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China’s state-permeated market economy and its constraints to the internationalization of the renminbi

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Abstract

The domestic institutions of China’s state-permeated market economy (SPME) have been conducive to the consolidation of an investment- and export-led growth model that has transformed China from a low- to middle-income country. Since the global financial crisis Chinese authorities have become increasingly disposed to internationalizing the renminbi (RMB) to address the external monetary vulnerabilities arising from their economy’s excessive dependency on the dollar. We adopt a comparative capitalism perspective to argue that China’s international monetary ambition is incompatible with the domestic financial institutions of its SPME and growth model. The success of RMB internationalization hinges on the implementation of far-reaching domestic institutional reforms that would overhaul the key domestic financial institutions of its SPME. On the basis of a comprehensive analysis of the complementarities between these institutions and their role in China’s SPME and growth model, it is argued that the political capacity and resolve of the Chinese government to adopt these reforms can be called into question.

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Notes

  1. Interest rate liberalization, for instance, is a topic that has been discussed within the PBOC since 1980s and thus far it has not occurred. It is also very likely that it will only happen once the Chinese government establishes a national deposit insurance scheme in order to have a competitive level playing field between large and small banks, which has not happened neither. Interviews with senior bankers at the SOCBs and smaller commercial banks conducted in Beijing in May 2012 and July 2013.

  2. It needs to be noted that the percentage of consumption in China’s GDP might be underestimated in Chinese statistics.

  3. Interviews with senior researcher at CASS conducted in July 2013 in Beijing corroborate this hypothesis.

  4. Interview with senior official at CASS, May 2012.

  5. For an extensive analysis of China’s ‘entrapment’ by US monetary power, see Vermeiren (2013).

  6. It should be noted that the reduction in the mismatch between the role of the RMB as a settlement currency for imports and exports in 2012 reflected fading appreciation expectations rather than the increased attractiveness of the RMB as a settlement currency for Chinese exports.

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Authors and Affiliations

  1. European Economy and Emerging Markets, Elcano Royal Institute, Príncipe de Vergara, 51, Madrid, 28006, Spain

    Miguel Otero-Iglesias

  2. EU-Asia Institute at ESSCA School of Management,

    Miguel Otero-Iglesias

  3. Department of Political Science, Ghent Institute for International Studies, Ghent University, Universiteitstraat 8, Ghent, 9000, Belgium

    Mattias Vermeiren

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  1. Miguel Otero-Iglesias
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  2. Mattias Vermeiren
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Correspondence to Mattias Vermeiren.

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Otero-Iglesias, M., Vermeiren, M. China’s state-permeated market economy and its constraints to the internationalization of the renminbi. Int Polit 52, 684–703 (2015). https://doi.org/10.1057/ip.2015.14

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