STUDENTS of yuan internationalization tend to forget that the globalization of
Chinese currency happened much earlier with copper coins, which were first
standardized and minted in the Qin Dynasty (260BC-210BC).
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 1,000AD,
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)
encouraged exports in order to finance their losing war against the Huns, which the
succeeding Yuan Dynasty (1271-1368) 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 little 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 industrialization path.
It was the fall of Constantinople (today Istanbul) 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 past its peak in outward exploration, having abandoned the
Zhenghe voyages 20 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 chilies, 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 Ming reformer Zhang
Juzheng, minister under Emperor Wan Li (1583-1620) 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 globalization 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 route in both rail and road,
while the Maritime Silk Road expands the westward trade through South-East 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 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 per cent 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. Yuan internationalization 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 realizes that there are still many
opportunities for opening up new trade and investing in hard infrastructure, not just in
China, but with her trading partners.
This would shift production away from the coastal areas to inland provinces with
direct land and rail routes to neighboring countries that had weak infrastructure and
less access to global markets.
Furthermore, the historic U.S.-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 yuan internationalization. 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.
Andrew Sheng is writing on global finance from an Asian perspective.
A version of this article appeared in The Star Online, 6 December 2014
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