Abstract
China and the international monetary system need each other. The international monetary system is strained, with crisis just around the corner, yet reform is not on anyone’s agenda. Meanwhile China, deeply invested in the current system, faces narrowing options as trading partners question its moves abroad, debt levels rise at home, and its current account moves from surplus to deficit. RMB internationalization might appear to provide a way out, but the policy has its limits and tends to exacerbate rather than relieve tensions. We argue that a tension-reducing solution is at hand to the problems of both the international monetary system and China—IMF-style Special Drawing Rights (SDRs). If in a unilateral initiative China were to make the SDR central to its next phase of capital account opening, China’s institutions, corporates and individuals—presently restricted in their access to international currency—would likely embrace it. Begun by China, with support from the international community and Hong Kong, promulgation of the SDR would usher in an era of lower tensions, providing space for development and avoidance of conflict within a reordered monetary system in which China would have a more prominent role.
Highlights
In this commentary, drawing on ideas we first set out in Harrison and Xiao (2018), we argue that two major monetary problems, seemingly loosely connected, have a common solution
We suggest a solution to these two problems in expanded use of the International Monetary Fund (IMF)’s Special Drawing Rights (SDRs)
We argue for a unilateral initiative by China to promote use of the SDR by its own institutions, corporates, and individuals
Summary
In this commentary, drawing on ideas we first set out in Harrison and Xiao (2018), we argue that two major monetary problems, seemingly loosely connected, have a common solution. We argue that the current tensions in the international monetary system result from a systemic cause, namely reliance on a single national currency, the dollar, as the de facto global currency. Such a system is inherently prone to instability, yet there is no prospect of systemic reform. China will need to further open its capital account and, step up its monetary relations with the world These two problems have a potential, common solution. Global imbalances would reduce if the world were to make wider use of SDRs as a fully-fledged currency This is not a realistic prospect given that the willingness of states to cooperate on multilateral initiatives is diminishing, while the international monetary system is low among politicians’ priorities.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
