Can China’s RMB supplant the dollar?

Politics & Current Affairs

Diana Choyleva and Dinny McMahon discuss their recent report for the Wilson Center on China's efforts to internationalize the renminbi, and whether Beijing can reshape the U.S.-led global financial order.

Illustration for The China Project by Derek Zheng

Below is a complete transcript of the live Sinica Podcast with Diana Choyleva and Dinny McMahon.

Kaiser Kuo: Welcome to the Sinica Podcast, a weekly discussion of current affairs in China, produced in partnership with The China Project. Subscribe to Access from The China Project to get access. Access to, not only our great daily newsletters, but all the original writing on our website at We cover everything from China’s fraught foreign relations to its ingenious entrepreneurs, from the ongoing repression of Uyghurs and other Muslim peoples in China’s Xinjiang region, to Beijing’s ambitious plans to shift the Chinese economy onto a post-carbon footing. It’s a feast of business, political, and cultural news about a nation that is reshaping the world. We cover China with neither fear nor favor.

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I am Kaiser Kuo, coming to you from Chapel Hill, North Carolina.

Joining me is the notorious Elon Musk apologist, Jeremy Goldkorn, aka Jīn Yùmǐ 金玉米, who recently argued with a distinct gleam in his eye that his fellow white South African and his apparent feckless management of Twitter was actually a Schumpeterian act of creative destruction. And that from Twitter’s ashes will arise something far, far worse for American culture and political discourse. Jeremy, greet the people, won’t you?

Jeremy Goldkorn: Hello people. I think you’re misconstruing my argument. I think it’ll be great if he destroys Twitter, but yes; indeed, the next thing is bound to be far worse.

Kaiser: It always is. It always is. We’re delighted to be joined today by Diana Choyleva and Dinny McMahon, who co-authored a recent study on China’s push for RMB internationalization, which will be our topic of discussion on this episode. The report, which was prepared for the Wilson Center is titled China’s Quest for Self-Reliance: How Beijing Plans to Decouple from the Dollar-Based Global Trading and Financial System. Diana Choyleva is chief economist and founder of Enodo Economics, an independent macroeconomic forecasting consultancy that she set up in 2016. She joins us from London. Diana, welcome to Sinica.

Diana Choyleva: Thank you. It’s my pleasure to be here. Can’t wait.

Jeremy: Dinny McMahon is a veteran journalist who spent many years at The Wall Street Journal. He is the author of China’s Great Wall of Debt, and spent some time working at the Paulson Institute’s think tank MacroPolo. Dinny, welcome to Sinica.

Dinny McMahon: Thanks, Jeremy. It’s great to be here.

Kaiser: So, Diana, let me start with you with a very simple question. I’ve heard it said that the U.S. enjoys an extravagant advantage by the very fact that the dollar is the global reserve currency of choice and the main currency of settlement for international trade, but I’ve always assumed that that’s true. What precisely though is that advantage? Is it just guaranteed demand for dollars and that makes deficit spending that much easier? What’s the advantage?

Diana: That is the advantage, exactly as you phrased it. The U.S. is able to borrow at much lower cost and doesn’t necessarily, though, set its monetary policy in the interest of the rest of the world. And so, some of the pushback originally from China was, in particular after the global financial crisis, that it’s not prudent for the world to have just one reserve currency. And actually, at the time, the Chinese were talking much more about a multicurrency world in which there is, and even suggesting something like the SDR.

Kaiser: Special drawing rights. Yeah, maybe you can explain what that is for people.

Diana: Yeah. Special Drawing Rights at the IMF. But the story has changed really since the arrival of Xí Jìnpíng 习近平 because China changed dramatically under his leadership and is on a path of decoupling itself and trying to achieve self-sufficiency and self-reliance. And that goes across all sectors of the economy, including the financial sector. So, now it’s much more about the geopolitics and China feeling it’s a huge disadvantage by being so dependent on the dollar-based global financial system.

Jeremy: May I ask, perhaps Dinny, aside from Xi Jinping and his very clear focus on China’s self-reliance, what else has changed that Beijing came to see the dollar’s global dominance as such a major strategic vulnerability for China?

Dinny: Well, I think the big thing over the last couple of years in particular has been the use of the United States, and more broadly its allies of the dollar as a weapon. Now that’s something that’s been building gradually over the last 20 years. I mean, the U.S. has gradually excluded both individuals and institutions, and also almost entire economies, from the use of the dollar system. So, if we’re looking at the short list that had the dollar weaponized against them, it’s places like Iran, North Korea, Afghanistan, but I think the really big one was after Russia invaded Ukraine — Just the sheer scale of the financial sanctions that were imposed on Russia, for all intents and purposes, Russia’s Central Bank and its financial institutions, and by extension, so many of its firms just aren’t in a position where they can use the dollar anymore.

China looks at that and realizes that this is an extra quiver in the American arsenal of repercussions that it can deploy in whatever manner it sort of sees fit. And so, I think there is a concern, given the potential for rising tensions over Taiwan in particular, that conceivably one day China could be on the receiving end on a comparable suite of financial sanctions. And so, the only way that China can really insulate itself against those sorts of measures is to be less reliant on the dollar. And the only way to be less reliant on the dollar is to use another currency, and ideally a currency over which it has control. And that is really, there’s only really one option, and that’s a renminbi. So, I think, if you kind of take what Diana was saying on the whole issue of monetary policy, on one level, China is becoming increasingly frustrated with the way that the U.S. sets sort of global monetary conditions.

And at the same time, this weariness that one day the Chinese economy might not be allowed to function properly because of U.S. financial sanctions, all of a sudden, there is this real impetus and this real urgency to decouple from the dollar financial order because there are some real risks involved.

Kaiser: Dinny, I understand the urgency after the Russian invasion, but long before February 24th, 2022, Beijing has been pushing for RMB internationalization. It’s a decade ago. I mean, it was really after the financial crisis first, right? Surely also, Beijing wasn’t the only other economy that was chafing under this, that found it really alarming how the U.S. had begun weaponizing the power of the dollar through financial sanctions, as you say. And it’s not only ones who were directly targeted, but there were others who maybe might find themselves in the crosshairs who’d probably want to do that. Was Beijing, though, alone in pursuing internationalization of its own currency? Or were there others who were trying as well?

Dinny: Over the last, well, however many years, it has been a goal of a lot of other smaller countries in the region as well. I mean, certainly in Southeast Asia, I think the Thais and Malaysians also have those sorts of ambitions. And certainly, in the past, in the 1980s, and certainly the early ‘90s, the Japanese had a strategy as well for trying to promote the internationalization of their currency as well. But for the most part, it’s not really an option for most countries around the world because there’s real costs involved. Internationalizing your currency really means getting foreigners to be willing to transact in a currency that’s not their own. Now, most foreign nations, most foreign trading companies and financial institutions are willing to do that in the dollar, and to a lesser extent the euro, because the costs involved in using those currencies are relatively low.

I mean, that’s the great thing about the dollar, in some ways because the dollar is so entrenched as the global currency because it’s so entrenched — because it’s so entrenched. Because there are so many dollars globally available everywhere, it’s always going to be cheaper to use the dollar than perhaps almost any other currency. And when I say cheap, I mean that cost effectiveness exists on a whole lot of different levels. On one level, it is the spread or the rate that a bank will charge you to change one currency into another. To change your currency into the dollar, it’s always going to be pretty cheap rather than to change your currency into, say, Indian rupees or something else. Then, of course, the other thing is, for trading companies that have to hedge their foreign exchange risk, what they want is really well priced and cheap forwards contracts.

The other thing that they need is readily available and cheap trade financing. And given how cheap it has been to borrow in the dollar for years; again, that’s been another sort of factor reinforcing the dollar’s primacy.

Jeremy: Diana, one of the things I’ve always found difficult to understand about the idea that China will internationalize the renminbi is that there is literally a communist on the money — Chairman Mao. I mean, it always seems to me that there’s going to be a deficit of trust in market-based economies. I’m being slightly facetious, but I mean, has something changed in the last couple of years? I mean, does China now have any advantage or any greater trust in the world that it didn’t have, say, back in the years following the global financial crisis?

Diana: No. On the contrary, actually we are living in the world of the great decoupling, which was, and has been our key investment thesis for the past three years. And in that world, the financial systems will also bifurcate. And so, it becomes a question of who will end up in China’s financial sphere of influence and why? One issue in choosing which currency you are going to use, whether for payments or investment, is the issue of trust. And it’s extremely unlikely that it will be the U.S. adopting the, the RMB. And the way China sees this at the moment is that it wants, in particular, the Asian region to become the center of both trade and finance for the Asian region. And ideally, in an ideal case, as far into Europe as possible, and obviously Africa is part of the mix, but in some ways less important part.

And when it comes to that, then you’re looking of, not just the issue of trust, but what Dinny was saying of how to convince those countries that for whom it is cheaper to transact in dollars, to transact in the yuan. First you mentioned that China started internationalizing the RMB shortly after the global financial crisis, and they failed. They failed by their own admission because it was large. Any interest that there was, there was predicated on the expectation the yuan will rise, and once that went out of the window, we actually saw a decline in the share of yuan used for China’s overall exports and imports. So, now they have a new strategy because of this imperative to have self-sufficiency and be able to withstand and have their own geopolitical sphere of influence.

They have this imperative to achieve this one way or another. And what we found in our report was that originally we were thinking that we’ll spend a lot more time on the payment system, on maybe looking in more depth at the digital currency and what all that means, but actually we found that it was how they thought of ways to incentivize their partners, trading partners, to decide to transact in yuan despite it being that much more expensive.

Kaiser: So, that’s the question that we’re going to get to right after this one. So, we’re going to talk about what China is doing to try to incentivize its partners to actually use the yuan, to increase demand for the yuan. But first, I want to understand this — you said China is trying to achieve this. But I want to get a clear idea of what it is that China is trying to achieve. Does China seek to turn the yuan into just a currency that’s comparable with the pound sterling or the Japanese yen in its importance, one that countries want to hold as part of a diverse basket of currencies? Or is the game plan really to truly supplant the dollar? How should we try to right-size China’s ambitions in this regard, Diana?

Diana: It’s in the middle of what you described. It wants to achieve more the position of the euro if you’d like.

Kaiser: Ah, I see. Okay.

Diana: I mean, at its most simple, it wants to be able to buy what it needs from the world in yuan and using its own payment systems. So, it is not going to be sanctioned by anyone. Of course, that’s at the extreme because China wouldn’t be necessarily buying everything it needs from only its sphere of influence. But think of it as the yuan being at the center of China’s trading block and how that block ends up or who ends up being part of that block will very much depend on what China needs, but also whether it has leverage over those countries.

Kaiser: Fantastic. Dinny, so let’s start with you and talk for a little while about what China is trying to do to increase demand for the yuan in international markets. You mentioned the importance of futures markets in commodities as being really key to its eventual success. So, can you unpack all that? What is China trying to do to increase demand for the yuan?

Dinny: The way to think about it is this. So, when they launched renminbi internationalization in 2009, for about the first eight years, the way they went about it was giving foreigners, and giving Chinese, giving everybody the opportunity to use the renminbi for cross-border trade, for cross-border investment. I mean, previously there wasn’t really any chance to use the Chinese currency outside the borders. And so, initially, that first wave of internationalization was giving people the opportunity to do that, to pay renminbi for Chinese goods, for Chinese importers to pay foreigners in renminbi, for foreigners to invest in Chinese capital markets. In Hong Kong, you could save in renminbi. Chinese companies were investing bonds in Hong Kong denominator renminbi. All of a sudden, you started building up an ecosystem for the use of renminbi outside of China’s borders.

But what didn’t happen is, although China gave the world the opportunity to use of renminbi, it didn’t actually give them a reason to do it. So, as Diana was saying, that’s what’s been happening pretty much since mid-2017. It’s like, what can China do to give people an incentive to use renminbi, particularly in an environment where it’s always going to be cheaper to use the dollar? Because the renminbi is not going to be able to compete on cost until the day that you’ve got these huge pools of renminbi outside of Chinese borders comparable to what the U.S. dollar has at the moment, which is really what helps keep the dollar so cheap. So, something else has to happen. And so, somehow China has to get renminbi flowing out of the country and then flowing back in — hat sort of circle of life — to make it an international currency.

And they’re doing it in two main ways. So, in terms of getting renminbi flowing into the country, the focus is very much on what’s called the financial account. So, it is getting foreigners to invest in Chinese stocks and bonds and financial assets. The focus here is pretty much they’ve done that by imposing rules. So, at the moment, if you are a foreigner and you want to invest in Chinese capital markets, pretty much you have to do it using renminbi. What I mean by that is, back in the old days, if you were buying Chinese A-shares or whatever, you’d take your dollars and you would bring them onshore to China, and then you would change them into renminbi, and you would buy stocks listed on the Shanghai Stock Exchange. Now, under a whole lot of programs that have been rolled out over the last few years, so the Stock Connect program, the Bond Connect program; now we’ve got a Swap Connect and a Wealth Management Connect program.

Under those rules, you can’t bring dollars into China. You have to source renminbi from outside of China, probably in Hong Kong, and then bring the renminbi into the mainland. So, that’s the first thing they’ve done. They’ve effectively imposed rules that to invest in China’s financial assets, you’ve got to use renminbi sourced from overseas. So, that’s the first side of the equation. That’s how they’re getting renminbi to flow in. The other side of the equation is how do you get the renminbi to flow out? And the focus here has been very much with trade. Getting foreigners to accept payment from Chinese firms in renminbi. And the focus here is going to be… I mean, what China’s trying to do here is effectively change the way global trade flows work. I mean, this is a long-term project.

Kaiser: So, what countries is it targeting first in this? I mean, what countries is it hoping to encourage people to accept the RMB? The other specific geographies, is this — are we talking about Russia, central Asia?

Dinny: Well, the focus, it’d be very much countries from which it buys, first and foremost, natural resources. And it’ll be countries broadly in its sort of BRI, Belt and Road Initiative orbit.

Kaiser: And countries that it exports finished goods to.

Dinny: Less so. I think the focus at the moment is less about getting foreigners to pay for Chinese exports in renminbi, although ultimately that’s the goal, right? Long-term goal, they want exports and imports, all of it denominated in renminbi. But in the short-term, the focus is very much about getting renminbi flowing out of the country through trade. And so, this is about Chinese firms being able to pay renminbi for their oil, for their iron ore.

Kaiser: I see.

Dinny: For nickel. For everything else. It’s not happening on a large scale at the moment. To the extent that’s happening, it’s very small.

Jeremy: Yeah. How has the progress been?

Dinny: These are long-term structural efforts to change the way global trade works. And so, you can’t really sort of measure just how successful it’s been over the last two years or even three years. So, I’ll give you a couple of examples of what they’re trying to do. The first thing is, what they really want is to pay for commodities in renminbi. And that’s fundamentally difficult because global commodity markets are priced in dollars. And that’s the way that it’s been since the end of the Second World, really since the end of the second World War. Global commodities are priced in American, for the most part, in American commodity exchanges in Chicago and in New York. And so, because the prices for commodities are set dollars, for the most part, those commodities are then traded globally in dollars.

What China wants to do is change that. And they’re quite frustrated by the status quo, because in the 1950s, it made, in the ‘60s, it made sense for all this to be done in dollars because the U.S. was producing a huge amount of commodities and it was consuming them at the same time. But the U.S. is no longer at the center of global industry. It’s not a big consumer of so many of these commodities anymore, like iron ore, or soybeans, or so much of what runs the global economy anymore. The focus of that consumption is all on China. China consumed so much more minerals and natural resources than any country on earth. And so, the Chinese regulators are like, “Hey, these things should be priced in China. We should have a much bigger say in how global markets price this stuff. And guess what? That should be done in renminbi.”

The vision is like, firstly, given our demand, this is where it should happen. And secondly, what they’re trying to do is leverage the… Firstly, China has five different commodity markets at the moment. They all specialize in slightly different things. And those markets are incredibly actively traded. Now, the trading volumes on these things are in order of magnitude than even the U.S. markets these days. Now, that’s not necessarily a good thing because so much of that trading volume is by day traders. It’s not really a great tool for hedging as yet. But the vision from the Chinese side is ultimately that these markets will become more professional. They’ll become gradually more and more open to foreign investment. And then hopefully you get a shift, a migration of the center of pricing power from the U.S. to China.

And they’re doing certain things to try and advance that as well. There is a realization that the demand for industrial inputs isn’t something that’s static. It changes over time. And particularly as the global economy is starting to shift into a net zero, a carbon zero, a more environment-friendly-focused composition of industry, there’s a lot of metals and inputs that are going to become more important to the global economy — things like certain rare earths or cobalt and stuff like that. And so, China is trying to set up futures contracts for the products of the future in the hope that if they can get in the ground floor now in becoming the epicenter for pricing these things, then it will be in renminbi, that will become global, and they’ll start be able to slowly, this way, change how certain commodities globally are priced.

Jeremy: So, Dinny, you talked about the future. Diana, maybe I can ask you about the past. What happened the last time one currency displaced another? How did the dollar displace the pound sterling?

Diana: Actually, my expertise is much more talking about the future as a forecaster. I mean, I’ve found over the years that what I’m good at is seeing these big major turning points, and often ahead of time. This is one aspect of this big turning point, this great decoupling.

Jeremy: Let me rephrase the question then. Is this a turning point? Are we at a turning point?

Diana: We are already at this turning point. In fact, you can even go back to the global financial crisis. And I’ll answer your other question about the past as well, because, of course, we can only think about the future by knowing exactly what happened in the past. I think that’s very important and we’re very frustrated that economics has been reduced to models essentially or to one trying to be one model, whereas the real world doesn’t work like that. And all these economic theories that came through over the years, they were addressing specific situations with a bunch of assumptions. Actually, as an economist, you should be aware of all these economic history and use this as your tools rather than just believing one or the other. Anyway, it’s clearly something we’re very passionate about.

In that sense, the way that the Chinese are trying to achieve this is very different to everything that has happened in the past, and they would not necessarily follow the same route. So, looking to the future, I think we are at a turning, and we have been at a turning point. Because if you take it further back, really there were two or three big shocks. First of all, we had the fall of the Berlin Wall, and that gave all the euphoria that we were at the point of the end of history. Clearly now that’s not the case, but at that time, there was a lot of euphoria, which then made the U.S. extend what was its original engagement strategy for China under Nixon, to a strategy that would welcome China into the World Trade Organization on the expectation that really, they’re converging, they will converge in economic terms to the free liberal democratic world, and eventually politically as well, and a lot of kind of hubris that the capitalist model won.

Simultaneously, actually, during those 30 years, we had the technology revolution. And so what happened, hosted that combination, actually was one that we, the world as a whole, were not able to make happen in the best possible interests of individual nations. Because if you are a Martian and you’re sitting on Mars, you’ll be looking at earth and you really wouldn’t understand why we are quarreling right now and why there is so much division. Because if you look at the past 30 years, we have had it the best we’ve ever had it in terms of major wars and conflicts, in terms of growth, in terms of pulling vast numbers of people out of poverty — electrification across the board, education levels rising across the board. This has been a very, for the earth being, it has been a very good period, but we are all defined by our nationality.

What happened was that, first of all, because China didn’t converge fast enough to a free market economy, if China had allowed the yuan to move freely in 2004, we wouldn’t have had the buildup of excess debt in the U.S. and in other Anglo-Saxons that then… That then led to the global financial crisis. And there was a lot of misunderstanding and ease to this day that it was American profligacy that was the root cause of the financial crisis. That was not the case. If it was American profligacy, we should have been seeing high real interest rates. It was the command economy aspect of China that was causing it to save excessively, and that was dragging globally because it was such a big economy, and now so integrated interest rates. And then it’s too late to refuse if people want to throw cheap money at you.

But at the time, having forecast the global financial crisis, I wrote a book in 2006 with one of my colleagues called The Bill From the China Shop, and we were looking into that. Looking into later on, thinking about QE and what happened in terms of the adjustment of the global economy. I made one mistake in the wake of the financial crisis, thinking that this economic eruptions, this inability of the global economy to work efficiently without ending up in a global financial crisis and economic crisis, would be sufficient for this decoupling to start. In hindsight, the mistake I made was not to factor in the politics, the fact that this was such a fundamental rewriting the rules of the engagement globally, that we needed to have critical political mass for this to happen.

Now, in China, Xi coming to power was one part of the equation, but actually, in the western world, the inequality that was created, because again, of those dynamics both in income and in wealth terms, led them to the populous choices of Brexit, if you’d like, in London, to the arrival of President Trump. And what Trump did on the U.S. side, by being so politically incorrect in the way he attacked China, was that he made it a free-for-all, for anyone who had a gripe with China to go after them. And he unleashed this feeling in the U.S. that has been building but didn’t really have an expression. And now we have a much more experienced and coordinated team under Biden that is equally hawkish actually. When we looked at the team he gathered at the very start of his presidency, the conclusion was that this will be a team that will continue this type of interaction with China, but that will be more effective in doing so.

So we’ve ended up really, I mean, we are now, we have the critical political mass. The economics haven’t changed in the inability for this to progress. And the technology, we are at a juncture where you could be asking yourself very fundamental questions, including whether the pace of technology will continue at this rate or this bifurcation will pull us back. We could be talking about China, and Taiwan, and the U.S. and this clash of two, an aspiring hegemon and existing hegemon. And the currency is very much part of that overall era of the great decoupling.

Kaiser: Interesting that you locate the problem basically in the failure of Beijing to float the yuan. This gives rise to all of it.

Diana: Well, what happened was that essentially you are integrating two very different economic systems and political system into a global system that was built on the rules set by the free liberal democratic world. And China was big enough to disrupt that, and it didn’t quickly converge to becoming itself a fully-fledged market economy. And that distorted the pricing mechanism and how it informs investment decisions across the globe. And so, by them keeping artificially, the price of capital low, globally, led to a lot of excesses and a lot of misallocation, in China including. And then the way the western system responded post the global financial crisis, which was the right way to do to try and avoid the deflationary depression outcome. There was bypassing of the banking system and injecting money directly into the economy in order to sustain healthy transactions.

That is how QE operates. It doesn’t operate by lowering the long-term interest rates and trying to encourage even more borrowing when actually the problem is excess debt. But a lot of the central bankers didn’t really think about this in that way because that kind of… This is going back to my issue of, in these days at university, you’re not really taught properly how monetary economics works, for example, monetarism, and so you miss out. There’s very little knowledge on that front in the world. But nonetheless, at that time, that wasn’t a problem beyond the fact that when it became an issue of continuously underpinning asset prices, which, of course, make wealthy people wealthier. So, the wealth inequality, the income inequality just increased as a result because they were in the supply side changes necessary to reenergize those economies.

But you could even argue that, ultimately, it was a question of really globally people beginning to start disentangling. And none of that happened until the population in the western world reached a stage where they were voting for, and Trump was a very good populist. He really puts the finger on and knows how to talk to the people who were feeling the brunt of this. And so, that’s how we ended up here.

Jeremy: How heterodox are those views?

Diana: I would say that certainly when it comes to China that they certainly do not see it that way. They, in Beijing, they see the U.S. as the culprit. And this global financial crisis was very much the impetus for them to really follow their own way even more so. There were a lot of people in China who were aspiring towards Wall Street, who saw Silicon Valley, and you saw these… And there was a lot of disappointment afterwards in those circles as well, which were much more open to the western world. So, they saw it as a failure of the western system and didn’t see at all their role in it.

Kaiser: Well, I mean, your explanation does seem to strip them of any kind of moral agency. It’s like you think that China making cheap money available led inevitably to credit default swaps and to subprime lending, right? It just seems that maybe strips them of any moral agency in it. I can see why Beijing would object to that. But we could get very, very into the weeds here. Let’s stick with the topic which is RMB internationalization. Let’s try to get back onto that because we took a little bit of a detour there. I want to talk about this, about the digital yuan, which I don’t think is well understood outside of China, or even really within China. In your report, you guys write, “China’s digital currency and cross-border payments system are unquestionably part of Beijing’s efforts to promote the RMB internationalization as well. However, they’re not driving the process. At best, they play a supporting role.”

Can you explain what exactly China’s digital currency is supposed to do if it’s not really driving RMB internationalization or if it really had nothing to do with RMB internationalization to begin with?

Diana: It doesn’t necessarily have nothing to do, but originally, it was very much looked at in the context of the domestic economy and how it would essentially provide the authorities with a lot of power, additional source of power and control over the domestic economy. Now, if they wanted to transact in yuan over their own payment systems, they needed their own payment systems, which they have been creating. So, as such, it’s a necessary but not a sufficient condition. Where the digital currency comes in is two ways — One is that the cross-border payment systems are across the board anyway, much more costly than the domestic ones. And they should be less costly, and technology can bring this costs and efficiency to them. So, there’s a lot of trials, but Chinese leading, of using the digital currency for cross-border payments.

And actually those will be more efficient and less costly. But again, that is something that is not sufficient. It will address the cost issue, but at the end of the day, and then we can go to your original question about trust, which I think is very important, and we didn’t really delve deeper into it than we should. So, this is in its infancy of, what we looked at is ways of them using already what they have created, which is a replica of the existing type of global cross-border payment systems and convincing people to use theirs, but doing a lot of work on whether they can progress towards a system that they will use digital currencies for cross-border payments; it will bring efficiency gains, but most importantly, and this goes to the nub of the issue when it comes to capital controls. Because a lot of the people you’ll hear saying that, “Oh, it doesn’t matter, the digital currency or a paper currency.” As long as they keep the closed capital account, then they will never be able to internationalize the RMB.

And I think we are looking at it from the other way around that they’re trying to do all these other ways of making the renminbi more available offshore, bringing costs down, convincing others to use it, opening their capital markets to, say, whoever wants some of our growth. But will they be growing? They can come and use the RMB to buy assets. But if they manage to move to a cross-border system of payments based on digital currencies, the Chinese Communist Party will have, and this is at least 10 years out, they will have visibility, complete visibility, which will give them the sense of control. And they will be able to intervene the moment they see a problem. So, in this circumstances, they will be much more willing to be having a much freer capital account than they have been up until now.

That’s kind of the role, if you see what I mean. The digital currency can be a very, very important part of the process, but actually, that’s much further in the future. And before that, since we were trying to forecast the next five years, which in general is a tough job. Anything beyond the next day, it’s a tough job.

Kaiser: Sure.

Diana: We found out that we ended up a lot less there than in the other aspects that we wrote about.

Kaiser: I see.

Jeremy: In other words, the progress with the digital yuan has been much slower than…

Diana: Oh no, their progress has been extremely fast. It’s incredible. And they’ve really honed into that and the use of blockchain technology, but they spend a lot of time building their CIPS, the payment system. And now it’s about okay, we have already an existing infrastructure — how do we convince people to use the yuan? And of course, if you use the yuan better, use the system too. They are rolling out digital e-yuan very fast domestically. So, that is progressing. There are trials internationally on using digital currencies for cross-border payments. And actually, that doesn’t necessarily necessitate the other economy to have a digital currency domestically as long as it has a digital currency that it can do cross-border payments with. So, there is progress there, but none of this infrastructure is yet built.

And it took them five years to build the CIPS. And that was just replicating existing technology, not building, if you’d like, on new technology. So, just realistically, with the best will in the world that they certainly have, because of everything we discussed, they just can’t progress that quickly.

Kaiser: You said took them five years to build the CIPS, what’s that?

Diana: The China Interbank Payment System.

Kaiser: Ah, I see. Okay.

Diana: I will sort of let Dinny chip in.

Jeremy: Perhaps you could explain that. That’s a SWIFT for China, is it?

Dinny: It’s a little bit more than that. It is both… Because SWIFT is essentially just a communication system. It’s a way for banks to talk to each other, and then they use the national payment mechanisms of whatever currency that they’re transacting in. And the thing is, with CIPS, is that it is both a payment platform and a communication platform. So, the beauty of it is that you can ideally transact in renminbi and there is, the United States shouldn’t be able to have any insight into what’s going on.

Kaiser: SWIFT plus IBAN maybe.

Dinny: More or less.

Kaiser: Okay.

Jeremy: One more follow-up, Diana, you said that if the digital yuan came into use, it would give the Chinese government visibility into what was going on, and obviously then a certain amount of control, which would allow them to have the confidence to open up the capital account. But surely, the fact that they still have control would mean that nobody would want to use the digital yuan because it still wouldn’t feel freely tradeable if they could come in at any time and say, “Okay, we don’t really like what’s going on here. We’re going to shut this down.”

Diana: At some point that becomes… Let me give you an example for the average business or the average person. In the global financial crisis, how many people knew that their deposits were not protected and we had to have governments come in and mandate deposit insurance where it wasn’t available? Convenience, ease of use, all of that, it can come into play. And these considerations can… which are fundamental. You would think that knowing that money in the bank doesn’t mean you can have those money, that they’re not necessarily 100% protected, should have been well-known fact, but it wasn’t. But I think it’s important here to bring something else because you are absolutely right that there is a lot of worry with respect to, can we get our money out of China? Because the Chinese have not thrown the door open of their financial sector. You can get money in, but can you get money out?

And so, that’s one of the resistance to using, the obstacles to using the yuan at the moment that the Chinese are also trying to find ways of getting the yuan out there and getting it back in without having to deal with that, without having to open up the capital account. Dinny talked about futures and their efforts on that front, but there is another very important development that they are pushing, which is leading to this circulation of yuan, and that’s basically rethinking how the BRI and how they can be a trading hub or a focal point of their trading zone. They used to think that with the BRI, with all this demand for infrastructure out there, those countries will be willing to borrow in yuan for investment in those projects, but that didn’t happen. The majority of the BRI lending for infrastructure investment was in dollars.

So, the way they’re seeing this now is to create this closed loop where they’re building industrial capacity in the BRI countries by providing loans in yuan that build that capacity, which then produces something that China wants and needs, and will be paying in yuan for, which then will be used to pay back the loan to give them this mechanism of not going for the dollar, but going for the yuan. That’s the industrial process that they’re trying now to roll out across the BRI in order to encourage that circulation of yuan simultaneously. And this relates to the experience of Japan. One of the key lessons of how Japan tried to internationalize the yen was that actually, and they found it wasn’t working, I mean, just to mention, the Japanese, they didn’t have a strategy for RMB internationalization, and neither did America.

When you asked me about what we learned from the past? China is arguably the first country that has such a strategy. But the Japanese found, in their experience, that because they weren’t the final consumer at the time, but just more a transitory point, and the final consumer was elsewhere, then the willingness of people to transact was in the currency of the final consumer. So, that ended up being the dollar. And so, what the Chinese are trying to do is to become the final consumer for the Asian trading block. And as a result, though, I mean, not as a result, but to achieve that, they have to become the consumer and they have to stimulate domestic consumption. They talk a lot about their 1.4 billion people and their core 800, or was it 800 or 400 million? I know it’s a double or the fact. But anyway, they talk about their middle class and that they’re big enough to be this consumer.

But everything that Xi’s doing with common prosperity, dual circulation, and rising tall in the east, actually is endangering the rebalancing of China’s economy towards consumer spending. So, there are big questions as to whether they will achieve it, but this is what they are trying to do.

Kaiser: Fascinating. Absolutely fascinating. So, we should expect, as the continuing likely direction, is that they will continue to try to push industrialization in BRI countries that will be done with loans made in RMB, that produce goods that are desirable in China, that will be paid for in RMB, and then to get the circulation going that way. Very, very interesting. I’m afraid we are running up against time, so I want to thank you both. It was a fascinating conversation. Dinny and Diana, really, really interesting stuff. And let me remind everyone that the report is called China’s Quest for Self-Reliance: How Beijing Plans to Decouple from the Dollar-Based Global Trading and Financial System. It’s from the Wilson Center. Let’s move on to recommendations. But first, a word from Jeremy on what you can do to support our work.

Jeremy: Please subscribe to The China Project Access. You’ll get an ad-free version of this podcast on Mondays, four days earlier than everyone else, two daily newsletters, and one weekly newsletter, and access to everything behind our paywall. And with that, let me just… I have another note of thanks for Diana and Dinny for making clear a lot of stuff about a subject that, for the layperson, is extremely difficult to get your head around.

Kaiser: Yeah, it’s excellent. I highly recommend this report too. It’s written very, very clearly.

Diana: Thank you so much. We put so much effort into that aspect of things because we know that that subject can be very difficult to get your head around, as you said, and especially for people who don’t have necessarily a background in economics, all the geopolitical folk or business people. So, we put a lot of effort into being as clear and as sort of, also not to have any moral judgment in there. We are just saying things as they are without taking a moral stance of any sort.

Kaiser: Well, if dumb dumbs like us could understand it, then you’ve done a very good job. So, thank you very much. Right, Jeremy?

Jeremy: Okay.

Kaiser: All right. Recommendations. What do you got for us, Jeremy?

Jeremy: Mine, as I think is universally known, the American healthcare system is, in many ways, really terrible and resembles a Kafka novel, but it’s not the only place that’s bad. There’s a great book by a guy named Adam Kay called This is Going to Hurt: Secret Diaries of a Junior Doctor, which describes his experiences working in Britain’s National Health Service, the NHS. And if you have kids, Adam Kay has also written a book called Kay’s Anatomy, which is a very funny guide to the body.

Kaiser: Ah, great. Great stuff.

Diana: I can definitely second that, by the way, because I saw Adam Kay perform like a standup on the book, and it’s absolutely hilarious. And it’s one of the only books that I met… We didn’t have to convince my boys to read. They just gobbled up the children’s version without any extra enticement.

Jeremy: Yeah, it’s fantastic.

Kaiser: All right. A double endorsement. Excellent. Diana, your turn, what do you have for us? What do you want to recommend?

Diana: Well, I mean, you stumped me a little bit when you said, not to be in your professional life and something from your personal life. And it’s not something that I sort of share in professional circles, but I was reading how important it is for maintaining sort of your brain, young and healthy. And it’s apparently better than chess. And so, I certainly feel now very good about my passion outside of economics, which is dancing.

Kaiser: All right.

Diana: But so I can recommend to anyone out there that dancing has many benefits, including-

Jeremy: What kind of dancing, Diana?

Diana: Oh, well, in my case, it’s kind of a Brazilian partner dance that is very niche.

Jeremy: Oh, nice.

Diana: So, people wouldn’t necessarily dance it very widely, though, funnily enough, the UK current Treasury Secretary has done this dancing, and I’ve certainly partnered him, 15, or however many years ago, when he was still appearing in that. But on balance, it’s an area where I very rarely meet anyone connected to my professional life –

Kaiser: Oh, fantastic. That sounds great.

Diana: Keep dancing. I mean, I think it’s a great thing to do, but I wanted to recommend a book. And that is because we tend to sort of do this annual. Every year, we have our best books on China lists and best films on China and so on. But a book I came across a few years ago that was written in, I think in 2005, thereabouts. Yes, just to look here. Yeah, 2005, by someone called Constantine Menges, and it’s called China: The Gathering Threat. If you read this book, it’s so prescient at the time in looking at how things were going to develop from a geopolitical point of view that I was blown away. Sadly, Constantine died. So, I wish I was able to meet him. I’ve read so many books on China, as you can imagine, and to yet find one that was so amazing after all these, more than 20 years of doing this job, was really very enjoyable for me. So, I definitely recommend that book, and just consider the time it was written and what it said at that time.

Kaiser: Interesting. I’m sure I would find much to disagree with it. Always a good reason to read a book, especially written in 2005. All right, Dinny, what do you have for us?

Dinny: I would recommend something I’m reading at the moment. I’m not through it yet, but it’s been on my list of master reads for ages. I recommend Lombard Street by Walter Bagehot, the former… the founding editor for The Economist. I know I’m probably not the first person to even recommend it on this show, but…

Kaiser: You are actually. It’s 149 years old, but hey, whatever,

Dinny: Although I’m finding it fascinating. I mean, it sort of, as a description of how a central bank should work and how the evolution of money markets in the UK is absolutely fascinating. And I’m finding it particularly interesting because so much of what he writes about is discounting of trade bills, discounting a banker’s acceptances, which is a type of trade financing which doesn’t really exist. Oh, it still exists, but it’s not a big part of global finance this day, certainly not in developed economies, but it’s still a really big part of the Chinese financial system. And so, reading about how these things worked 150 years ago is fascinating. Looking at the parallels about how this particular financial product still plays a role in China’s financial system — how it’s used differently, how it’s used the same. I just realized I had a real geek out moment there, but that’s something that I would really recommend because I’m enjoying it incredibly.

Kaiser: We encourage geeking out here. That’s what we’re all about. Fantastic. Thanks. Lombard Street. I am going to recommend a television show. It’s a miniseries on Amazon Prime. It’s a western, it’s called The English. It stars Emily Blunt and Chaske Spencer. Emily Blunt plays a wealthy British lady who’s arrived very recently in the U.S. trying to make her way to Wyoming to find the father of her now-deceased child. Chaske Spencer plays a Pawnee who’s been a scout for the U.S. Cavalry, who reluctantly accompanies her. It’s really, I mean, I guess really cliché western, where it’s like stark and brutal, but it’s really beautifully shot, really all the things that a modern Western should be. It’s fantastic. I highly recommend it. Really beautiful, beautiful television show. So, thank you once again, Dinny and Diana. Thank you for joining us. Really, really edifying conversation.

Diana: No, thank you guys, and we really enjoyed it.

Dinny: Thank you very much for having us. We really enjoyed it.

Kaiser: The Sinica Podcast is powered by The China project and is a proud part of the Sinica Network. Our show is produced and edited by me, Kaiser Kuo. We would be delighted if you would drop us an email at to tell us how we’re doing, or just give us a rating and review on Apple Podcasts as this really does help people discover the show. Meanwhile, follow us on Twitter or on Facebook at @thechinaproj, if Twitter is still around.

Jeremy: Hopefully not for much longer.

Kaiser: Yeah, not much longer.

Be sure to check out all the shows in the Sinica Network. Thanks for listening, and see you next week. Take care.