberalization ? ............................. 23. sit. y. Nat. 5. The Globalization of the RMB : a Necessity for the New Silk Road.............................. 27. er. io. 5.1. A Dream of a New Silk Road ...................................................................................... 27 5.1.1. The Economic interests of the BRI Initiative ....................................................... 28. n. al. Ch. i n U. v. 5.1.2. Geostrategic Considerations ................................................................................. 33. engchi. 5.2. Are the BRI Projects Economically Sound ? ............................................................. 35 5.3. Potential Impact of the BRI Project on the Internationalization of the RMB ....... 37 6. Conclusion ........................................................................................................................... 39 References................................................................................................................................ 40. ii. DOI:10.6814/THE.NCCU.IMBA.027.2018.F08.

(5) List of Figures and Tables Figure 1: 1 USD to RMB, since 1981 ...................................................................................... 11 Figure 2: Issuance of Dim Sum Bonds per Year ...................................................................... 14 Figure 3: Share of RMB in global trade ................................................................................... 22 Figure 4: Total debt level in China .......................................................................................... 23 Figure 5: Belt and Road Initiative ............................................................................................ 27 Figure 6: China's GDP per capita in each region ...................................................................... 29 Figure 7: China-Pakistan economic corridor project ................................................................ 30. 政治大. Figure 8: Railways planned in South-East Asia under BRI project ......................................... 31. 立. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. iii. i n U. v. DOI:10.6814/THE.NCCU.IMBA.027.2018.F08.

(6) 1. Introduction The People’s Republic of China economic growth has been spectacular in the past 30 years. From a developing country, China is now the second economy of the planet, and the main driver of global growth. However, its rise from poor countries to high-middle income developed country is particular. China used to be a socialist planned economy, whose production is dictated by a central planner which allocates the resources and outputs among the socialized economic actors. 1 Deng Xiaoping reforms transformed this socialist planned economy into a. 政治大 being still being “subsidized” 立by the output plan. This system later evolved into a form of State. “socialist market economy” which let state-owned enterprises adapt to a market economy while. ‧ 國. 學. Capitalism, a capitalist system where the State is a main actor.. 2. This gives special. characteristics to Chinese economy because while some sectors and industries have been liberalized, others haven’t. That is the case for the financial industry that has been one of the. ‧. last to begin its liberalization.. y. Nat. io. sit. While the objective for China used to be to grow the economy and lift its people out of poverty,. n. al. er. China is now trying to be a global player on the political stage as well. For that it needs to. i n U. v. internationalize its currency, the Ren Min Bi (RMB, 人民幣, “people’s currency”) in order to. Ch. engchi. improve its financial stability and open its domestic financial market which would improve in the long-term the economy through a more efficient capital allocation. The internationalization of their currency will also allow them to become rule makers instead of followers like they have been so far. It would however require prudency and care in the internationalization of their currency. If they manage to internationalize their currency, it would improve their geopolitical weight as their currency will be used as a reserve asset by various central banks and international institutions in the world. Nevertheless, the main objective of the Chinese. 1. Market Socialism: The Debate Among Socialists, by Schweickart, David; Lawler, James; Ticktin, Hillel; Ollman, Bertell. 1998 2 Market socialism or Capitalism? Evidence from Chinese Financial Market Development, 2005, by Du, Julan and Xu, Chenggang. April 2005. International Economic Association 2005 Round Table on Market and Socialism, April 2005.. 1. DOI:10.6814/THE.NCCU.IMBA.027.2018.F08.

(7) Communist Party is the stability of its economy from which it gains its legitimacy. The financial market might reveal not mature enough and hinder the economic stability of China, especially that this internationalization could reveal being very costly if the Chinese governments invests in non-profitable projects in an attempt to increase the usage of its currency abroad. We can also question the scale of the internationalization first, maybe the first goal of the Chinese government is to internationalize its currency in its region and not in the world.. We will start with an outlook at what is a global currency and the history of global currencies. Then, we will introduce the objectives of the Chinese government to internationalize its. 治政大 reforms under way and what are of the RMB can bring changes to China, what are the current 立 the limits to the internationalization of the RMB. The last part will be devoted to the Belt and. currency, and the history of the RMB. The third part will explain how the internationalization. ‧ 國. 學. Road initiative, a gigantic Chinese infrastructure project which aims to build infrastructures in many countries in order to integrate better those economies together. After presenting the BRI. ‧. project, we will see how it can help improve China’s economy, as well as serve its geostrategic interests and how it can be a catalyzer for the internationalization of the RMB.. n. er. io. sit. y. Nat. al. Ch. engchi. 2. i n U. v. DOI:10.6814/THE.NCCU.IMBA.027.2018.F08.

(8) 2. What Makes a Currency a Global Currency ? With the globalization of the trade economies, countries, companies, and people have been trading among each other at an exponential rate. The world production is now the result of a globalized supply chain, where a product can be manufactured in China by a Taiwanese company for an American company, using raw materials from South America. As currencies fluctuate unpredictably among each other, companies tend to favor using only one currency for their purchase and their sales. It allows them to mitigate the currency risk. The currency risk is defined as “an adverse change in the price of one currency in relation to another “ . 3. 治政 For instance, a German company exporting to the United 大 States will pay its employee and suppliers using euro and will立 get US dollars through its sales. If the price of euro related to US ‧ 國. 學. dollars increase, the company will get fewer euro to face its expenses in euro, which can greatly affect its profitability. To manage this risk, it is advisable to use for expenses the same currency. ‧. received from sales.. Nat. sit. y. This lead to the de facto creation of currencies that can be considered as “global” because they. io. er. will be accepted by a lot of economic actors in the world, out of the domestic borders of the currency. The US Dollar is currently the main global currency, and therefore has a very high. n. al. Ch. i n U. v. liquidity in the world market, and some countries even pegged their currencies to the US Dollar.. engchi. The euro is also a global currency, in a lesser extent. Indeed, the Eurozone inherited from the global position of the Deutschmark 4 and is an economic powerhouse.. 2.1. History of Global Currencies The first global currencies have started to appear with the rise of global trades. When the. 3. Investopedia, Currency Risk. 4. The Euro’s Challenge to the Dollar: Different Views from Economists and Evidence from COFER (Currency. Composition of Foreign Exchange Reserves) and Other Data, by Ewe-Ghee Lim IMF, 2006. 3. DOI:10.6814/THE.NCCU.IMBA.027.2018.F08.

(9) Spanish Kingdom conquered America, they discovered and started exploiting large amount of gold and silver, which lead to a large quantity of silver coins minted by the Spanish crown. The silver in those coins was very pure, and therefore had great value, which reinforced the trust that people had in this currency. They knew that by accepting a Spanish-minted coin, they had a defined quantity of precious metal. This detail is very important, because trust is what makes a currency accepted : people know that this currency has a real intrinsic value, which in the case of a Spanish coin was a certain amount of silver, certified by the King himself. This is the reason why counterfeiting money is considered a crime, counterfeiting money means that one is posing as the King himself, which is an infringement to a country’s sovereignty.. 5. 治政大strict rules to mint their coins, using Followed by this success, more countries starting adopting 立 a defined quantity of precious metal (silver was replaced by gold), and gold became the new ‧ 國. 學. global currency. At the end of World War 2, the Bretton-Woods System was set up. World Currencies were pegged to the US Dollar which was convertible in gold. This reinforced the. ‧. use of US Dollars and helped make it a currency used globally.. sit. y. Nat. 2.2. What Makes the US Dollar the Current Global Currency ?. al. n. global currency :. er. io. According to Blinder 6, there are 4 different characteristics for a currency to be considered a. Ch. engchi. i n U. v. -. It should constitute a preponderant share of the official reserves of central bank.. -. The currency should be used as hand-to-hand currency in foreign countries.. -. It should be used to denominate a disproportionate share of international trade.. -. It should have a dominant role in international financial markets.. As of 2017, the IMF indicates that the US dollar constitutes 62% of the official foreign exchange reserves in the world. Regarding its use as currency outside of the United States, the US dollar is the official currency of 9 countries, and is an unofficial currency widely used in 36 other countries. Regarding its role in the global trade and international financial market, the US 5. Sapiens, Yuval Noah Harrari, 2011 Blinder, A. (1996). The Role of the Dollar as an International Currency. Eastern Economic Journal, 22(2), 127136. 6. 4. DOI:10.6814/THE.NCCU.IMBA.027.2018.F08.

(10) dollar accounts for 88% of the exchange 7 while the RMB only account for 4% (note that the total adds up to 200% because currency exchange always work by pairs of currency). There are even some commodities that are almost exclusively traded in US dollar, such as oil.. The global dominance of the US dollar has historical reasons : after World War II, it was the most powerful global economy, and Europe was devastated by the war. The new Bretton-Woods system set up at that time insured the convertibility of US dollar into gold. The US was the main buyer of oil and settled the purchases in US dollar which made the US dollar the dominant currency for that trade, it financed the reconstruction of its allies with US dollars and trade. 政治大. agreement that helped its currency becoming a global one.. 立. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. 7. Ch. engchi. i n U. v. Bank of International Settlement (2016). 5. DOI:10.6814/THE.NCCU.IMBA.027.2018.F08.

(11) 3. The RMB: the Domestic Currency of a Global Actor We have previously mentioned the Bretton-Woods system that was set up in 1944. The system that had been chosen at that time was not the only one discussed. The famous economist Keynes had proposed another system in which there would be an international currency called BANCOR whose value would be derived of a basket of 30 different commodities. This “currency” would be the unit for accounting between nations, and trade surplus and deficit would be measured with it. In this system, if the trade surplus is too high, then an International Clearing Union would charge interest on that surplus, incentivizing countries with surplus to. 治政 big, its currency would be depreciated relatively to the 大BANCOR, which would make the 立increase the country’s export. currency more competitive and. import products from other countries. On the other hand, if a nation had a deficit balance too 8. ‧ 國. 學. This system was not chosen during the Bretton-Woods Conference. At that time, the developed. ‧. world was in ruin, the Allies were fighting the Axis powers and the United States provided them with a large quantity of goods, which made them the world creditor. 9 The system proposed by. Nat. sit. io. n. al. er. States.. y. Keynes would have charged them interests for that and it was out of question for the United. Ch. i n U. v. However, this system was mentioned once again in 2009, in the heights of the great financial. engchi. crisis by the governor of the People’s Bank of China, Zhou Xiaochuan, as a possible response to the crisis. 10 It criticized the current system that had obviously failed, by making the US Dollar too important in the Global Economy, a lack of liquidity of it due to an economic recession in the United States could trigger a world financial and economic crisis. More than just proposing a solution, this essay was also the beginning of the Chinese government challenging the hegemony of the US Dollar.. 8. “The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order” Benn Steil, (2013), Princeton: Princeton University Press 9 “John Maynard Keynes and International Relations: Economic Paths to War and Peace.” Markwell, Donald (2006) 10 “Zhou Xiaochuan: Reform the international monetary system”, Dr Zhou Xiaochuan, Governor of the People’s Bank of China, (March 2009). 6. DOI:10.6814/THE.NCCU.IMBA.027.2018.F08.

(12) While some might argue that this essay was a sign of China’s power, it was also a sign of the vulnerability of China to the dollar hegemony. As Krugman explained in 2009, China’s growth has engendered huge capital account surplus and brought quantity of foreign investment in China. 11 If there had been a floating exchange rate, the market mechanisms would have appreciated the value of the RMB which would have reduced the price advantage of Chinamade products and slowed down the export. However, at that time the exchange rate was fixed to keep the competitiveness of the RMB intact. Therefore by pointing out the hegemony of the US dollar, Zhou turned the attention away from the fact that China’s regulations and choices had led to this situation.. 治政大to buy US dollars and accumulated To keep the exchange rate fixed, the Bank of China had 立 2000 billions of US dollar-denominated asset by 2009. Most of those assets were government ‧ 國. 學. short term bonds, presenting virtually zero-risk, but as 70% of China’s assets were dollardenominated, the exposure to the dollar was extremely risky. This has been theorized as the. ‧. dollar trap. A decrease of value of the US dollar would mean a huge capital loss for China. In this regard, the financial crisis acted like an alarm system to the Chinese government. It made. y. Nat. al. er. io. 3.1. Objectives of the Chinese Government. sit. them realize that the current system could adversely affect them and that a change was needed.. n. v i n C h From a veryUpoor country in the 1970s, they have China’s growth has been very impressive. engchi become an economic powerhouse, often nicknamed “the world’s factory”. The standard of. living is now on par with developed economies, and with its huge productive capacity, China is one of the main trading partner in the world. According to the World Trade Organization.12 It ranks first as exporter of merchandise, third as importer of merchandise, and fifth exporter of commercial services and second as importer of services (excluding intra-EU trade). Trade accounts for 20% of the 11 000 billions US Dollar Chinese GDP. China accounts for 13% of global exports and 10% of global imports.. 11. 12. “China’s Dollar Trap”, Paul Krugman (2009), The New York Times China Profile, World Trade Organization. 7. DOI:10.6814/THE.NCCU.IMBA.027.2018.F08.

(13) As we have seen previously, despite the importance of China in global trade, its economy is widely exposed to the value of the US Dollar on which the Chinese government has virtually no control. Moreover, given the extent of the dollar-denominated asset owned by China, a selloff to reduce the dollar exposure would increase the supply of dollars and decrease its value, leading to a capital loss for China. Therefore, the main reason for China to internationalize its currency is to diminish their accumulation of US Dollars and reduce the risk of a dollar centered financial system. 13 China has already starting divesting some of their US Treasuries bond in 2018, being for the first time a net seller in two consecutive months (March and April 2018). 治政大 measure against Trump’s threat of tariffs. 立. selling each time 5 billions USD of US debt. Some analysts argue that it would be a retaliatory 14. ‧ 國. 學. A second reason for China to internationalize its currency is for trade interests. Similarly to the US dollar reserves of the country, selling or buying in US dollar (or another foreign currency). ‧. while producing in RMB exposes the companies to a currency risk. If they make a contract with a German customer to sell them goods for 1 million euro one year forward, and that in the. y. Nat. sit. meantime the RMB appreciates against the euro, they would incur a loss. Therefore,. er. io. internationalizing the RMB will allow it to be used more widely in global settlements, which will lower the risks to which Chinese exporters are currently exposed. 15. n. al. Ch. engchi. i n U. v. A third reason for the internationalization of the RMB is to improve China’s domestic financial structure, as argued by Arthur Kroeber. The motivation would work as a “Trojan Horse”.. 16. If. the RMB is internationalized, it would have to follow the market discipline that rules outside of China. As we will see later, the financial markets in China are not liberalized, and StateOwned Entreprises (SOE) benefit from cheap loans given by State-Owned Banks. As the RMB would be subject to market discipline outside of China, the Chinese government will have no. 13. “Debating the International Currency System: What’s in a Speech?” Chin, Gregory and Wang Yong, (2010) China Security 14 « La Chine se met à vendre de la dette américaine », by Isabelle Couet (June 2018) Les Echos 15 “China’s Exchange Rate Politics,” Freeman III, Charles W., and Wen Jin Yuan, June 2011, Washington, D.C.: Center for Strategic and International Studies 16 “China’s Global Currency: Lever for Financial Reform,” Kroeber , Brookings-Tsinghua (February 2013) Center for Public Policy. 8. DOI:10.6814/THE.NCCU.IMBA.027.2018.F08.

(14) other choice than to make the necessary reforms inside of China. This means that it is the end of commercially uncertain projects that SOE undertake, which were so far possible thanks to cheap credits. This will also be the end of the increase of local money supply that local governments request to the Chinese banks. The RMB would then obey the rules of the market rather than the rules of the government. This actually would be welcomed by foreign countries who have often accused China of keeping its currency at a lower rate to compete with foreign companies. For instance, after Trump’s telephone call following his election with Taiwanese president Tsai Ing-wen, he tweeted “Did China ask us if it was OK to devalue their currency (making it hard for our companies to compete) […] I don’t think so!” 17. A financial reform. 政治大. would then pose China has a trustable partner.. 立. The fourth and last reason is the one that makes the most headlines on newspaper : to end the. ‧ 國. 學. US global hegemony. This would then be a geopolitical reason, as an internationalized RMB would give China more weight on the global order, and maybe replace the hegemony of the US. ‧. on the long term. This reason, that was advanced by the central bank governor in 2009, is liked by the nationalists that can see their country taking a more prominent place in the global politics,. y. Nat. sit. while it would paradoxically imply that China has to liberalize its financial market and let it. n. al. er. io. opened to foreigners. 18. Ch. i n U. v. There are however arguments against an internationalization of the RMB. An internationalized. engchi. RMB would be used more abroad for trade and payments, it would also be bought by foreign central bank as a reserve currency for their capital accounts. The increase in demand will push the value of the RMB up, and companies will need more of a foreign currencies to buy the same amount of RMB. This would be a bad thing for the Chinese economy, that rely massively on manufacturing and export thanks to lower price that enable them to compete with foreign companies abroad. An increase of the value of the RMB will therefore make their export more expensive and that could damage the Chinese economy. A solution would be to move up the value chain 19 and export products less price-sensitive. In the meantime, China could increase 17. Twitter, @RealDonaldTrump, December 2016 , “Dollar Primacy and American Power: What’s at Stake?,” Kirshner, (August 2008) Review of International Political Economy 19 “ China’s fast climb up the value chain”Hirschbichler E., Liu N, and Weihe U. (May 2018), McKinsey Quarterly 18. 9. DOI:10.6814/THE.NCCU.IMBA.027.2018.F08.

(15) its import to push the value of the RMB down. By moving up the value chain and importing mass-manufacturing products, China could reduce the effect on its economy of an appreciation of its currency and limits the appreciation of its currency in the same time.. Another problem that can arise from an international currency is the responsibility that China will have toward the holder of this currency. If the RMB makes a large part of the reserves of foreign countries, raising the interests rates quickly can have adverse effects on the economies of those countries. If those countries are China’s borrower or trade partners, China would need to take into account the effects of its monetary policies on its partners financial stability before raising its interests rates.. 立. 3.2. History of the RMB. 政治大. ‧ 國. 學. The Popular Republic of China used to be a country with a socialist economy, and with a low. ‧. amount of trade with the outside world before its liberalization. Therefore, before 1971, the. y. Nat. value of the RMB was pegged to 1USD=2,46RMB without any economic consideration.. sit. However, with the opening of China to the rest of the world and the liberalization of its economy,. er. io. the RMB has been progressively devaluated several times to improve the competitiveness of. al. n. v i n C hin spite of a booming rate stayed in place during 12 years e n g c h i Uof the Chinese economy and its trade with the outside world.. the Chinese economy. Those devaluations stopped in 1993 at at rate of 1USD=8,76RMB. This. 10. DOI:10.6814/THE.NCCU.IMBA.027.2018.F08.

(16) Figure 1: 1 USD to RMB, since 1981 20. 政治大. As we can see on the figure above, quickly after the RMB was de-pegged from the US dollar, its value has quickly appreciated (1USD could buy fewer RMB). It was shortly re-pegged. 立. during the financial crisis and the RMB value is since then oscillating between 6 and 7 RMB. ‧ 國. 學. per US dollar. As we can see from this graph, there has been a clear change of policy around 2005. For instance, the RMB was forbidden outside of China until 2004.. ‧. In the 1970s, Deng Xiaoping has gradually liberalized Chinese economy in order to not disrupt. Nat. sit. y. its old system and companies and letting them the time to adapt to a market economy from a. io. n. al. er. socialist economy. In a similar fashion, China has been gradually opening its financial market.. i n U. v. In 2002 was launched of the Qualified Foreign Institutional Investor (QFII) program. A program. Ch. engchi. that allocate quota to selected institutional investors to invest in the mainland stock market.21 Those quota have been increased each year, as well as new investors were selected. As of 2014, the quotas totaled 53 billon USD, for 258 investors. In 2004, the RMB deposits are allowed in Hong Kong. 22 Border trading in RMB is authorized in several regions. The authorization of owning RMB in Hong-Kong was preceded the previous year by instituting a clearing and settlement bank. In 2005, the RMB is no longer pegged to the US dollar.. 20. Federal Reserve. 21. "合格境外机构投资者境内证券投资管理办法". Xinhua Newspaper. 26 August 2006 "Renminbi as a reserve currency" Zhu, John (August 2014) Central Banking Journal. 22. 11. DOI:10.6814/THE.NCCU.IMBA.027.2018.F08.

(17) The following year in 2006, a program similar to the QFII, the Qualified Domestic Institutional Investor program allowed domestic institutions to invest outside of China. 23 In 2007 was launched the offshore RMB-denominated bond market, called the Dim Sum bond. It is used by foreign companies to issue RMB-denominated debt, even if they are not present on the Chinese market. 24 Four years later in 2011 was created another program similar to the QFII, but with looser regulation and possibility to invest in a broader range of financial securities. This program is still subject to quotas.. 治政 opened. The China Interbank Payment System (CIPS) is 大 launched this year as well. This system 立 of financial telecommunication offer interbank services such as clearing and settlement services. Finally in 2015, the interbank bond market to Central Banks and other financial institution. ‧ 國. 學. for RMB trade. According to the Financial Times 25 , China created this system to have an alternative to the Swift system spied by US agencies. The creation of this system is important. ‧. as it provides an infrastructure to connect the Chinese financial system with the global one. This was also the year when the International Monetary Fund has included the RMB in its. y. Nat. al. er. io. sit. basket of reserve currency, an important mile stone to be considered as a global currency.. n. After this decade of improvement, the Chinese financial sector experienced its first shock which. Ch. i n U. v. hindered the internationalization of the RMB. In July 2014, the Chinese stock market started. engchi. growing at a fast paced. The Shanghai composite Index was at 2000 points in July 2014 and reached 5166 in June 2015, an impressive growth of 150% in one year. The bubble crashed and the stock market fell back to 3000 points at the beginning of the year 2016. Since then, the stock market has shown very little volatility and has remained for 3 years around 3000 points. The government response to this crisis was however very severe. It forbid investors to short sell (sell without owning the stock, speculating that the price of the stock will fall), forced. 23. "US stocks open to China savers". Komaiko, Richard (April 2008) Asia Times "'Dim sum bonds' are fueling China's currency rise" Fion Li (November 2011) Washington Post. 25 “China launch of renminbi payments system reflects Swift spying concerns” Gabriel Wildau (October 2015) Financial Times 24. 12. DOI:10.6814/THE.NCCU.IMBA.027.2018.F08.

(18) institutional actors to keep buying stocks, helped with Central Bank cash. 26 Investors who hold more than 5% of the stocks of a company were forbidden to sell the stocks to avoid another major sell-off. In January 2016, after having forced State-Owned Funds to buy 200 billions of USD of shares in a few months to prevent the prices to fall, the government accused foreign forces to destabilize its market and has arrested close to 200 persons on the basis of “spreading rumors” (a convenient law who allows people saying a different story from the official one to be arrested). The stability-obsessed regime has known its first financial turbulence and reacted firmly to it. Three years after those turbulences, the stock market remains at the same level while most global equity markets have been rising.. 立. 政治大. ‧ 國. 學. 3.3. Dim Sum Bonds vs Panda Bonds. Those curious nicknames designates two similar financial products used to raise RMB for. ‧. foreigners. The first one was the Dim Sum bond, issued in Hong Kong and named after the. sit. y. Nat. famous Cantonese dish. The Panda bond is more recent and is issued inside mainland China.. er. io. The reason for those two different kind of bonds for the same underlying product (the RMB) is. al. n. v i n C hto invest in ChineseUmainland market, issuing those bonds majority of investors were restricted engchi in Hong-Kong allowed Chinese companies to reach more investors who wished to have an that the Chinese securities market have only been recently opened to foreign investors. As a. exposure on the currency of the fast-growing Chinese economy. The Dim Sum bonds were launched in 2007, and only Chinese and Hong-Kong banks could issue RMB-denominated bonds. In 2010, the market was deregulated and foreign banks could issue Dim Sum bonds as well. The appetite of the investors for those bonds was enormous, and the growth was exceptional At the beginning of the decade, the Dim sum bond market was flourishing due to several factors: The RMB was appreciating against the US dollar, the Treasury Notes interest rate was near-zero while the interest rate in mainland China was at 6.50%. This attracted. 26. “Beijing abandons large-scale share purchases” Jamil Anderlini (August 2015), CNBC. 13. DOI:10.6814/THE.NCCU.IMBA.027.2018.F08.

(19) Chinese companies to borrow money at a lower rate by issuing in Hong-Kong to foreign investors that lacked good investment opportunities. 27. The Panda bonds appeared later than the Dim Sum bonds, as if the Chinese government wanted to use Hong-Kong as a pioneer for the internationalization of its currency before finally opening its financial market. In the case of a full opening of the inland market, there would be very little interest in holding Dim Sum bonds, while the Panda market would be more liquid with the vast pool of local Chinese investors.. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v. Figure 2: Issuance of Dim Sum Bonds per Year 28. The issuance of Dim Sum bonds had decreased in 2015 for three reasons. Firstly, the 2015 market shock affected the trust in the Chinese financial market and stopped the appreciation of the RMB against the dollar, making it a less profitable financial instrument. Secondly, in 2015 China started gradually opening its capital accounts in mainland China meaning it was easier for investors to invest in mainland market through Hong Kong. To make it happen, they reduced. 27. ‘Dim sum bonds’ are fueling China’s currency rise, Fion Li (August 2011), The Washington Post. 28. “China's Debt Crackdown Helps Revive Flagging Dim Sum Market”, (June 2018) Bloomberg. 14. DOI:10.6814/THE.NCCU.IMBA.027.2018.F08.

(20) paperwork and improved the convertibility of offshore assets into RMB. Thirdly, Chinese investors are still barred from investing large part of their capital in Hong Kong, and the RMB deposit in Hong Kong (called CNH, to differentiate with CNY) have reduced greatly due to loss of confidence in the RMB. This tightened the liquidity of the RMB assets in Hong Kong and made the issuance of RMB bond offshore less attractive. Lastly, the fear of investors speculating against the RMB has led Chinese authorities to forbid short selling in Hong Kong, which tampered the liquidity of the RMB-denominated bonds. 29. This decrease in the issuance of Dim Sum bonds has let analyst thinking that it was actually a. 治政大can see that as of June 2018, there meantime, the Panda bond issuance soared. However, we 立 already had more issuance of Dim Sum bonds than in the whole year of 2017. This would transitory product before the full opening of the mainland capital market. Especially that in the. ‧ 國. 學. announce a possible revival of the Dim Sum bonds. The reason is that a part of the supply and demand from the Panda bonds has been transferred onto Dim Sum bonds. 30 On the supply side,. ‧. the Chinese government has been more and more concerned about the high level of debt of its economy, and 13 lower rated bonds issuance have been canceled in the second quarter of 2018,. y. Nat. sit. the most in 2 years. Meanwhile the demand for RMB-denominated bonds remains high, and. al. er. io. most of the repayments of such bonds is reinvested in new bonds, especially that investment in. n. RMB are profitable compared to investment in other currencies and the yield spread between. Ch. i n U. v. RMB notes and Treasuries Notes have widened to their biggest point in two years.. 29 30. engchi. “China’s Panda-Bond Boom Threatens Dim Sum Market Survival”, (August 2017) Bloomberg “China's Debt Crackdown Helps Revive Flagging Dim Sum Market”, (June 2018) Bloomberg. 15. DOI:10.6814/THE.NCCU.IMBA.027.2018.F08.

(21) 4. Internationalizing the RMB: How Will It Be Done ? 4.1. A Big Bang Coming ? When looking into Chinese’s economy liberalization in the past decades, everyone can notice how immense the changes have been. However, by looking closely to the liberalization, it is possible to notice a pattern : liberalization has always come gradually. Firstly, Deng Xiaoping liberalized the agricultural industry in a very gradual manner. Quotas still existed and were not abolished, however it was possible for farmers to sell their production surplus on a market. 政治大. regulated by market prices. This reform incentivizes the farmers to produce more and in a more efficient manner, and little by little the sector was liberalized. This process has been repeated. 立. several times when the economy was opening, and every time it allowed the old actors to adapt. ‧ 國. 學. to the new system without running the risk of bankrupting because of issues inherited from their inefficiencies that existed under a socialist economic system. 31. ‧. The last sector to be liberalized is potentially the most explosive one: the financial sector. A. sit. y. Nat. liberalized and efficient financial sector help the economy strives in the long term, thanks to a good and efficient allocation of the capital. However, a financial crisis can affect strongly the. io. n. al. er. economy of a country. That is why the Chinese government has always been reluctant into fully. i n U. v. opening its financial sector, the loss of control can affect the stability of the regime. Indeed, the. Ch. engchi. Communist Party keeps its legitimacy at the head of the country because things are improving for everyone, people are lifted out of the poverty at an unprecedented scale in the history of the humanity. However, if a financial crisis triggers an economic crisis that deeply affects the standard of living of the Chinese people, how could the Communist Party keep its legitimacy ?. On the other hand, we have developed earlier the motivation for the Chinese government to open its financial sector and internationalize its currency. It will help China into becoming a political power, lower risks for its trade, and help developing its economy in the long term.. Just as other sectors were gradually liberalized and opened, the Chinese financial sector will 31. How Reform Worked in China By: Yingyi Qian William Davidson Working Paper Number 473 June 2002. 16. DOI:10.6814/THE.NCCU.IMBA.027.2018.F08.

(22) undergo deep changes, in a gradual manner. For instance, since November 2017, foreign securities companies that needed to create joint venture with local companies to enter the Chinese market can now own 51% of the joint venture. Three years later, this limit will be abolished and foreign securities companies will be able to fully own their local subsidiary. 32. We can see another example of this gradual opening in the new rules for capital flows. In July 2017, China opened a bit more its financial market by letting foreign investors buy Panda bonds through Hong Kong, which would increase capital inflow in China. In the same time, Chinese citizens cannot buy in the Hong Kong Market. 33 Therefore, it is not a full opening of its financial. 治政大sell-off in China just as it happened prevent quick capital outflow that could trigger a massive 立 in several emerging economies in the 1990s. Indeed, if the spread between interest rates sector as capital cannot really flow freely outside of China. The reason behind this policy is to. ‧ 國. 學. between China and the US came to decrease, this could create a downward pressure on the RMB by making the US dollar relatively more profitable. Investors would sell their RMB-. ‧. denominated asset to invest in US-dollar denominated assets, increasing the depreciation of the RMB and making it even less profitable. This kind of capital outflow has happened in emerging. y. Nat. sit. economies and triggered economic crisis. The Chinese government therefore tries to prevent. al. er. io. that from happening by making it more difficult for capital to leave the country. This situation. n. could lead some investors to avoid investing in China even though the Chinese government. Ch. i n U. v. emphasizes that foreigners will not have trouble withdrawing their capital. In the long term,. engchi. analysts are confident that capital outflow for domestic investors will be opened, however as always with China, it is something that happens gradually.. The most important transformation that will arise from those changes in regulation is not the fact that foreigners will be able to own securities firm in China, but that those new owners will change the standards of the capital market in China. Again, this is not new in the Reform Era, China has improved its technology, its industrial standards and its productivity partly thanks to the participation of foreign companies. Foreign based companies who had participation in 32. “Capital market prepares for further opening-up, more inflows” Shi Jing in Shanghai (March 2018) China Daily. 33. “China rewrites Rulebook on Capital Flows After Crisis Lessons” (July 2017) Bloomberg. 17. DOI:10.6814/THE.NCCU.IMBA.027.2018.F08.

(23) Chinese companies helped those Chinese firms improve their standards thanks to a knowledge spillover effect. 34 By opening the participation of foreign firms in Chinese securities firms, the Chinese government is aiming for the same objective: an improvement of Chinese lending standards, a greater efficiency in capital allocation. If that happens, then the Chinese capital market will be strong enough to withstand financial and economic shocks, and the RMB will be able to be internationalized without risks of capital outflow due to a risky situation.. Analysts estimate that the presence of foreign financial firms in China will have massive consequences on the Chinese financial market. Those firms are appealed by massive growth. 治政 planned to be at 3.1% in 2030 against only 1.3% now, but大 that would totaled a value 18.8 trillion 立 RMB from 3.2 Trillion RMB now. The life insurance business owned by foreign firms will and earning opportunities in China. The market share of bank asset owned by foreign firms is. ‧ 國. 學. grow from 193 billion RMB to 2 trillion RMB. Regarding the Asset Management business owned by foreign firms, it will grow from nothing to 5 trillion RMB of assets managed by. ‧. foreign financial firms. All those combined should multiply the earnings of foreign financial services firm by ten-fold from 16 billion RMB to 188 billion RMB in 2030. The foreign banks. y. Nat. sit. will remain smaller player in the Chinese market, however their presence will improve the enterprises to better standards of lending and investing. 35. n. al. Ch. engchi. er. io. competitiveness of the financial sector and will move it away from cheap loans to state-owned. i n U. v. Another enabler of the incoming big bang is the innovation in the financial industry. The Chinese fintech (financial startups) industry is booming, and their impact on the industry is already clear. Quickly, China has adopted cashless payments that are now the norms, and even street vendors or beggars will accept cashless payments. The size of the Chinese market has enabled those companies to be among the world leaders in financial innovation and even though the trend will slow down, the innovation of the Chinese financial sectors will help this industry to strive.. 34 Jon Schmid & Fei-Ling Wang (2017) Beyond National Innovation Systems: Incentives and China’s Innovation Performance, Journal of Contemporary China, 26:104, 280-296, 35 “China is about to give global finance the chance of a lifetime” (May 2018) India Times. 18. DOI:10.6814/THE.NCCU.IMBA.027.2018.F08.

(24) There are six different trends in the Chinese fintech sector. The first one is mobile payment and wealth management. Chinese consumers are adopting cashless payment, near-field communication payment and internet-based wealth management at a rapid rate and this sector is already mature enough and experience fierce competition.. The second sector that will experience growth is the internet-based banking services. It is expected that the Chinese SMEs and consumers will take loans and credit cards from internetbased companies that have lower operation costs than traditional banks.. 治政 away from simple borrowings to more complicated 大 financial products such as treasury 立 management. Again, the internet-based companies can address tailored solutions to complex The third trend is the business-to-business internet finance. Chinese companies are moving. ‧ 國. 學. corporate problems.. ‧. The financial infrastructure is expected to change, with could-based services rather than operating their own data and IT centers. This is a cost-effective solution as it lowers the. y. Nat. sit. overhead costs of the financial industry actors. The big data analysis will improve the. al. er. io. personalization of financial products, as well as help financial players to manage their risks. n. through better risk management models.. Ch. engchi. i n U. v. The last trend that will enable Chinese financial sector to improve is the usage of new technologies such as the blockchain technology which can have interesting applications to suppress clearing intermediaries, reduce the transaction costs and improve trades and settlement of derivatives products. Thanks to all those innovative trends in the Chinese financial sector, we can expect the Chinese financial sector to be more efficient than abroad. 36. While the Fintech sector could help China drive its financial system performance, it can also create new risks that have not been experienced yet. For instance, Chinese consumers will have an easier access to credit or to financial instrument, and they might ignore the risks associated 36. “What’s next for China’s booming fintech sector?” Joseph Luc Ngai, John Qu, and Nicole Zhou (July 2016) McKinsey. 19. DOI:10.6814/THE.NCCU.IMBA.027.2018.F08.

(25) with the usage of those instruments. We can imagine that a consumer will be able to get almost instantly a loan on its smartphone and then spend the money without being able to reimburse it, maybe even on a stock market and losing all its fund. So the fintech sector can bring better efficiency, but wil also create new risks because of a change in the way the consumers use those products and interact with their bank.. With all that in mind, the Chinese government is getting ready for its currency to internationalize. It can do it in two different ways. First, it can become a world’s major investor and invests massively abroad. This will lead to an increase of the demand of the domestic. 治政大 if investors have confidence in the way is to internationalize it through trade. It is only possible 立 ability of the currency to sustain its value, and therefore desire to conduct the trade in RMB. currency to make the repayments. Therefore, the currency will globalized like that. The second. ‧ 國. 學. That is how the Deutschmark has internationalized in the 1970s 37, thanks to years of sustained economic growth coupled with conservative monetary policy fighting inflation. China will try. ‧. to embrace both ways, the first one by making investment through the Belt and Road Initiative, and the second one by increasing the confidence of investors in its currency thanks to good. y. Nat. sit. financial markets. However, the reform of the financial markets are not done yet and the. er. io. Chinese government needs. n. a l More Place in the Financial 4.2. Is the RenMinBi Taking World ? iv. n U engchi In the recent years, the RMB has started to gain its place as a reserve currency among different. Ch. international institutions and central banks. This move shows the confidence of economists in China’s ability to open and improve its financial system, especially that China has stopped to manage its currency exchange rate to let it be determined by the market. 38. The first important milestone in RMB becoming a reserve currency was the decision of the International Monetary Fund (IMF) to include the RMB in its reserve currency basket, called. 37 Huang, R. (2015). The Enlightenment of Internationalization of Mark and Yen to Internationalization of RMB. Studies in Sociology of Science, 6(1), 22-24 38 “Bundesbank to include renminbi in its currency reserves” Emma Dunkley, Alice Woodhouse, and Claire Jones (January 2018) Financial Times. 20. DOI:10.6814/THE.NCCU.IMBA.027.2018.F08.

(26) Special Drawing Rights (SDR). The SDR is the unit of account used by the IMF and represents a claim to currency for IMF members. The SDR historically was composed of 4 currencies : the US dollar, the Euro (former Deutschmark and Franc Français), the Great-Britain Pound, and the Japanese Yen. On the 1st October of 2016, the RMB was included in this basket which is now composed of 41.73% of US dollar, 30.93% of Euro, 10.92% of RMB, 8.33% of Yen, and 8.09% of Great-Britain Pound. It made it the 3rd biggest reserve currency of the IMF.. Following its acceptance as a global reserve currency, central banks have started buying RMBdenominated assets to use them as currency reserve. The European Central Bank (ECB) as well. 治政 underscores the growing role of the RMB in the global 大 financial markets, which increases the 立 need for central banks to build reserves of RMB for settlements. Moreover, it helps those central as the German Central Bank have started building reserves of RMB as well. This decision. ‧ 國. 學. banks to diversify their assets and not be exposed too much on US dollars fluctuations. In 2017, the global currency reserves are still dominated by the US dollar (62.7%), Euro (20.15%), Yen. ‧. (4.89%), Great-Britain Pound (4.54%), Canadian dollar (2.02%), Australian dollar (1.80%), Swiss franc (0.18%), and the RMB (1.23%). 39 The presence of currencies from rich countries. y. Nat. sit. with smaller economy and smaller trade is explained by the trust that investors have in those. n. al. er. io. economies and those currencies, while the RMB has just started to gain acceptance.. Ch. i n U. v. Along with that rise in RMB becoming a global currency, its global usage has taken off. From. engchi. virtually nothing in the early 2000, it became the 4th most traded currency in September 2015, amounting for 2.31% of the global amount, just behind the Japanese Yen.. 39. IMF, World Currency Composition of Foreign Exchange Reserves. 21. DOI:10.6814/THE.NCCU.IMBA.027.2018.F08.

(27) 立. 政治大. sit. y. ‧. ‧ 國. 學. Nat. Figure 3: Share of RMB in global trade 40. er. io. Soon after, the Chinese financial market experienced a shock we have previously mentioned,. al. v i n share of the RMB in global trade C dropped to 1.47%, making it the 7 most used currency behind hengchi U the Swiss Franc. The paradoxical situation between an increase usage as a reserve currency, n. and the share of RMB in global transactions has dropped since then. As of November 2017, the th. coupled with a decrease in its usage for trade is representative of the situation. On one hand, central banks believe that this currency will increase in importance in the future and build reserves of it, but on the other hands traders are not using it as much, illustrating a current defiance toward the RMB. 41. This shows that the internationalization of the RMB will not be a smooth sail on a calm sea, and that it will take time and reforms for the RMB to gradually gain a global acceptance. However, by making an appraisal of the usage of the RMB as a currency reserve and as a 40 41. RMB Tracker, Swift website “Renminbi global transactions share at multiyear low” Roger Blitz (November 2017) Financial Times. 22. DOI:10.6814/THE.NCCU.IMBA.027.2018.F08.

(28) currency for trades, we can see that institutions are getting ready for its internationalization. Central banks have been building reserves of RMB, there are now RMB clearing banks in 23 different countries.. 4.3. What are the Limits to the Financial Industry Liberalization ? The main current concern regarding the Chinese financial system is its high level of indebtment. With the desire of maintaining the growth at all cost, the total level of debt has been piling up for several years and is starting to stabilize.. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. Figure 4: Total debt level in China. v. 42. This could not be a problem if the credit quality was low and unhealthy companies were deleveraging. However, this is not the case. The stabilization level of debt comes from healthy companies that are deleveraging, while weaker borrowers in less efficient sectors are not.. 42. “China’s Alarming Debt Pile Could Finally Stabilize This Year”, (April 2018) Bloomberg. 23. DOI:10.6814/THE.NCCU.IMBA.027.2018.F08.

(29) Moreover, the government was committed to support the growth and maintain the jobs in nonviable firms rather than letting the struggling firms to fail. A warning signal has been sent by the IMF in December 2017, stating that this level of debt was posing stability risk to the financial system. 43. The IMF noted similarities with the situation in the United States pre-2008. Real estate prices have been increasing for years in China and forced the citizens to borrow more to be able to purchase real estate. If the price were to decrease, the level of debt of the Chinese household will not match their assets and we can expect bankruptcy that will trigger new drop in real estate. 治政大rise of property prices in the richest property prices, even though some analysts believe that the 立 cities is due to strong demand powered by economic opportunities in those cities. prices. The government is aware of the situation and is taking steps to cool the inflation of the 44. ‧ 國. 學. Just as the Chinese government does not hesitate to intervene in the real estate market, the. ‧. Chinese government does not exclude to do what is necessary to maintain China’s financial stability. During the 2015 shock market, it forbid short selling, prevented notable shareholders. y. Nat. sit. to sell their shares, and put investors spreading rumors in jail, and organized massive share. n. al. er. io. purchases to keep the demand (and the prices) artificially high.. Ch. i n U. v. This tendency of the Chinese government to intervene when things are not going its way is also. engchi. a limit to the future development of the financial markets. If the Chinese government tries to keep a grip too tight on its capital market, that will hamper the economy by lowering the efficiency of the capital allocation, as well as giving bad signal to investors that might be .. On the other hand, the goal of the Chinese government is to pursue stability, and periods of liberalization are always followed by periods of tighter controls. 45 The Chinese Communist 43. “China's debt levels pose stability risk, says IMF” Larry Elliott (December 2017) The Guardian “Property Prices Continue To Surge In China Despite Government Cooling Measures -- Here's Why” Chen Xueliang (May 2018) Forbes. 44. 45. Ling Chen & Barry Naughton (2017) A Dynamic China Model: The Co- Evolution of Economics and Politics in China, Journal of Contemporary China,. 24. DOI:10.6814/THE.NCCU.IMBA.027.2018.F08.

(30) Party keeps its legitimacy from the economic growth that benefited almost the entirety of its population. If a financial crisis arises from an open market and hurts the economy, the legitimacy of the Chinese Communist Party will be lowered and social unrest could happen. Therefore, it is a risky task for the government to open fully its financial market, as even though it is a requirement to internationalize its currency and for the national interest of China, it exposes them to a greater risk as an opened and liberalized financial market can trigger economic crisis that will go against their objective of improving the economic situation of their citizens.. 治政大 banks that currently dominate foreign-owned, with objectives that differ from the state-owned 立 the market. A foreign-owned bank will not grant cheap loans to local governments and stateThe loss of control on the capital markets will come in different ways. Banks might become. ‧ 國. 學. owned companies for unprofitable projects.. ‧. The foreign firms will set up higher standards that will improve profitability. But they will also bring products whose consequences can be explosive. For instance, a Wall Street bank will have. y. Nat. sit. experience in handling derivatives product and structured finance that Chinese bank might not. al. er. io. have. The lack of experience of the domestic banks, coupled with the need to remain. n. competitive against foreign bank can have deep consequences on the economy. Especially that. Ch. i n U. v. the current level of debt is high, and hard to assess as domestic banks have put bad assets off. engchi. their books through the use of shadow banking. 46. To summarize, there are limitations to the financial liberalization of China. There are political limitations, as the financial sector can have deep impact on the economy, the Chinese government might be tempted to keep control on it to insure the stability of the regime. This could hurt the economic growth on the long term. The liberalization will also bring lack of control on financial institutions which won’t share the social development objectives of the central and locals government and will not be willing to assume risks through cheaper credit for the sole benefit of local governments.. 46. “China Quietly Rolled Out a Very Big Bang” John Micklethwait (April 2018) Bloomberg. 25. DOI:10.6814/THE.NCCU.IMBA.027.2018.F08.

(31) There are also economic limitations. China’s level of debt is rising and is difficult to assess. The credit quality is not good, and domestic firms have been cleaning their books by keeping bad debts out of their balance sheet, and companies have been using shadow banking to increase their level of debt without affecting their perceived credit quality. Moreover a liberalized financial market with foreign firms would increase the level of competitiveness. As profits will lower, inexperienced Chinese firms might take more risks in area they do not have a lot of experience, such as derivative products and structured finance. The problem with the opening of the financial market is that we cannot know if the financial markets are mature enough to. 治政大 but it is not clear on how the market will react. 立. handle it. China has been pushing for the liberalization, and has gradually liberalized its markets. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. 26. i n U. v. DOI:10.6814/THE.NCCU.IMBA.027.2018.F08.

(32) 5. The Globalization of the RMB : a Necessity for the New Silk Road 5.1. A Dream of a New Silk Road Xi Jinping has announced in 2013 a new infrastructure construction program in order to connect 68 different countries with China, with trading roads, pipelines and railroad. This program, known as the Belt and Road Initiative (BRI), aims to improve the regional integration of the Chinese economy as well as improving the efficiency of trade between Europe and China,. 治政大 Middle-East from the Roman to the Silk Road which connected China to Europe through 立 Empire to the Ming Dynasty. There are two different program for this initiative (See Figure. whose land connection is poorly developed. Hence the name of “New Silk Road” in reference. ‧ 國. 學. below): The first one is a land route to Europe, through Central Asia and Russia from the Central Western Region of China. And the second one is a maritime road, connecting the maritime. ‧. China to the fast-growing South East Asia Economy, the Indian Peninsula, the Eastern coast of Africa and Europe through the Suez Canal in Egypt.. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v. Figure 5: Belt and Road Initiative 47. 47. “Understanding China’s Belt & Road initiative” Peter Cai (March 2017) Lowy Institute. 27. DOI:10.6814/THE.NCCU.IMBA.027.2018.F08.

(33) The Belt and Road Initiative is actually a multitude of infrastructure projects, both domestic and internationals to better integrate the Chinese economy in its region and in the world. The vast majority of Chinese regions have plans for the BRI programs because it allows to get cheap funding for their own infrastructure projects. China’s neighbors are also keen to participate as it will allow them to develop their infrastructure thanks to Chinese funds and technology. Altogether, those projects will cost 8 trillion USD, and will be financed with debt instruments, as well as from the huge reserves of USD that China has accumulated until now. In 2015 alone for instance, China had spent 800 billions of its USD reserves in those projects. 48 This is a way. 政治大. of divesting from its US dollars assets, and not being financially exposed by a loss of its value.. 立. 5.1.1. The Economic interests of the BRI Initiative. ‧ 國. 學. China’s economic growth has not been uniform and suffered from huge regional disparities. While its maritime coast has greatly benefited from the economic expansion, it is not the case. ‧. for landlocked region. The reason is that the coastal regions benefited from maritime trade,. y. Nat. foreign investment, and industrial development favored by Deng Xiaoping. The objective was. n. al. 48. 49. Ch. engchi. er. io. not produce economic disparity, which was not the case. 49. sit. that the economic prosperity of those regions would spill over the inland region and that it will. i n U. v. Lam, W.L., (2016) Getting lost in One Belt, One Road, Hong Kong Economic Journal “Are there spillover effects between coastal and noncoastal regions in China?.” Brun, J. F., Combes, J. L., &. Renard, M. F. (2002). China Economic Review. 28. DOI:10.6814/THE.NCCU.IMBA.027.2018.F08.

(34) 立. 政治大. ‧. ‧ 國. 學 Figure 6: China's GDP per capita in each region. y. Nat. sit. On this figure we can see that the coastal province are much more developed that the inland. er. io. provinces. The GDP per capita in Shanghai is five times the GDP in Gansu, the poorest. al. n. v i n C h Therefore, thereUare big mountains. engchi. region 50which used to be the main road of the Silk Road, entering the Gobi Desert between the Tibetan and Mongolian. incentives for the Chinese. government to develop the inland regions by developing an infrastructure network that will link them with the rest of the world and help develop those regions.. For instance, the BRI initiative plans to create an economic corridor between Xinjiang and Pakistan, with the construction of a harbor in Gwadar, which could help Xinjiang export more goods as currently this autonomous province is 5000 kilometers away from the harbors of the coastal China.. 50. “Regional Development: Rich Province, Poor Province”, The Economist, 1 October 2016. 29. DOI:10.6814/THE.NCCU.IMBA.027.2018.F08.

(35) This project is known as the China-Pakistan economic corridor (figure below), and it will allow Xinjiang to be integrated into its regional economy. 立. 政治大. ‧. ‧ 國. 學 y. Nat. io. sit. Figure 7: China-Pakistan economic corridor project 51. er. The Belt and Road initiative can also help China exporting its standard abroad in a new. al. n. v i n C h such as Lao,UVietnam, and Myanmar because they the infrastructure of the emerging markets engchi emerging market that currently does not have competition. There has been few investments in. lack the financial resources to purchase them. However, thanks to Chinese loans and. technologies, there will be high-speed railways built in those countries. The Chinese high-speed train technology will be the first mover in those markets, and that will allow to set their standards and prevent foreign competitors such as the Japanese Shinkansen or German ICE to export in those markets whose standards will be adapted to Chinese trains.. 51. Pakistan Government. 30. DOI:10.6814/THE.NCCU.IMBA.027.2018.F08.

(36) 立. 政治大. ‧. ‧ 國. 學. Nat. sit. y. Figure 8: Railways planned in South-East Asia under BRI project 52. al. er. io. With that advantage of being the first mover in key infrastructure projects, Chinese. n. manufacturers and suppliers of high-speed trains will gain new markets and will be able to. Ch. i n U. v. sustained their growth. In addition to the South-East Asia peninsula, the Chinese government. engchi. has also gained a bid to build high-speed railway on Java island in Indonesia thanks to attractive financing conditions (namely, China finances the project). Therefore, the Chinese standard will be the dominant one in all this region and future projects will probably be Chinese-made as well.. Along with transportation infrastructure, China will develop the telecommunication infrastructure in those regions. Chinese companies such as ZTE and Huawei will be the first mover for modern technology such as 5G in those regions, which will guarantee them a strong competitive advantage for the years to come. 53 Huawei and ZTE have, for instance, already 52 53. “Chinese railway could put Laos on the tourist map” Brian King, (August 2017) CNN “Beijing's Silk Road Goes Digital” Elizabeth (June 2017) Council on Foreign Relations. 31. DOI:10.6814/THE.NCCU.IMBA.027.2018.F08.

(37) gained bid to set up optic fiber cable network in Afghanistan. Another telecommunication project that will be used by countries along the new Silk Road is the Beidou satellite network, a competitor of the US-made Global Positioning System (GPS) and European Galileo.. Another economic reason for the BRI project is to deal with Chinese overcapacity production. To deal with the lower demand due to the global economic crisis in 2008, China has subsidized production of steels, cement and other manufacturing industries. In steel for instance, China’s share of global output was 15% in 2000, and grew to 50% of the world output in 2015. Since 2001, it is estimated that 20% of the Chinese manufacturing production was subsidized. 54 The. 治政大lead to massive failures as companies overcapacity issue could lead to lower profits which could 立 have been using massive amounts of cheap debt (that local governments forced banks to. overcapacity issue has been described as a “timebomb” for the Chinese economy. This. ‧ 國. 學. offer). 55. ‧. Finding a solution to the overcapacity of Chinese industrial sector is therefore an important challenge for the government, especially that China’s needs for infrastructure might stall once. y. Nat. sit. most domestic infrastructures will be built. China’s effort to reduce overcapacity by simply. al. er. io. laying off workers could result in serious social issues as those industries employ millions of. n. workers. In 2016, China already cut 1.8 million jobs in the coal and steel industry (out of 12. Ch. i n U. v. million). 56 To avoid to make difficult cut, China will use the BRI project to move its. engchi. overcapacity. The Chinese premier Li Keqiang has announced that the facilities will be moved out of China to allow local production where it is needed. Instead, China will move up the value chain, and will move away from the cheap mass manufacturing model and will produce highspeed rail, machinery, and telecommunications that they will export in the countries of the BRI project. However, this aspect of the BRI project might not be possible as foreign countries might not accept to enter sectors with overcapacity, and that can hinder China’s growth by lowering the amount of labor-intensive jobs that still represent a large part of the employment in China.. 54. “China-Induced Global Overcapacity an Increasing Threat to High-Tech Industries” Stephen Ezell (February 2018) Information Technology and Innovation Foundation 55 “Overcapacity a time bomb for China’s economy” Shuaihua Cheng (September 2015) South China Morning Post 56 “China to cut 1.8m jobs in coal and steel sectors” (February 2016) The Guardian. 32. DOI:10.6814/THE.NCCU.IMBA.027.2018.F08.

(38) 5.1.2. Geostrategic Considerations In addition to the economic interests, the BRI project can help China on a geostrategic level. Firstly, by integrating its neighbor in its economy, China will be the natural leader of the region and will benefit from this position. Given the size of the Chinese economy, integrating its neighbors economies in Chinese’s economy would make them dependent of the will of the Chinese government. A country whose economy is entirely dependent of its neighbor will need to follow the interests of its neighbor. This would naturally make China the leader of the region.. 政治大. The projects in themselves have also geostrategic reason. One of the flagship project of the BRI initiative is the China-Pakistan Corridor Project and the construction of a harbor in Gwadar, not. 立. far from the Iranian border. The city of Gwadar will also host a 2.5 billion of US dollar liquid-. ‧ 國. 學. natural gas facility financed and built by China 57 which will be alimented by a pipeline connecting Iran and Pakistan. The site of Gwadar will therefore help China secure its energy. ‧. supplies, with a strategic location closed to the Persian Gulf, and avoid to go through the Malacca strait and the South China Sea where tensions between China and its neighbors are. er. io. sit. y. Nat. rising. 58. In addition to securing its access to strategic resources, the harbor of Gwadar is located in water. n. al. i n U. v. deep enough to welcome military ships and submarines. It can therefore become a base for. Ch. engchi. Chinese military activities in the region, for the moment peacekeeping activities off the coast of Somalia to protect commercial ships from pirating activities, but that will also enhance China’s capacity projection in the future if it is needed. Another BRI harbor has created political turmoil and complaints from India: the harbor of Hambantota in Sri Lanka. The harbor was built by Chinese companies and financed by state-owned Chinese banks. The 1 billion USdollar project was too expensive for Sri Lanka who could not face its debt repayment and ceded the harbor to China for 99 years. Currently, the harbor is underused and is not allowed to welcome military ships. However, 99 years is a long time and this situation could evolve, which worry India who sees itself circled by China. 59 57. “China to build $2.5 billion worth LNG terminal, gas pipeline in Pakistan” (October 2015) Deccan Chronicle “Tensions rise in South China Sea region as China consolidates position” (May 2018) India Times 59 “Inside China's US$1 billion port in Sri Lanka where ships don't want to stop” (April 2018) Straits Times 58. 33. DOI:10.6814/THE.NCCU.IMBA.027.2018.F08.

(39) The BRI also plans infrastructure project in Africa. The leaders of the continent are accepting the investment that they do not have the ability to finance themselves. China can also gain a better access to the plentiful natural resources of Africa that it needs for its economy. For the moment, there are only 3 African countries involved in the BRI initiative: Egypt, country where the Suez canal is located, Djibouti, a small country on the Red Sea where China built a harbor and a railway connection to Ethiopia, a country not directly involved in the BRI project but where Chinese investments in the manufacturing industry have been massive 60, and Kenya, an emerging economy on the Eastern coast of the continent. In addition to the BRI initiative, Africa. 治政大 connecting the different countries of the continent. 立. is receiving massive investments from China, with railroads, roads and infrastructures project. ‧ 國. 學. China is increasing its soft power in Africa and challenging the position of the former colonizers in the region. On a diplomatic stance, a lot of indebted African countries can be helpful in the. ‧. United Nations. However, this position is risky and could lead to important changes in the Chinese foreign affairs doctrine. So far the doctrine has been to not be involved in foreign. y. Nat. sit. countries domestic affairs. This could change in Africa, where the political risk is present and. al. er. io. the situation can quickly become dramatic. France has often been criticized on its actions in. n. Africa that have been ruled by some as imperialistic, while others argue that it was necessary. Ch. i n U. v. to maintain peace. For instance, France intervened during Côte d’Ivoire civil unrest in 2004 and 61. engchi. in 2011 , launched a military intervention in 2013 against a terrorist movement in Mali that was going to capture the capital Bamako 62 which would have destabilize the whole region where France have interest, or again in Central African Republic in 2013 France launched a peacekeeping operation approved by the United Nation to prevent an explosive situation when Muslims and Christian militia were on the verge of committing a genocide 63. France has acted under UN mandate, but has been looking for this mandate, asking for emergency UN meetings to allow a quick decision and a quick intervention. Under the current Chinese foreign affairs doctrine, China cannot do that, as it fears it could lead foreign countries into meddling in what 60. “Ethiopie, la nouvelle usine de la Chine” (May 2018) France Television « Côte d'Ivoire : la France frappe au cœur du dispositif Gbagbo » Jean-Philippe Rémy (April 2011) Le Monde 62 « Les dates clés de l’intervention française au Mali » Malo Tresca (April 2014) La Croix 63 « Centrafrique : l'ONU appelle à agir pour éviter un génocide » (January 2014) Le Monde 61. 34. DOI:10.6814/THE.NCCU.IMBA.027.2018.F08.