STUDENTS of Renminbi (RMB) internationalisation tend to forget that the globalisation of Chinese currency happened much earlier with copper coins, which were first standardised and minted in the Qin Dynasty (260 to 210 BC). My old Chinese art historian teacher used to tell me that Chinese coins and ceramic shards were the first durable global debris, easily found around the rubble sites from Sri Lankan temples to Egyptian pyramids.
Money followed trade
Because China was short of silver and gold, common coins were minted mostly in copper. Silver in China was used as an official storage of value as early as 1,000 AD, when it was recorded that ingots weighing a tael each became official payment for taxes, but it was rarely minted as coin. Having invented paper, China was also the first to experiment with fiat or printed money. The Song Dynasty (960-1270 AD) encouraged exports in order to finance their losing war against the Huns, which the succeeding Yuan Dynasty (1271-1368 AD) also encouraged. Unfortunately, printing more paper money led to inflation.
Both dynasties encouraged trade with the West through two key channels, the land Silk Road across Central Asia to Egypt and Rome and the Maritime Silk Road via the Malacca Straits and India. Chinese exports of silk, porcelain, crafts and spices were traded for gold, silver and copper coins, as Europe had few products at that time that China wanted. This imbalance in trade, plus the need to defend against the Huns and the Ottomans, forced Europe to embark on its industrialisation path.
It was the fall of Constantinople (Istanbul today) to the Ottoman Empire in 1453 that cut off the land trade. This blockage spurred the Spanish to go westwards to reach China, discovering America instead in 1492. Similarly, the Portuguese sailor Vasco da Gama raced to reach China via the African Cape of Good Hope in 1492. By 1453, the Ming Empire had passed its peak in outward exploration, having abandoned the Zhenghe voyages twenty years earlier.
The discovery of the Americas and the conquest of Mexico (1519-1521) and Peru (1532-1572) made Spain very rich. But it was the opening up of new silver mines in these two countries and its shipment to China via Manila in 1571 that circumnavigated global trade. Silver and food like chillies, corn, peanuts, potatoes and tomatoes came to Asia from the Mexico-Manila route, avoiding the English pirates that were waiting for the Spanish galleons in the Caribbean.
It was the availability of large quantities of silver that enabled the Ming reformer Zhang Juzheng, minister under Emperor Wan Li (1583-1620 AD), to unify the Chinese tax system in 1581 to enable taxes to be paid in silver.
Why did China need so much silver? It was partly due to the sharp rise in population, which rose from 59 million to 160 million by late Ming, as well as the rise in overall prosperity, supported by political stability and growth in foreign trade. It was estimated that one quarter to half of the South American production of silver ended up in China, with the Mexican silver dollar widely used as currency. Silver, and later opium, became the settlement currency for the first global trade imbalance.
In short, it was the Chinese use of silver, produced by the West in South America, that anchored the globalisation of trade. Europeans competing for that trade through development of maritime industry and science sparked off the Industrial Revolution and ended up with the conquest of large parts of Asia.
China only abandoned silver as its standard in 1935, ending over 900 years of monetary history. Silver is so ingrained in Chinese finance that banks are literally named as silver business-houses.
Currency still follows trade
President Xi Jinping’s announcement of the New Silk Road and the 21st Maritime Silk Road are a reformulation of the East-West land trade routes for both rail and road, whilst the Maritime Silk Road expands the westward trade through Southeast Asia, Southern Asia and thence to Africa and beyond. The land route branches two ways: One is the rail link from China, Kazakhstan, Mongolia and Russia, which opened in July 2011, linking Chongqing in Western China to Germany and reducing the shipment time from 36 days by sea to 13 days by freight train. The other is the future road and rail link from Yunnan to Myanmar and eventually to India.
Today, there are actually two Maritime Silk Roads—the historical Southern route via the Malacca Straits and the newer Arctic route, which, thanks to global warming, may be open four months a year to enable ships from China to travel via the Arctic to Northern Europe 30% faster than the Suez route.
All these suggest that China has a grand strategy to develop global infrastructure and trade via the new Silk Roads, financed through the BRICS Bank, the Silk Road Fund and the Asian Infrastructure Investment Bank. RMB internationalisation becomes real trade and hard investment driven, rather than through the capital account. These would aid not only global recovery but also Chinese structural reforms.
Rather than trying to compensate for the lack of global demand from increasing domestic consumption, which will take time, China realises that there are still many opportunities for opening up new trade and investing in hard infrastructure, not just in China, but with its trading partners. This would shift production away from the coastal areas to inland provinces with direct land and rail routes to neighbouring countries that had weak infrastructure and less access to global markets.
Furthermore, the historic US-China climate change deal to limit carbon emissions was not only a right step forward out of the current deadlock in global negotiations, but also a breakthrough for the stimulus of the domestic carbon trading market, already under pilot trading in a few key cities.
There is a pattern forming on RMB internationalisation. History suggests that global currencies have to be founded on real trade and business, supported by liquid financial markets, efficient institutions and robust infrastructure.
The last Chinese global currency standard served China for over half a millennium. Creating the next global currency will not, therefore, be a short-term journey.
The writer is a distinguished Fellow, Fung Global Institute.