The Internationalization of the RMB, and the Role of the AIIB

fund for infrastructure projects in Southeast Asian countries, settling China-ASEAN trade in RMB. It was also been predicted that China might come to the aid of Europe, insisting on contributing at least partly in RMB. This prediction came true when China established the AIIB.

As the above progress indicates, China has made its plan to internationalize the RMB very cleverly.

Not only did it begin to implement RMB internationalization to increase its competitiveness in financial markets, but it also established the AIIB. The bank is key to mapping out the OBOR initiative. The AIIB will play a critical role for China to take an economic interest and, at the same time, to be pivotal among developing countries where there is an already existing infrastructure market. The action plan for the OBOR initiative states that countries along the Belt and Road should

“make joint efforts to establish the Asian Infrastructure Investment Bank (AIIB).” It also states that they will provide good credit-rating in order to issue Renminbi bond in China for those countries along the OBOR route, and for the qualified Chinese financial institutions and companies to “issue bonds in both Renminbi and foreign currencies outside China.” The AIIB, the New Development Bank (NDB), and the Silk Road Fund, together with China’s policy banks, have already taken the lead in participating in cross-border investment projects.

China has been promoting the internationalization of RMB since 2008, the year of the onset of the global financial crisis, claiming that the weak recovery of Western economies shows that we need another strong currency, such as the RMB, to equal the US dollar as the dominant international reserve currency. Moreover, the RMB is increasingly accepted in international trade, and it will reduce the costs of trade with China, facilitating trade settlement and avoiding the risks of using a third-party currency, such as the US dollar. China hopes that this will deepen regional economic integration.

Furthermore, as the OBOR initiative progresses, China will serve as a key trade partner in the OBOR region. With political stability and cultural prosperity, the country hopes to lead the region in

economic and financial development. Expanding the use of the RMB in this region will facilitate trade, financing, investment, and financial transactions, which in turn will make the RMB a major international currency.

Table IV-6: OBOR and RMB internationalization

Bilateral local currency swap RMB Settlement Bank

Belarus Singapore Russia

Indonesia Albania Malaysia

Uzbekistan Sri Lanka Hungary

Kazakhstan Russia Singapore

Thailand Armenia Thailand

Pakistan Serbia Qatar

UAE Tajikistan Laos

Malaysia Pakistan Cambodia

Turkey Qatar

Mongolia

Ukraine

Hungary

Another reason for China to push for RMB internationalization is that the process provides a great deal of opportunity for reform. RMB internationalization is a “convenient pretext to pursue financial liberalization and market reforms” (Thornton, 2012). Such strategy has been used by previous Chinese leaders: for example, Premier Zhu used accession to the WTO to push through structural changes in 2001. The change includes removing the agricultural protection and opening up the services market.

There is a possibility that these factors might sway the reform-minded officials to push for financial and exchange rate reforms using RMB internationalization.

China’s pattern of internationalization

Since its opening-up in 1978, China has been altering its economic policies and focusing on economic prosperity to catch up with the rest of the world. With a foreign trade monopoly and administratively set prices of the command economy, which was common in the communist country, China had to face the consequences of not joining the world market. China soon realized that, as much as it preferred to remain in full political control behind its closed economy, as the size of the global market increased, so did the cost of being outside the world trading system (Hellen, Keohane, 1996).

Relative price, a liberalized market, and internationalization pressured China to open up and alter its associated institutions. In addition, I believe that there is strong connection between China’s efforts to resolve domestic issues and how the country came to push forward and implement the OBOR

initiative.

In Chapter 2, I reviewed the concept of internationalization and how it affects domestic policy preferences. In general, domestic debates and coalitions are more focused on international policy issues as internationalization progress (Hellen, Keohane, 1996). Although China opened itself up to the global market, it did so in a strictly controlled, segmented way, so that bureaucrats did not lose their political power, while accepting all the advantages resulting from internationalization.

Shirk(1996) explains how China presents a complex picture of the impact of internationalization on economic policies, despite being a communist country. According to her, the 1978 policy change was a result of strong pressure from international economic factors, and the fact that China still managed to gradually reform its foreign trade administration is remarkable. Chinese leaders removed regulatory constraints from specific regions, while managing to maintain those controls over other localities. The level of openness, and which regions took advantage of preferential treatment, were determined solely by the central government, and its policies and initiatives were implemented based on its plan. This was highly different from what neoliberalists might have expected from a country’s reaction to internationalization. Many scholars have defined Chinese characteristics of internationalization as

“elite driven,” “economic nationalist,” and “particularistic contracting.” All in all, China has been consistent in showing these “controlling the opening” characteristics, though over the years the economic reform and its regulatory barriers have slowly loosened up, especially following the 1999 WTO agreement between the US and China.

V.   Conclusion  

The aim of this thesis was to determine whether the Belt and Road initiative was implemented to serve as an external instrument to assist in the necessary domestic rebalancing process and, if so, to examine how the OBOR initiative is connected to China’s domestic developmental policies. In doing so, I systemized China’s internationalization process and emphasized unique characteristics which made this Chinese case sets apart from other internationalization occurring around the globe. From stage one, since 1978 economic reform, China has gradually lowered regulatory barriers and acknowledged the global market force, resulting in a competitive edge for the country and giving it incentives for tremendous economic growth. These opportunities arose from differences in the relative values of goods and services inside and outside of China (Keohane 1996), and other benefits deriving from global transaction made China gain greater global links.

Next stage of China’s internationalization came with its domestic policy -Western Development strategy- to overcome the spatial inequality caused by preferential economic policy during the first stage, and the government decided to reform the Sate Owned Enterprises (SOEs) and increased usage of the Special economic Zones (discussed earlier in this paper). The SOEs, which were also part of China’s “going global” strategy, began in the mid-1990s. Deepening the level of domestic and

international policy integration which are all in line with previous policies, China finally implemented the OBOR initiative, the stage three.

With OBOR initiative, China expects its ties with neighboring countries to its western region to create opportunities, as OBOR consists of the same developmental projects, including infrastructure- consisting transport, hydro plants, energy, telecommunications, and the enticement of foreign investment, China should expect growth in the western area. The SOEs that played a vital role in China’s overseas investments during the reform period also are expected to benefit from the OBOR initiative. They will improve operations management, and enhance global competitiveness even further. The OBOR project encourages the participation of enterprises from cooperating countries, but has mapped out specific methods for SOEs. Many countries along the Belt and Road have poor transportation and energy infrastructure, and therefore have enormous demand for improving those sectors. Chinese enterprises have accumulated a wealth of overseas construction experience, and the central government wants to utilize this ability and derive greater profits from participating in a larger and much more profitable platform. The OBOR initiative could also help improve the stability of inner regions and maritime transportation routes, countering the surge of terrorism and extremism,

transnational organized crime, and other non-traditional security threats. China’s five-year plan (FYP)

and the action plan for OBOR both state that China believes that its economic cooperation within the OBOR framework may help address the deep-rooted causes of instability and radicalization of poor countries that have been on the periphery of the global economic system.

I also proposed policy linkage to support my argument that OBOR is the extension of domestic policy, presenting its 10th Five Year Plan(2001-2005) of the Great Western Development strategy, the 12th Five Year Plan (2011-2015), in addition to internationalization of the RMB. Western

development is still a major factor in China’s domestic development policy, and through OBOR, China could add an international policy pillar for the “Go West” drive, a domestic endeavor from the FYPs. Indeed, various papers have already analyzed China’s strategy for future development, claiming that OBOR is driven by a variety of domestic and foreign policy challenges facing China, the idea being that OBOR can facilitate and keep China’s economic boom alive. China’s GDP growth rate has decreased to 7% after decades of double-digit growth, and China is now suffering from increased labor costs, an aging population, growing energy demands, and overcapacities in manufacturing sectors.

I have shown that OBOR should be viewed as broadening the scope of China’s domestic strategy, which I call it the “internationalization of domestic development”, turning specific economic projects into economic collaboration projects with OBOR countries. As I have emphasized earlier on this paper, legitimizing the internationalization of domestic development was one of the key focus during my research. It might even seem like a normality in any diplomatic move in this day and age,

nevertheless, it is absolutely necessary to examine China’s case considering its unprecedented influence around the globe. What also sets this case apart from others is that China is taking an unordinary path by initiating the OBOR, a first multilateral cooperation China has established, being strictly China-centric geographically and strategically. Such characteristics have been listed more in detail earlier on in this paper. I must also point out how most domestic development policies made since the 1978 reform are mostly China implementing its national strategy to benefit from the

international, liberal market economy. OBOR will create even more favorable external conditions for related internal strategy which gives strong motivation for China to endeavor after the success of the initiative.

Discussion

China is now less mercantilist and more comfortable with lowering the barriers to global market forces. It has moved beyond partial integration to adjust its external behavior and now strives to become an influential leader, creating a new and improved international system. China is more involved in a market economy, planning to increase operational efficiency in a modern economic system, and to place its resources where they are most needed. Now that China is implementing the Belt and Road initiative, I have tried to reevaluated and redefined China’s internationalization.

The fundamental characteristics of regulating internationalization have not changed. OBOR is an initiative that aims to create a new economic entity of an open platform for all parties willing to contribute to global connectivity, but still with China strategically planning every step seems to be the evidence of this. The internationalization of the world economy has had significant impact on

domestic politics.³⁵ This paper tried to analyze China’s internationalization process as part of domestic development having its academic purpose. However, whether this process will in fact be beneficial to China’s domestic development in the longer term while fulfilling OBOR’s claimed goal is uncertain, with legitimate questions left that require further investigation. There is no doubt that China will continue to promote coordinated and interactive development projects between regions through the implementation of OBOR for the country’s regional development and for major function-oriented zones, enhancing the coordination of regional development. However, it is too early to estimate any clear and concrete consequences of China’s systemic progress.

In addition, the OBOR initiative faces several immediate challenges without the participation of the US and Japan in the AIIB. China will need to consider improving its relationship with these two countries to improve the AIIB’s credit rating and legitimacy. Many participants from the Asian region have poor credit, which means that projects may be difficult to pursue. Moreover, because consensus is reached in the top levels of government while implementation is done at the local level, it could be difficult to obtain the full support and cooperation from local governments. Security will be another crucial challenge for OBOR: the Kashgar-Gwadar economic corridor will come across what is consider to be conflict-ridden territories.

Nevertheless, OBOR initiative is a strategic necessity for the resilience of China’s development. If successfully implemented, OBOR could have tremendous political and economic impact, given the                                                                                                                          

35  Keohane, Robert O. and Miler, Helen V. 1996. INTERNATIONALIZATION AND DOMESTIC POLITICS.

Cambridge University Press.  

dominant role of developing economies in China’s growth and the huge potential of the Global South.

The initiative embodies the Chinese leadership’s goal of making use of the interplay between bold internal reforms and external rebalancing acts through the process of internationalizing domestic development. Scott Kennedy, the deputy director of the Freeman Chair in China Studies at Center for Strategic and International Studies(CSIS), stated in an interview that OBOR has become an integral part of China’s economic policy to cushion the effect of the domestic economic downturn and “to help make use of China’s enormous industrial overcapacity and ease the entry of Chinese goods into regional markets.” ³⁶This could pose a challenge for China because there is already a deficit of trust between it and the regional and peripheral powers, who harbor suspicions about China’s intentions and its egoistic goals behind OBOR. China needs to try to overcome those challenges and convince the respective countries that OBOR goes beyond internationalizing its domestic development, that if this cooperative relationship continues, it would share the prosperity that China will achieve, and that it could work towards deeper integration economically and politically which will result in fostering regional peace and stability.

36 By the Center for Strategic and International Studies. 2015. Lim Wen Xin interviewing Scott Kennedy

“Building China’s “One Belt, One Road””, Assessed in April 2015, https://www.csis.org/analysis/building-china’s-“one- belt-one-road”

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