Nevertheless, such reflection does provide an opportunity for a realistic assessment of the prospects and challenges that lie ahead for the RMB. There are at least 5 key factors. Let me list them without going into the details. •  Currencies that rise to dominance are often of countries that are dominant in global trade. •  Currencies often become internationalised because the country is a key global exporter of capital. •  Every successful currency had official support. •  Currencies can only rise to international prominence when backed by liberalised and developed markets. •  There needs to be confidence in the currency and the economy. How does China fare against these signposts? I would say that it is three out of five. As far as trade dominance is concerned, China surpassed the US economy as the largest goods trading nation in 2013. The internationalisation of the currency, despite its cautious nature, is certainly getting a lot of official support – not just from Chinese policymakers but also from policymakers in other countries. As for confidence in the currency and the economy, there would not be so much enthusiasm for RMB internationalisation were such confidence missing. The fact that countries are queuing up to be able to trade RMB within their borders, or to gain access to China’s domestic financial markets, shows a strong desire on the part of these countries to participate in what they see as an economy with a potential for continued strong growth.
The observation of large surpluses of a currency, and that currency nevertheless appreciating, is an anomaly created by a global system where there are too few global currencies. By there not being enough choice, the whole world bears the pain when the domestic policies of the few major currency economies become extreme and inconsistent with the global role of their currencies. Monetary policy in many major advanced economies is being conducted as if theirs are closed economies with closed financial systems. The implication in terms of how monetary policy is conducted is that it creates a false sense of confidence about the effectiveness of extreme monetary policy with respect to the domestic economy and a failure to fully appreciate the global implications. In an integrated global economy and financial systems, the impact of policies leak out. Investors and savers earning lousy returns on their savings do not simply throw up their hands and say “since I’m earning lousy returns I might as well consume my savings or save less.” No, they start looking for other means to preserve the value of their savings, including venturing beyond their borders in search for better returns. The outcome is a monetary policy that is less effective than what is envisioned by the policymakers in the major economies and a significant policy headache for countries that are on the receiving end of those capital inflows.