Ever since China opened its doors to trade with the world nearly twenty years ago, it’s been touted as the next global economic superpower. 

And yet, somehow that potential hasn’t been fully realised. Could its monetary policy be to blame?

An opinion piece in the financial times written in June by Ruchir Sharma, chair of Rockefeller International, argued that the reason China has not realised its full potential as a world-leading financial powerhouse is because of its monetary policy. 

China’s rise on the world stage is perhaps this century’s most frequently repeated news story, the article says. 

“The country’s economic footprint has expanded spectacularly. 

“Its widening military reach has made recent headlines. 

“Yet as an aspiring financial superpower, China is going nowhere.”

So, is this assertion true?

One of the four Asian Tiger economies that began their rise to prominence in the latter decades of the twentieth century, China’s rapid expansion was largely driven by exports and large-scale industrialization, particularly in manufacturing.

Motivated by Japan’s boom in the 1980s which put Tokyo on the world map as a financial centre, and secured a place for the yen as a world-leading currency, China has made no secret of its big ambitions. 

In PR terms, it certainly has done a good job of placing itself front and centre in the popular imagination as a major player on the world stage.

However, despite all the publicity and some impressive GDP growth figures, which saw its economic output expand from 4% – 18% since 2000 – the fastest growth of any world economy – its stock market has performed poorly. 

Plagued by several major crashes such as the infamous Black Monday of 2015, which wiped nearly £74 billion from the FTSE 100 and led to similar losses across both the US and Europe, it has suffered from a trust problem. 

This problem has not been helped by the recent Evergrande property scandal, which has many experts nervous about a potential property crash in the near future. 

Once bitten, twice shy

Burnt by experiences like this, and a government that isn’t afraid of imposing exchange controls, printing money, or meddling with the financial system, many foreign investors are wary of putting any real money into Chinese stocks or backing the renminbi. 

This may be why few take the notion of it being a possible replacement for the US dollar as the world’s reserve currency very seriously, despite its decline in both strength and popularity in recent years.

“Global doubt about China’s markets limits the renminbi’s appeal,” Sharma writes.

“Today, over half of all countries use the dollar as their anchor, a soft peg to manage their currencies. 

“None use the renminbi. 

“About 90 percent of foreign exchange transactions involve the US dollar, while only 5 percent use renminbi.”

China hegemony theory exaggerated

Many think that the threat of China becoming a so-called ‘counter hegemony’ to western dominance has been vastly overstated. 

Several academics and Chinese businessmen have been openly skeptical about this assertion. 

They point out that China’s isolationist policies and funding of “hundreds of financially dubious projects in unstable countries, more than half of which have credit ratings below investment grade,” would ultimately weaken, rather than strengthen, its position.

Trade and exports languishing 

And what of trade

Well, that too appears to be languishing in the face of severe Omicron lockdowns, which have led to factory and port closures. 

Given that manufacturing accounts for nearly a third of the country’s total economic output, this could be why the World Bank chose to downgrade its growth forecast for China in June 2022.

What lies ahead for China remains to be seen – they’ve come back from other crises such as the Asian Tiger Crash of 1997 and remained seemingly unperturbed by 2007-8. 

With plans afoot to develop the world’s first major digital currency, they may surprise us yet.

Read the latest issue of Trade Finance Talks, July 2022