I have an interview with PBS next week at their New York Offices where I plan to talk about China’s Silk road initiative. It’s an interesting topic, not just because of the transformative potential the project has for international economic relations, but also for its financial ramifications.
That said, prepping for the interview has me thinking. The policy goals of the silk road initiative stand in some contrast to those of renminbi internationalization. The internationalization of China’s currency, whatever its drawbacks, is explicitly designed to help modernize the country’s economy, and to help galvanize the introduction of market-based reforms. The silk road initiative, by contrast, could be interpreted by critics as a means to help ease the pace of reforms by providing an outlet for construction projects that would, in the absence of the program, create an oversupply of machinery, cement and other industrial goods. So a successful silk road could mean fewer, or less rapid structural reforms.
In any event, the silk road provides an interesting counterpoint to traditional Western economics. Usually when there is a disconnect between supply and demand, as one sees in the overproduction taking place in China’s construction sector, market forces inexorably push towards retrenchment. That is, one would see some decline in supply that would track actual demand. The silk road initiative, however, represents a government-led program to increase demand to match supply—via increased exports overseas, and made possible by generous China-backed financing. I’m not sure if it will work, but given where the demand is coming from—volatile and at times unstable governments—there are, undoubtedly, risks.
The silk road will ultimately promote the RMB’s internationalization, but I think only gradually. The details for these kinds of things are opaque, but the financing is according to most accounts based on China’s foreign exchange. So the impact on the renminbi should be limited. I also can’t see too much liberalization of China’s capital account given the country’s still considerable capital outflows. (Though given the less than stable political nature of many Central Asian countries, and the incontrovertible nature of many local currencies, perhaps capital account liberalization could actually increase the demand for the renminbi in that part of the world). Still, increased trade should have a positive impact on renminbi demand given China’s near full liberalization of its current account.