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A globalised renminbi can transform both China and London

[Reprinted with permission from the Financial Times 18 Oct 2013 (EnglishChinese)]

The Chinese will see how the lifting of controls is linked to economic success.

This week George Osborne announced steps to make London a global trading hub for China’s currency. If the internationalisation of the renminbi proceeds and the chancellor of the exchequer’s plan succeeds, London will – so it is hoped – again flourish as a leading financial centre. The nature of that flourishing could well differ from what we saw before 2008, but the prosperity will feel the same. Can it happen? Yes. Will it happen? That depends on a number of considerations. Will it be a good thing? Almost surely.

via http://upload.wikimedia.org/wikipedia/commons/2/25/City_of_London_at_night.jpg

City of London at night (via Wikimedia.org Commons)

Too often, when observers say renminbi internationalisation will never happen, what they mean is they cannot imagine the renminbi – with less than 3 per cent share of world official currency reserves – undermining the exorbitant privilege enjoyed by the US dollar as the world’s reserve currency.

But neither internationalisation of China’s currency nor London’s benefiting from it require that to happen. These are both relatively modest undertakings. They hinge on just one thing: the currency simply has to become a force in global currency markets.

True, this will require renminbi use in the financial markets to exceed single-digit shares. By how much? Well, to paraphrase singer Miley Cyrus, no one’s got that memo yet. But already the renminbi’s share is rising on pretty much all measures of world currency use. That is what matters.
To understand whether this will continue, we need to think about the risks and opportunities that arise from world markets accepting the renminbi more widely.

Even without full official convertibility, the currency is already significant. Full convertibility could occur overnight by fiat if the Chinese authorities thought the moment propitious.

Confidence and trust in China’s management of the renminbi are higher than in US management of the dollar or European Central Bank management of the euro. The supposed absence in China of market transparency, government flexibility and the rule of law have little bearing on acceptance of its currency. Only perceptions of risk and return matter – and government dysfunction in the US is doing everything possible to convince the world that dollar risk is significant.

China has a population about four times that of the US and an economy only half its size. It trades as much with the rest of the world as the US does. And the potential for continued economic growth remains strong. There are problems but also solutions. China invests more than many observers think reasonable but its western regions remain poorer than significant parts of Africa, and its capital stock and infrastructure per worker remain low. It no longer has a particularly young workforce – but its 340m elderly people quietly doing tai chi in the park will make for a more stable society than a similar number of young men with poor job prospects. Yes, there is a “middle-income trap” in the developing world, but all the countries that have found sensible ways to escape it had characteristics exactly like China has today.

Since 1980, the nation has steadily pulled the world’s economic centre from west of London to east of the Mediterranean. Through all this, the city’s position as a place worthy of confidence and trust, as an intellectual and cultural centre and a hub for learning and higher education, has remained constant. But, given the shift in global economic performance, it is an anomaly that the renminbi is not yet a significant force in world currency markets: the pressure for it to become one is strong.

Beijing knows it. It has warmed to the idea of making London a renminbi global trading hub. It has also established the Shanghai free-trade zone, where international finance is carried out under liberal global rules, which has the notable support of Premier Li Keqiang.

The Shanghai free-trade zone promises to do for China and global finance what the Shenzhen special economic zone did for China and the global manufacturing supply chain. The rest of the country will see how closely entwined are modern economic success and the lifting of controls on information flows, as well as currency flows – in Shanghai, in London. That will be significant, not just for London’s prosperity but also for pointing to how China itself will change.

[This was first published 18 October 2013 in the Financial Times (English, Chinese)].

“3 little syllables”: LSE graduation, July 2007

Given how knowledge is supposed to be just world knowledge—not Korean, Japanese, British, or American knowledge—it is impressive how much gets written comparing to those in the West the sheer numbers employed in Chinese science and technology, or the levels of expertise in Indian engineering. How long will it be, it is implied, before Chinese knowledge or Indian knowledge overtake Western knowledge?

Thomas Friedman describes in The World is Flat how Craig Barret — the current Chairman and former CEO of Intel Corporation — shocks Americans by admitting Intel could well thrive as a company even if it never hired another American, although this of course is neither Intel’s intent or desire. “We still do hire lots of Americans. But today we can hire the best talent around the world and be very successful,” casting his eye over how a lot of Intel investment now takes place in Russia, China, India, Malaysia, and Israel.

Why hold back? Why not hire only the best?

The other story making the rounds is how in many Western firms now, annual prize ceremonies for top performance come with cheat-sheets to help the CEO pronounce the names of 9 out of 10 of the firm’s most outstanding employees. Now and then, of course, “John Smith” from Peoria Illinois surprises.

So it was with some trepidation in early July that, as Head of the LSE Economics Department, I looked over the list of 300 or so graduating students whose names I would have to announce, before an audience of 1,000 in the Peacock Theatre at LSE’s graduation ceremony. As I had previously blogged last December and October, that audience would include friends and family who had travelled vast distances to attend.

LSE has long been and continues to be far more international than any other university I know. Of its student population of 8,000, half come from more than 120 countries outside the European Union. Last year, for the first time ever, China and Hong Kong fielded over 950, the highest number of foreign students at the LSE. Malaysia and Singapore, even when added together manage only a tiny population at home. Yet, somehow they routinely send the LSE almost as many students as does the Chinese mainland now, and one-third more students than does all of Germany.

At the ceremony, I got up to the podium and, following protocol, tipped my hat to Howard Davies, the Director of the LSE, standing across the stage. He nodded, and looked pointedly back at me, for my Department’s students were the bulk of those waiting to be called up on stage to shake his hand. I started down the list, and got smoothly around the first bend with “Igor Cesarec”, “Christina Yuen Kiu Chan”, “Wang Sheair Chua”, “Yahan Li”, “Sulwyn Lim”, “Saravanan Nagappan”, “Hieu Nguyen”, “Sunehra Rahman”, and “Muhammad Kashif Riaz”.

I figured I was doing well. I only had 240 names that morning; some graduates had decided to go home or had had to start work, and couldn’t attend.

I could see the finish line. I headed towards it with “Adrian Zhi Da Wong”, “Sukjai Wongwaisiriwat”, and “Zhi Jia Yap”. I was on the final straightaway now with “Jiaqian Chen”, “Ilja Boelaars”, “Kun Lung Wu”, “Vasileios Gkionakis”, and “Nuarpear Warn Lekfuangfu”.

Then I messed up.

“Linda Peng”. Three syllables. From Malaysia.

These people I have named and others in the Peacock Theatre that morning are friends of mine. Of those who graduated BSc from the Economics Department, three years back I had given them and their classmates, all 850 of them, the very first lecture they ever attended at the LSE. Not by coincidence, that had also occurred in the Peacock Theatre; it was the first lecture on Introductory Economics. These people are members of an amazing and accomplished class. I wasn’t pleased to see them leave that July morning. But I was proud I got to announce their names as they left.

World knowledge it is then.


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