Social Sciences in China, 2016

Vol. ?, No. ?, ??-??, http:

Partners, Institutions and International Currencies: The Political

Foundations for the Rise of the Renminbi

Li Wei
School of International Studies, Renmin University of China

国际货币的使用不仅仅是一种自然的市场现象 ,还有赖于坚实的国际政治基础。英镑、美元、
欧元和日元这四种主要国际货币的历史经验和教训表明 ,强大的货币伙伴网络和有利的国际制度体
系,是国际货币形成稳固地位的两大国际政治基础。作为一种后发货币 ,人民币欲崛起为全球货币舞
台上的主要币种,除了需要相关经济条件之外,还需要通过政府外交力量争取更多的货币合作伙伴和
创建支持人民币国际使用的国际制度体系 ,以夯实人民币崛起的国际政治基础。而无论是搭建国际
货币的伙伴网络还是创立国际货币的制度体系都是对国际货币发行国治领导能力的考验。这种政
治领导能力包括基于信誉塑造的公信力、基于利益供给的向心力和基于制裁实施的强制力三个维
度。相比之下,由于当下人民币还处于货币崛起的初步阶段,人民币作为国际货币的国际政治基础建
设更加需要通过信誉塑造发挥公信力和利益供给发挥向心力。

关键词：人民币崛起 货币伙伴网络 国际制度体系 政治领导 货币外交

The use of international money is not only a natural market phenomenon, but also relies heavily
on an international political foundation. Lessons of history from major international currencies - the
sterling, dollar, and euro - show that a strong partner network and a favorable international system of
institutions are the two major political foundations for the formation of a stable international
currency. The renminbi, a late starter looking to rising as a major world currency, in addition to the
economic conditions it needs, calls for governmental diplomacy to draw more partners and create an
international institution in support of its worldwide use, both as means to reinforce the political
foundations for its rise. These are real tests of the issuing country’s political leadership, which
subsumes the public trust built on reputation building, a centripetal force driven by benefit provision,
and a coercive force applied through sanctions. Still in the early stage on its ascent, the development
of renminbi’s political infrastructure should mainly concentrate on building reputation and credibility
and exercising the centripetal force through benefit provision.

Keywords: The rise of the renminbi, monetary partner networks, international institutions, political
leadership, currency diplomacy

I. Introduction

International economic activities in massive scale require one or several generally accepted
world currencies to serve as a vehicle for international trade. Without a world government that is
authoritative and neutral in printing and managing the international money based on the needs in real
economy, a reputable national currency (also referred to as sovereign currency or territorial currency)
circulated within a sovereign state may go beyond national borders and come to play the role of an

© Social Sciences in China Press

 Social Sciences in China

international currency. In today’s age of economic globalization, this has become an important
transnational phenomenon with significant political and economic consequences.
The emergence of an international currency is more than just a natural market phenomenon;
lying underneath its formation is a firm international political foundation. Studying international
currencies hence requires involvement of theories of international political economy. As the
economic conditions under which a international currency coming into being have been well studied
among economists, this article focuses more on the political elements that established the standing of
the international currencies. The author argues that seen in light of the lessons from major
international currencies - the sterling, dollar, euro and yen, a strong monetary partner network and a
favorable system of international institutions are the two primary political foundations for the
creation of stable international money. The rise and fall of these currencies, while subject to the
changes in economic status of the currency issuers, are also tightly tied to the metamorphosis of the
international political foundations, which, in the long run, is even more decisive. The government, in
addition to strengthen the points of weakness in the economic field, that is, lack of openness and
underdevelopment in the financial market, needs to play a greater role in building monetary
partnership and creating international institutions to consolidate the political base for the yuan as a
rising international currency. The above agendas, whether to create a network of global monetary
partners or to establish a system of international institutions, depends on the Chinese government
giving full play to its political leadership in the global monetary and diplomatic arena.

II. The political economy on international currencies

A world currency can bring tremendous economic benefits and special political power to its
issuing country.1 Therefore, capable countries are vying for a higher world status of their national
currencies. Exploration into the causes for the rise and fall of international currency has driven the
attention of many scholars of different disciplines, and has produced both competitive and
complementary interpretations.
As China gradually grows up to become the world second largest economy and largest trader, its
economic ascent has made a transition from the rise of its trade toward the rise of its finance. With
the climb of the renminbi being an inherent part of the latter, to solve the enigma of the wax and
wane of the international currencies is hence of special significance to China on the rise of its
currency.
1. Economic Interpretation of International Currencies
Economists have long regarded the circulation of international money as economic affairs,
believing that international currencies are the outcomes of free choices in the trade market. Their
studies show that the market share of an international currency is decided by the following economic
factors: size of the trading network, confidence in currency value, and liquidity in the financial
market.

1
The status of an international currency may introduce costs into its issuing country. For the benefits and costs of
international currencies, see Hyoung-Kyu Chey, “Theories of International Currencies and the Future of the World
Monetary Order," International Studies Review, vol.14, no.1, 2012, pp.51-77; and, BenjaminJ.Cohen, “The Benefits
and Costs of an International Currency: Getting the Calculus Right," Open Economies Review, vol.23, no.1, 2012,
pp.13-31.
 Li Wei

First, the function of a currency as a medium of exchange suggests that market players are more
inclined to use a currency that has already been widely used. This gives the international currency
distinct network externality, also called the effect of economies of scale: in other words, the more
widely a currency is being used in the market, and the more it has been printed, the lower cost it will
incur with the cross-border transactions, the higher profits it will bring when being used, and in turn,
the higher international status it will achieve. The scales of the domestic economy and the foreign
economic activities -including trade and finance -in the country issuing the currency are the
fundamental economic indicators for a currency to create network externality. A currency’s scale of
circulation in a country fundamentally determines the degree of internationalization of this currency:
the bigger the country’s domestic circulation network, the greater the externality the currency may
potentially generate; in the meantime, the larger scale of the country’s foreign economic activities,
the more able it will become to create an international trading network. Therefore, world currencies
are the patents of economic giants and export-oriented economies; Regional currencies in small
powers and closed economies are unlikely to turn global. Only currencies of big powers that are
deeply involved in international business are likely to be used massively across the globe.2
Second, the level of popularity of a currency depends on the confidence of international actors in
the wealth reflected in that currency, i.e., the purchasing power, which is revealed by the internal and
external prices of the currency. The former refers to the level of domestic inflation, suggesting the
purchasing power of the currency at home; the latter refers to the level of the international exchange
rate, representing the purchasing power of the currency abroad. For investors and traders, the safest
currency must be the one with greatest price stability, inasmuch as a sharp devaluation is most
damaging to a world currency. It is the high stability that came with its peg to gold that made the
sterling the main international currency in the 19th century. 3
Last, the worldwide use of a currency also requires the support from the liquidity and openness
in the financial markets of its issuing country to provide international investors with more value-
adding opportunities, thereby enhancing its international appeal. A world currency issuer must have a
financial market with breadth and depth, 4which usually come from a free environment exempt from
state intervention and administration. Nations with advanced financial markets are able to offer
superior and abundant financial products -such as stocks and bonds- to foreign holders of their
currencies. They can also ensure that the financial assets are freely convertible at any time, thereby
increasing the willingness of market players to hold their currencies. In his analysis of the sterling
turning into an international currency, Barry Eichengreen pointed in particular that it was the pledge
given by the Bank of England that assured the sterling’s financial liquidity and its free convertibility
into gold greatly that enhanced the currency’s international attraction. 5 Many scholars have attributed
the yen’s restricted use in the international market to the Japan’s narrow financial market. 6 Besides,

2
Tu Fei, “The Conditions for Leading International Currencies: Taking the Japanese yen as the example”, Doctoral
Dissertation, Chinese Academy of Social Sciences, May 2011
3
Benjamin J. Cohen, The Future of Sterling as an International Currency, London: Macmillan, 1971, pp. 59-61.
4
J. Lawrence Broz, The International Origins of the Federal Reserve System, Ithaca and London: Cornell University
Press, 1997, pp. 61-63.
5
Barry Eichengreen, Golden Fetters: The Gold Standard and the Great Depression, 1919-1939, New York and
Oxford: Oxford University Press, 1995, p.42.
6
George S. Tavlas and Yuzuru Ozeki, The Internationalization of Currencies: An appraisal of the Japanese Yen,
Washington, D.C.: International Monetary Found, 1992, p.3.

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 Social Sciences in China

the breadth and depth of a financial market is generally reflected in a world-class international
financial center, which is often paired with an international currency.
Although economists have reached a consensus on the above three determinants of a currency’s
international status, they hold vastly different opinions on the weight of these factors, or place
different stresses when analyzing the changes in world currencies. However, there is a common belief
among these that the world status of a currency is primarily determined by its economic
attractiveness to the market actors at the time when the currency fulfills its function of transaction,
measurement and reserve.
2. The political Factors of International Currencies
In the real world, however, use of a currency has never been a purely economic phenomenon:
officially issued by a country on a mandatory basis, the currency serves the purpose of both
circulation and reaching government goals7. In an anarchic international system, the market forces
alone are unable to spontaneously give birth to a currency to be accepted globally. Establishing and
retaining a currency's international status is subject to a wide range of political factors. In the late
1960s and early 1970s, over the discussion centering on the reform of the Bretton Woods System,
more and more scholars became aware of the need to gain political support for maintaining a
particular international monetary system, and they started to give increasing weight to evaluating the
political elements in their studies of international currencies.
As one of the founders of international political economy, Susan Strange once criticized the
study that adhered to market-oriented analysis during the discussions on future global role of the
pound in the early 1970s. She argued that the imperial expansion and the international political
environment at the time, including war and peace, played a major role in deciding the international
use of the pound. Therefore, she believed, “a political theory of international currency” was needed. 8
Subsequently, Marcelo de Ceco pointed in his investigation of the classical gold standard of the
th
19 century that the gold standard as an international currency mechanism was not a natural creation
by the market, but a reflection of the political predominance of the British Empire, which made
London the center of global capital flows and defended the sterling’s leading position. 9 In the 1960s,
the Federal Republic of Germany, against economic rationality, lent real support to the dollar’s global
dominance by holding large dollar reverses, which, some scholar suggests, was out of the
consideration of sustaining its security relations with the United States. And the dollar reserves, they
argue, was in exchange for U.S.’s security assurance. 10 As the Cold War came to an end, two
Germanys were reunified, and U.S. troops withdrawn, Germany pushed forward to the full measure
7
Robert Gilpin, The political Economy of International Relations, translated by Yang Yuguang et al., Shanghai
People’s Publishing House, 2006, pp.114-115
8
Susan Strange, Sterling and British Policy: A Political Study of an International Currency in Decline, Oxford:
Oxford University Press, 1971, pp.3, 42-43; See also Susan Strange, “The Politics of International Currencies,” World
Politics, vol.23, no.2, 1971, pp.215-231. It’s worth mentioning that Susan Strange’s studies on the political economy
of the sterling was regarded as one of the important symbols for the birth of International Political Economy as a
subject of social science.
9
The study was originally published in Italian in 1971, and its first edition in English was published in 1974. See
Marcello de Cecco, Money and Empire: The International Gold Standard,1890-1914,Oxford: Blackwell,1974.
10
The most representative studies were shown in Francis Gavin, Gold, Dollars, and Power: The Politics of
International Monetary Relations, 1958-1971, Chapel Hill: University of North Carolina Press, 2004; Hubert
Zimmermann, Money and Security: Troops, Monetary Policy and West Germany’s Relations with the United States
and Britain, 1950-1971, Cambridge: Cambridge University Press, 2002.
 Li Wei

the agenda for currency union when its security dependence on the United States gradually faded
away. When it comes to the monetary relations between China and the United States, some argues
that despite the fact that China was no military ally of the United States, it was out of the good
mutual political relations that China gave its support to the dollar over the first decade of the 21 st
century.11
For the development of the euro, some believe that the euro is first of all a political currency, a
product of world political mutations.12 Studies have also pointed out that it was because the euro
lacks a political foundation as strong as the dollar that it has not yet posed a substantive challenge to
the dollar’s international status.13
The 2008 financial crisis once again exposed the extreme importance of the international
monetary problem. More and more scholars began to "rediscover" the political elements inside and
have produced fruitful results. These studies attempt to answer the core questions of whether, on a
going forward basis, the dollar will maintain its prominence or the competitive landscape will end up
with diversified currencies, and of how the power politics of these leading nations will influence the
evolution of the international monetary system.14
The aforementioned political studies on international currencies have enriched the past
simplistic market-oriented analysis. They emphasize the role of geopolitics and the structure of
international security in establishing the international status of a currency, suggesting that only
nations with political clout are able to create powerful international currencies. 15 However, these non-
economic elements are methodologically inoperable as well as unverifiable in absence of relevant
system data. This has led even scholars who admit of the roles of the political variables, out of the
need for pursuing fine causal logic, to abandon their attempts to examine these variables. In fact,
most of the existing politics-oriented studies failed to resolve this methodological dilemma. What
they did was only to generalize the political elements that might be at play, rather than specify what

11
Eric Helleiner and Jonathan Kirshner, “The Future of the Dollar: Whither the Key Currency?" in Eric Helleiner and
Jonathan Kirshner, eds., The Future of the Dollar, Ithaca: Cornell University Press, 2009, p.16.
12
Barry Eichengreen and Jeffry Frieden, “The Political Economy of European Monetary Unification: An Analytical
Introduction," Economics & Politics, vol.5, no.2, 1993, pp.85-104.
13
Adam Posen, “Why the Euro Will Not Rival the Dollar," International Finance, vol.11, no.1, 2008, pp.75-100;
Benjamin J.Cohen and Paola Subacchi, “A One-And-A-Half Currency System," Journal of International Affairs,
vol.62, no.1, 2008, pp.151-163
14
These results were mostly given by international political economists, focusing on the future of the dollar, euro
and renminbi. For studies of the dollar, see Eric Helleiner, “Political Determinants of International Currencies: What
Future for the US Dollar?” Review of International Political Economy, vol.15, no.3, 2008, pp.354-378; Jonathan
Kirshner, “Dollar Primacy and American Power: What’s at Stake?” Review of International Political Economy,
vol.15, no.3, 2008, pp.418-438; Carla Norrlof, “Dollar Hegemony: A Power Analysis,” Review of International
Political Economy, vol.21, no.5, pp.1042-1070; for the studies of the euro, see Kathleen R. McNamara, “A Rivalry in
the Making? The Euro and Inter 2014 national Monetary Power,” Review of International Political Economy, vol.15,
no.3, 2008, pp.439-459; Randall Germain and Herman Schwartz, “The Political Economy of Failure: The Euro as an
International Currency,” Review of International Political Economy, vol.21, no.5, 2014, pp.1095-1122; for the studies
of the renminbi, see Hyoung-KyuChey, “Can the Renminbi Rise as a Global Currency? The Political Economy of
Currency Internalization,” Asian Survey, vol.53, no.2, 2013, pp.348-368; Eric Helleiner and Jonathan Kirshner, eds.,
The Great Wall of Money: Power and Politics in China’s International Monetary Relations, Ithaca and London:
Cornell University Press, 2014.
15
Benjamin J.Cohen, Currency Power: Understanding Monetary Rivalry, Princeton, Princeton University Press, 2015,
p.2.

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exactly these elements are, and in what ways they affect the rise and fall of international currencies.
In light of the achievements made by economy-oriented studies, this article tries to be specific
about the political factors that act on world currencies. The author holds that the political foundation
of international currencies includes two fronts: the network of monetary partners and the system of
international institutions. While the former provides stable and sustained support for an international
currency, the latter is the institutional safeguard of it. They both offer “non-market” protection and
retention for the currency, making it able to transcend changes in the market conditions while also
contributing to develop the currency holder’s path dependence. When the economy feels a pinch or a
crisis arises, this political force will provide with the currency enormous support that may counter the
market forces and ensure the stability of its international status.

III. Monetary Partner Network and International Currencies

A number of monetary partners and their intergovernmental cooperation network are the
political pillars that underpin the status of an international currency. Economic partnerships
(including trading, investment, and monetary), like military alliances, are concentrated in
intergovernmental cooperation and support, and sometimes stabilized in legal forms. Whether an
international currency can win the most possible support of its monetary partners is critical to raising
and maintaining its world status.
1. Monetary Partners and their purpose
The so-called monetary partner refers to a national government that provides convenience and
support for the international use of another country’s national currency, a concept used to describe the
official support of monetary relations. In the international market, central governments (mainly the
Ministry of Finance and Central Banks) as political actors are also users of international currencies,
and their choice of currencies can produce a herd mentality that sways the choice on private market.
International currencies need the support of monetary partners. Wherever there is a strong
international currency, there is a strong partner network upholding it. In this network, a few important
partners can provide sustained, stable and strategic support to the international currency. With their
strong supporting capacity, as well as the demonstration effect and pivotal roles that come along,
these partners are able to influence the currency choice of private sectors and other nations, hence
becoming the monetary pivots of the network which have solid roles to play in bucking the trend and
bolstering the currency in times of crisis. Opposite to monetary partners are monetary opponents, that
is, competitors or saboteurs of an international currency.
The support from monetary partners is essentially the action taken by the partners in backing up
the roles of the international currency in transnational economic activities. This may include the
following: first, pegging its national currency to the central currency. This helps to keep a stable
exchange rate, making the latter the denominated currency in private market and hence upholding its
role as a measure of value.16 In addition, partners with possession of key resources like energy and
minerals can also strengthen the international status of the central currency by propping it up as the

16
Currently, there are approximately 60 countries taking the dollar as the reference to decide the value of its national
currency, whereas 40 using the euro as the reference. See Benjamin J. Cohen and Tabitha M. Benney, “What Does the
International Currency System Really Look Like?” Review of International Political Economy, vol.21, no.5, 2014,
pp.1017-1041
 Li Wei

denominated currency of their resource exports. Second, using the central currency as intervention of
their central banks to regulate the foreign exchange market and maintain the stability of their
exchange rate. Besides, partners with major international financial centers can also sustain their
domestic offshore financial markets to welcome the entry of central currency into their financial
trading network. Third, holding the central currency assets as the official foreign exchange reserves
so that the international market can increase confidence in the central currency. Serving as foreign-
exchange reserves is the uppermost world role a currency can possibly take, and large holdings of a
currency as foreign-exchange reserves are the foremost support to the issuing country, especially in
the moments when the currency hits a rough patch.17
Monetary partners offer stable support to the central currency for a variety of reasons.
Economically, with close economic ties existing between the partner nations and the nation of central
currency, backing up the central currency will lead to greater economic returns and financial stability
for the partner nations, of which dollarized countries are the extreme examples. Politically, the
support of monetary partners for the central currency is largely based on security, geopolitical and
strategic considerations.18 The leading country, for example, provides protection for its partners in
exchange for the monetary support from them. 19 Over the first two decades following the end of
World War II, Japan and Germany’s support for the dollar, as well as the Gulf States' support for the
"petrodollars", is largely based on such considerations. 20 Another case is when the nation of central
currency and its partner nations have special political ties, such as India’s backing for the sterling as a
colony of Britain in the first half of the 20th century, and Hong Kong's support for the
internationalization of the renminbi inasmuch as Hong Kong has been the Special Administrative
Region of China.
The sterling and dollar could not have become the hegemonic currency in the international
market without backing of their partner network. It is true that the international predominance of
sterling in the 19th century was thanks to the strong economic foundation laid by the industrial
revolution in which Britain took the lead, however, the powerful partnership network Britain built
through its colonial system during its global military and political expansion is also a key factor.
Sterling had almost swept the all over the world: centered in London, the sterling system subsumed
the British colonies with no real monetary authorities, the Dominions (Australia, New Zealand and
South Africa), the independent countries that have close economic links to the UK and used sterling
to maintain the value of their national currencies, as well as the other peripheral sterling-holding
countries.21 In the system, many countries take the sterling as reserve assets and almost all the
international transactions were denominated in pounds, especially in India and South Africa, which

17
The supreme form of monetary partnership is Monetary Union, which means most of the currency partners have
their own sovereign currency while also providing stable support for the state currency of the centric nation.
18
Eric Helleiner, “Political Determinants of International Currencies, What Future for the US Dollar?” pp.354-378.
19
Some scholars point that security alliances make it easier for member states to take the currency of the leading
country as the anchor. see Quan Li, “The Effect of Security Alliance on Exchange-Rate Regime Choices,”
International Interaction, vol.29, no.2,2003, pp.159-193
20
Some argues that for the Gulf countries, “while there are substitutions for the dollar; there are not for the U.S
military safeguard”. See Bessma Momani,“ Gulf Cooperation Council Oil Exporters and the Future of the Dollar,”
New Political Economy, vol.13, no.3, 2008, pp.293-314
21
Benjamin J. Cohen, The Future of Sterling as an International Currency, pp.65-68.

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 Social Sciences in China

both acted as the fulcrum of the currency. During the First World War, due to the tremendous war
cost, the position of sterling became precarious. India, a surplus economy, became an important
support of the British revenue and expenditure system. India's sterling reserves were ready to be used
to make up for Britain's imbalances, and sterling’s position had hence been defended. 22 After World
War I, the UK began to rely on South Africa’s gold exports inasmuch as the war had eaten up heaps
of gold reserves. The two countries reached a number of agreements on gold purchase to hold up the
position of the pound - a situation that didn’t come to an end until the Second World War was over. 23
It was South Africa and India -two pivotal currency partners -by selling gold to the UK and holding a
large surplus of sterling that helped stabilize the position of the pounds, and that enabled the UK to
keep the global status of sterling as a regional currency up to the mid-20 th century, even with the loss
of Britain’s economic hegemony.24 The further decline of sterling in the second half of the 20 th
century was largely due to the disruption of sterling's partnership network over World War II and the
course of decolonization, when more and more former monetary partners gave up the currency for
political independence.
After World War II, all the participants of the U.S.-led Bretton Woods system have become the
dollar’s partners. Most of these countries are both recipients of the Marshall Plan, and the political
allies of the United States under its military influence. For them, to become supporters of the dollar
was out of both economic and security needs. Dollarized nations in Latin America constitute the core
of the dollar’s monetary network.25 In the 1960s, when a succession of dollar crises came and the
currency’s world status was challenged by Franc, it was Germany’s backing that tided it over these
crises.26
In this war of currency diplomacy, Germany was not only U.S.’s monetary partner, but also
serving as the fulcrum of the dollar. After the collapse of the Bretton Woods system in 1973, the
United States signed a secret agreement with Saudi Arabia to stipulate that the latter’s oil exports
should be denominated in dollars, which was traded for the US military protection of Saudi Arabia. 27
Due to the leading position of Saudi in the Middle East, OPEC countries started to follow suit,
beginning to use the dollar as the denominated currency for their oil export, which was how the
"petrodollar", as an important prop for the global use of the dollar, came into being. In the process,
the OPEC countries, holding large amounts of petrodollars, are the major currency partners of the
United States, while Saudi Arabia was the fulcrum of this partner network.
In sum, the history of the pound and dollar shows that the monetary partners has provided with
an international currency strategic support that might go beyond pure market forces, that has formed
a strong adhesive power on the currency to make up the political foundation for its world position,
22
Marcello De Cecco, The International Gold Standard: Money and Empire, New York: St. Martin’s Press, 1984,
pp.62-63
23
Bruce R. Dalgaard, South Africa’s Impact on Britain’s Return to Gold, 1925, New York: Arno Press, 1981, pp.134-
135.
24
Catherine R. Schenk, The Decline of Sterling: Managing the Retreat of an International Currency, 1945-1992,
Cambridge: Cambridge University Press, 2010, pp.24-25.
25
Jonathan Kirshner, Currency and Coercion: The Political Economy of International Monetary Power, Princeton:
Princeton University Press, 1997, p.141.
26
Benjamin Cohen, Organizing the World’s Money: The Political Economy of International Monetary Relations,
NewYork: BasicBooks,1977, p.103
27
David E. Spiro,The Hidden Hand of American Hegemony: Petrodollar Recycling and International Markets,
Ithaca: Cornell University Press, 1999, pp.105-106, 122-123
 Li Wei

making it insusceptible to change in economic situation and market conditions, and hence developing
a stable path dependence on the currency in the global market.
2. Diplomatic Partnership for the rise of the renminbi
The rise of the renminbi can’t do without the support of its monetary partners. To build a
partnership network is one of the crucial contents of China's currency diplomacy since the beginning
of the renminbi internationalization process. Those nations that took the lead in this process are the
monetary partners of China. They have provided a wide range of support in both political and
technical terms at the official level. Specifically, China's cooperation with its monetary partners
mainly has the following aspects:
First, partners with currency swaps: by arranging deals to provide the other central banks with
yuan, China's currency swap diplomacy is to facilitate the use of the in bilateral economic activities. 28
Moreover, the currency swap agreements between central banks also imply the reinforcement of
mutual trust between governments, symbolizing the political backing from these governments for the
international use of renminbi. By the end of June 2015, the People's Bank of China had concluded
currency swap agreements with 32 countries and regions, shaping up a yuan-centered currency swap
network on par with the dollar and the euro, in terms of either the number of signed protocols or the
range it covers.29
Second, partners with local currency settlement: as currency swaps laid the foundation of the
renminbi’s international use, a local currency settlement framework is an important step toward its
internationalization. While allowing enterprises to use local currencies to settle and pay in yuan may
be unilateral, policy support and administrative convenience provided by other national governments
can rapidly expand local currency settlement. Therefore, to promote local currency settlement has
become an important agenda of China's currency diplomacy. Since the pilot projects for the yuan
settlement was launched in 2009, China has, with more than 30 countries, incorporated “promotion of
local currency settlement” into bilateral or multilateral joint communiqués that reflects the support of
these countries.
Third, partners with currency trading: more extensive practice of local currency settlement calls
for direct exchanges of the renminbi with more foreign currencies to increase the yuan’s availability
on the market. Transactions between the yuan and other foreign currencies have long required the
dollar as an intermediary, which has led to higher costs of currency exchange and an increased
dependence on the dollar. Beginning in 2010, China's currency diplomacy pushed ahead with
proactive moves that have broadened the range of currencies that can directly trade against the yuan.
This process has been fast tracked since 2014, allowing over ten currencies so far to be traded
directly against the yuan. Using the yuan in the international market has become increasingly
convenient.
Last, partners with currency clearing: as the yuan is increasingly used to settle transactions and
trade directly for other currencies, there is a pressing need for establishing an overseas clearing
system to suit the convenience of more extensive use of the yuan in the global market. From 2013,
China began to quicken the pace to advance yuan clearing mechanisms abroad, and set off a wave of

28
Steven Liao and Daniel Mc Dowell, “Red back Rising: China’s Bilateral Swap Agreements and Renminbi
Internationalization,” International Studies Quarterly, vol.59, no.3, 2015, pp.401-422.
29
Zhang Ming, “ Global Currency Swaps: the Status Quo, Function, and the Future of Reforms to the International
Monetary System”, International Economic Review, no.6, pp.65-88.

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the currency clearing diplomacy in 2014 and 2015. With memorandums of understanding on cross-
border clearing signed with nearly 20 central banks, a global renminbi clearing network has taken
shape, providing great convenience for overseas circulation of the yuan.
Through these diplomatic efforts, the Chinese government has developed collaboration with 52
countries on different monetary agendas. These countries altogether have formed the partner network
on the preliminary stage of the renminbi’s rise. Based on their geographical locations and economic
levels, these currency partners can be grouped into three categories - Asia-Pacific developed
economies, distant economies and the peripheral developing economies. As shown in Figure 1, the
Asia-Pacific region is the principal geopolitical foundation to internationalize the yuan. With strong
economic ties to China, the five Asia-Pacific developed economies in particular - Korea, Singapore,
Australia, New Zealand and Japan - are the pivot of the renminbi partnership network. The other 36
distant partnerships are the fruits of China's currency diplomatic efforts made to Europe, Latin
America, the Middle East and Africa. These partners are mostly the economic hubs of their own
regions, whose support will pave the way for the yuan to go global. And the 11 developing economies
scattered around are main members of the “renminbi zone” in the making.
In the still-developing renminbi partner network, a number of collaborating countries have made
up the key nodes of the network. With greater capabilities and stronger wills, they have been more
supportive than other partners for the global use of the yuan over its ascent to a major currency.
South Korea and Singapore are representatives of these countries in the Asia-Pacific region.
South Korea, one of the few countries that have experienced postwar economic boom, has an
important place in the international economic and trade network. Singapore, as an important regional
financial center in Southeast Asia, affords a major platform with its financial services for the yuan to
take root in Southeast Asia. The two countries are now at the core layer of the China’s currency
partnership network, and their support will provide the renminbi with a huge international trading
network.
In Europe, four develop countries -Britain, Germany, France and Luxembourg - have important
roles to play in the network. However, these countries, out of the concerns about maintaining the
position of the euro as the world’s second most-used currency, may “hate the emergence of RMB as a
rival of the euro”,30 and hence are less likely to back such a currency they dislike. On the other hand,
as the renminbi is looking to become a match of the dollar and the euro - a very different pursuit of
international positioning than the sterling, Britain, less tensed about the yuan’s competition, will be
more willing to become the fulcrum propping up the RMB in going global. Britain’s sheer size of the
economy, its vast network of international trade and finance, especially London as the world's leading
financial center, can provide great help for the renminbi’s internationalization. Britain has once seized
the opportunity to assume to role of the dollar offshore center, whereby its position as an international
financial center was shored up even when its overall economy was in decline. This experience is also
one of the historical reasons to drive Britain to back the yuan internationalization.
In addition, Russia is China's another most pivotal currency partner, which is mainly reflected in
the Sino-Russian monetary cooperation against the potential impact of the petrodollars. To become an
influential international currency, the yuan must be included as the denominated currency in the
trading of oil and other commodities. As respectively the world's leading oil exporters and importers,
30
William H.Overholt, Guonan Ma and Cheung Kwok Law, Renminbi Rising: A New Global Monetary System
Emerges, London: Wiley, 2016, p.41
 Li Wei

China and Russia are attempting to expand local currency settlement in oil and gas trading, which is
most likely to usher in a new era of “petroyuan”. 31 The “Ukrainian crisis”-triggered West sanctions
have strengthened Russia’s resolve for rapid implementation of de-dollarization strategies, serving as
another major opportunity for the rise of the renminbi.
In short, after years of efforts in currency diplomacy, China's currency partnership network has
already been in place, making up a key component of its strategic partnership diplomacy. The
currency partners in this network are not equally important for the yuan’s ascent: those who have
greater ability and wills to back the renminbi are the high priorities of China’s currency diplomacy.

III. International Institutions and International Currencies

In addition to the currency partner network, international institutions relevant to monetary matters are
another important political pillar of international currencies. After World War II, a great many
international regimes emerged and started to play increasing roles in the international system, which
has become one of the main characters of international relations. 32 International regimes are of great
significance for retaining leading positions of great powers; some scholars call them the “The wings
of hegemony.”33 However, only few scholars have linked them to the growth and protection of
international currencies. In fact, these international regimes are vital to foresting and maintaining the
position of international currencies.
1. The International Institutions and Their Purposes
The significance of international institutions to world currencies was reflected in the following
two fronts:
First, international institutions provide globally acknowledged legitimacy for the growth of
international currencies, helping to secure their international monetary status. An international
institution is built on the basis of legitimacy: once established, the rules and norms stated in it are
believed to have gained the unanimously approval of its member states. 34 Therefore, an international
institution is not only the product of international recognition, but also an exemplar of what defines
legitimacy.35 The issuance and use of an international currency also concerns legitimacy. Besides the
natural selection of the market, a stable international currency needs to be recognized at official
levels of international authorities. International regimes are hence a legal arrangement for
international monetary relations, where rules and norms favorable to a currency will increase its
users’ confidence and dependence on the currency.

31
The so-called “petroyuan” is a brand new concept that emerged in recent years. See Flynt Leverett and Hillary
Mann Leverett, “America’s Monetary Stake in the Gulf and the Looming Challenge of the Petroyuan,” in Steven W.
Hook and Tim Niblock, eds., The United States and the Gulf Shifting Pressures,Strategies and Alignments, Berlin:
Gerlach Press, 2015, pp.124-127.

32
See Arthur Stein, “The Hegemon’s Dilemma: Great Britain, the United States, and the International Economic
Order,” International Organization, vol.38, no.2, 1984, pp.355-386.
33
See Men Honghua The Wings of Hegemony: International Institutional Strategy of the United States, Beijing,
Peking University Press, 2005.
34
Allen Buchanan and Robert O. Keohane, “The Legitimacy of Global Governance Institutions,” Ethics and
International Affairs, vol.20, no.4, 2006, pp.405-437.
35
Ian Hurd, “Legitimacy and Authority in International Politics,” International Organization, vol.53, no.2, 1999,
pp.379-408.

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Speaking of the dollar, the Bretton Woods system was an important guarantee for its
"international legitimacy ". The system stated clearly the role of the dollar as a leading global
currency in the form of political agreements between sovereign states, whereby the dominance of the
dollar were universally accepted all over the world. In the regional level, the euro, from its birth to
ascent, has been legitimated also through concrete institutional designs. 36 The use of the euro in the
European region is entirely based on the powerful system of institutions in the euro zone.
In addition, some micro-level international institutional arrangements can offer legitimacy to the
international status of currency as well. The Special Drawing Rights (SDR), created by the
International Monetary Fund (IMF), consisted the U.S. dollar, euro, pound sterling and Japanese yen,
and hence offered legitimate recognition for the international functions of these currencies. That the
Chinese government pushed hard in 2015 for inclusion of the renminbi in the SDR basket as the fifth
currency was also a posture hoping to increase the global recognition of the renminbi as an
international currency and the market confidence in it by using the endorsement of IMF as the
support of an authoritative international organization.
Second, the international institutional arrangements can also have a "lock-in effect" on an
international currency that is held to preserve its international standing. John Eikenberry once pointed
out that, for the leading country under an international regime, the most fundamental significance of
the regime lies in its capability to "lock in” the international orders in favor of the leading country,
especially when the power structure changes.37 In the monetary field, international institutions have
the same value. In addition to providing “legitimacy” in the growing-up stage of a currency,
international institutions can also reinforce the “path dependence” of the international market on the
currency to defend the status quo.38 Since there is no supranational centralized authority on the
international level to enforce the use of a certain currency, the issuing country can only rely on
international institutional arrangements to “lock in” the international status of the currency, whereby
using the currency will become a lasting and stable habit, and the range and degree of using it can
also be consolidated. This is particular true in times of economic crisis: the anti-market forces
provided by international regimes are capable of holding off or even averting the decline of an
international currency due to market causes, unless some major events such as the outbreak of a war
to knock the original system off balance. Therefore, with the spontaneous evolution of the market, the
efforts of the nations of central currencies seeking to establish monetary institutional arrangements in
global levels (such as the dollar) or regional levels (such as the Deutsche Mark and the euro) are the
necessary conditions to maintain the international status of their currencies.
As the First World War struck the international gold standard led by Britain, the pound sterling
began to decline. However, the British government responded by setting up preferential trade blocs
within its colonial system as well as a sterling area that shares monetary policies among member
states. This has laid a regional institutional foundation for defending the status of the sterling,
partially locking in its role as a regional currency.39
When it comes to the U.S. dollar, despite the fact that Bretton Woods system collapsed as a

36
Servaas Deroose, Dermot Hodson and Joost Kuhlmann,“The Legitimation of EMU: Lessons from the Early Years
of the Euro,” Review of International Political Economy, vol.14, no.5, 2007, pp.800-819.
37
G.John Ikenberry, After Victory: Institutions, Strategic Restraint, and the Building of Order After Major Powers,
Princeton: Princeton University Press, 2000, pp.4-5
38
Benjamin J. Cohen, The Geography of Money, Ithaca and London: Cornell University Press,1998,pp.95-96
39
Susan Strange, Sterling and British Policy: A Political Study of International Currency in Decline, pp.55-70.
 Li Wei

system of “hard rules”, the remaining institutions - IMF and the World Bank (WB) - has still been
playing important roles in the international regimes, inasmuch as these two institutions still use
dollars as the primary currency in foreign aid, while also being led by and serving the strategic
interests of the U.S..40 With these institutions, the United States managed to lock in dollar-led the
international monetary order, and protected itself from the damage of economic “stagflation” and
dollar depreciation in 1970s, as well as the impact of 2008 financial crisis.
At the regional level, the European Monetary Union (EMU) “locked” the euro as a regional,
super-sovereign currency, and therefore created a so-called forward-only “bicycle effect”, pushing up
the costs for leaving the euro. And as such, after the outbreak of the European debt crisis, Germany,
the leader of the institution, stepped forward and bailed out the union at the critical moment, rather
than let the crisis tear the euro apart.41
In contrast, the Japanese yen was a negative case where lacking international institutional
foundation led to its decline. In the late 1990s, the yen had kept falling while the dollar started to
regain the lost ground the yen had once encroached upon. 42 Despite many economic causes that were
accountable for the yen’s setback, the root cause for yen’s susceptibility to change of marketplace, as
well as its incapacity to resist market risk, was exactly its lack of strong political support (or the
protection of international regimes). As a follower of the United States on the security front, Japan’s
work on institution building in the East Asian region has amounted to little more than lackluster.
After the outbreak of Asian financial crisis in 1997, Japan proposed to establish the Asian Monetary
Fund (AMF), which was soon vetoed by the United States. 43 Without a solid international
institutional basis, even subtle changes in marketplace could shake the status of the yen.44
In short, the international institutions offer great support and protection to both currencies on the
rise and those looking to maintain the status quo, serving as one of the major political foundations for
the world positions of the international currencies.
2. China’s institutional diplomacy for the rise of the renminbi
Lessons of experience in the sterling, dollar, euro and yen show that international institutions are
indispensable protection for the internationalization of the renminbi. Since 2009, China has boosted
diplomatic efforts in promoting the international institutions for the yuan’s rise, including both
reforms of the existing global regimes (hereafter, “reform” for short) and erection of new regional
ones (hereafter, “erection”). China’s two-pronged strategy has set up a preliminary institutional
framework favorable to the ascent of the renminbi.
In the “reform” front, the Chinese government has run a diplomatic campaign reflecting its
interest and bid for power. First, since the outbreak of 2008 financial crisis in the U.S., China has
pushed for a core governance mechanism for the global economy in a timely and active manner, and

40
Randall W. Stone, Controlling Institutions: International Organizations and the Global Economy, Cambridge:
Cambridge University Press, 2011, pp.51-79.
41
Zhao Ke, “Germany’s battle to save the euro: maintaining and expanding the power of international currencies”,
Chinese Journal of European Studies, 2013, no.1, pp.64-86.
42
William W. Grimes, “Internationalization of the Yen and the new politics of monetary insulation,” in Jonathan
Kirshner, ed., Monetary Orders: Ambiguous Economics, Ubiquitous Politics, Ithaca: Cornell University Press, 2003,
pp.172-194.
43
William W. Grimes, Currency and Contest in East Asia: The Great Power Politics of Financial Regionalism,
Ithaca: Cornell University Press, 2009, p.54.
44
Li Wei, “the political foundation for checking and counter the U.S. dollar”, World Economics and Politics, 2012,
no.5, p.118.

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completed the transformation from “the age of G7” to “the age of G20”. 45 This institutional mutation
not only has cleared the way for China to participate in the global monetary governance, but also has
gained a greater voice for the nation, providing the yuan with the microscopic institutional platform.
Second, China has pressed for a structural reform of the existing international financial institutions
represented by the IMF and IB. The reform mainly concentrated on share allocation and personnel
system to reflect the rise of China’s monetary status. Third, steps were taken to strengthen the
monetary function of SDR while simultaneously to weaken the dollar as the world's leading reserve
currency, with intensive efforts made to incorporate the renminbi into the SDR basket.
China's "reform" diplomacy has made significant achievements in the context of the great
pressures the financial crisis brought to the institution defenders. For example, pushed along by
China, IMF and the World Bank passed the resolution for a reform to share allocation in 2010. The
U.S. Congress, despite years of procrastination, finally approved it in 2016 at China’s urging.
Once the resolution goes into effect, China will overtake Germany, France and the UK to
become the third largest shareholder in the IMF and IW only behind U.S. and Japan. In addition, That
Lin Yifu and Zhu Min assumed the office of the Vice Presidents of the IB and IMF was the first time
in history that Chinese staffs took up such posts, a major breakthrough of China in striving for
personnel power in international financial institutions. Moreover, the issuance of SDR has increased
substantially in response to China’s repeated proposals, laying a foundation for playing its role as a
reserve currency of significance.46 Not only so, after being successfully included in the SDR basket at
the end of 2015, the yuan has consolidated its position as the world’s fifth most used currency.
However, United States is, after all, the “system maker and privilege taker.” 47 As a currency
hegemon looking to preserve the status quo, while the U.S. government did made compromises and
concessions in the height of the financial crisis to meet China’s demand for “reforming” in exchange
for the country’s support for handling the crisis, it started to impose more and more obstacles to
China’s reforming efforts with the ease of the pressure from the crisis. 48 For instance, it has an
inclination to restore the G7 while alienating the G20 and to exclude of China from playing its role in
the global economic governance. Moreover, the United States still has the right of veto on the IMF
and IB. Besides, it has zero intention to change the personnel system where the President of the IB
continues to be nominated by its own. It is hence safe to say that the global financial institution to the
benefit of dollar hegemony has not yet been changed.
It is in such a context that China's institutional diplomacy has begun to bypass the hegemonic
powers, switching its strategy from global “reform” to regional “erection” where notable
achievements has been made.
First, the monetary cooperation between BRIC countries has been strengthened. During the
financial crisis, the United States attempted to shift the crisis onto other countries by devaluing the
dollar, as a consequence, the BRIC nations were prompted to come together based on their collective

45
Cui Zhinan and Xing Yue, “From the age of G7 to G20: the change of the governance mechanism of international
finance”, World Economics and Politics, 2011, no.1, pp.134-154.
46
Zhou xiaochuan, “To reform the international monetary system”, China Finance, 2009, no.9, pp.8-9
47
Mundell, Mundell Collected Work (Volume VI) International Currencies: the past, present and future, Chinese
Edition, translated by Xiang Songzuo, Beijing, China Financial Publishing House; Michael Mast anduno, “System
Maker and Privilege Taker: U.S. Power and the International Political Economy,” World Politics, vol.61, no.1, 2009,
pp.121-154
48
Li Wei, “Upholding Hegenomy: The International Economic Strategy of Obama Administration”, Foreign Affairs
Review, 2013, no.3 pp.51-66
 Li Wei

identity as emerging powers and on the common interests against the dollar hegemony. 49 The calls of
BRIC countries for a reform to the global monetary regimes, though not fully implemented, exert
great public pressure on the legitimacy of the international financial institutions under the control of
developed countries. Aside from these external calls, China and other BRIC countries have
cooperated substantively in the monetary field to promote the internal reform. These efforts included
pushing for local currency settlement, increasing the use of their own currencies, and thereby
prompting the establishment of a diversified international monetary system, as opposed to the
unilateral dollar-leading one. Setting up the BRICS New Development bank and the Foreign
Exchange Contingency Reserve was another action taken to pursue financial interests and safeguard
the financial orders of BRIC economies. The monetary cooperation in the BRIC system will be
another institutional foundation for the rise of the renminbi.
Second, the "10+3" model of monetary cooperation has been upgraded. Based on the degree of
closeness in economic ties and the strategic importance, East Asia is undoubtedly the primary
geographic region for the rise of the renminbi. In 2000, the 10+3 members launched the bilateral
currency swap agreements under the framework of Chiang Mai Initiative, taking the first step in
monetary cooperation. After years of diplomatic efforts, the East Asian multilateral foreign exchange
reserves formally went into effect, following the outbreak of the U.S. financial crisis. Up to this
point, the monetary cooperation in East Asia has been greatly improved. Moreover, in February 2016,
the ASEAN and China-Japan-Korea Macroeconomic Research Office (AMRO) was founded in
Singapore, as a formal international organization to provide macroeconomic monitoring and
consulting for the operation of the East Asian foreign exchange reserve. This marked a further
advance in the institutionalization of monetary cooperation in East Asia, while also providing a
regional institutional platform for the more widely use of the renminbi in East Asia.
Third, the Asian Infrastructure Investment Bank (hereafter, AIIB) was founded. At the end of
2013, China initiated the proposal for establishing the Asian Investment Bank, where brilliant
chapters in the history of China’s institutional diplomacy were included. 50 Many of the “close allies”
of the U.S. have joined the AIIB. The AIIB, in full operation since the end of 2015, has become the
fifth largest international development bank behind the WB, the European Investment Bank, the
Asian Development Bank and the Inter-American Development Bank. Following the course of the
renminbi’s internationalization, increasing settlement in yuan will become an inevitable trend for the
new international financial institution that carries a firm brand of China.
Finally, China has been boosting efforts in promoting monetary cooperation under the
framework of the Shanghai Cooperation Organization (hereafter, SCO). Over recent years, the
Chinese government has been actively launching activities in incorporating monetary collaboration
into the framework of the SCO on the basis of the Unionpay, including speeding up currency swaps
between member states, as well as setting up a settlement system for regional trade and investment,
and etc. Moreover, beginning in 2009, the government has been exploring the possibility for creating
the SCO Development Bank. With the progressing of the SCO-based monetary cooperation, the bank
will also serve as an important regional institutional framework that ensures the yuan’s entry into the
Central Asia.
49
Oliver Stuenkel, “The Financial Crisis, Contested Legitimacy,and the Genesis of Intra-BRICS Cooperation,”
Global Governance, vol.19, no.4, 2013, pp.611-630.
50
Gregory Chin, “Asian Infrastructure Investment Bank: Governance Innovation and Prospect,” Global Governance,
vol.22, no.1, 2016, pp.11-25.

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In brief, in the middle of the ascent of a currency, when the path dependence on the currency has
not yet been fully developed in the international market, advantageous institutional arrangements are
particularly crucial to help the currency overcome the challenge from economic changes and market
fluctuation. Given the difficulty in global institutional reform, the BRIC, the monetary cooperation
framework in East Asia, the AIIB, and SCO make up the major regional international system
platforms supporting the rise of the renminbi in the initial stage of its internationalization, while also
justifying the currency’s legitimacy and bringing into play its “lock-in effect”.

IV. Political Leadership and Currency Diplomacy

Whether its aim is to draw support from the partners or to build the institutional protection,
strengthening the political foundation of an international currency calls for the issuing country’s
productive diplomatic efforts in the international monetary arena. History shows that currency
diplomacy cannot succeed without the powerful political leadership.
Charles Kindleberger was the first to introduce the concept of "political leadership" into the
study of international economic relations.51 Thereafter, more and more scholars have been involved in
the study of political leadership, few of whom, however, have engaged with international monetary
affairs.52 This article discusses how the political leadership plays its role in securing new monetary
partnership and creating international institutions, thereby coming to affect the rise and fall of a world
currency. The so-called political leadership means countries with both strong material strength and
high moral prestige to motivate other countries to follow its will and achieve major international
strategic objectives through diplomatic means. Having a large number of followers is one of the basic
premises to assume political leadership. As for studies of international monetary politics, political
leadership refers to a country’s ability to build reputation, supply benefits and enforce rules and
sanctions in the course of earning trust, support and acceptance from other countries for its national
currency to be used as an world currency. Manifesting in public trust, a centripetal force, and
coercive power, political leadership contributes directly to the effectiveness of the currency
diplomacy concentrating on building partnership and monetary institutions.
The so-called public trust is follower’s faith in establishing strategies establishment and
implementing policy by the leading country, which is shown as the ability to reassure the followers
and build their confidence. Speaking of the degree of its correlation to the international monetary
affairs, the public trust is reflected in three levels. The first level is the leader’s political commitment
to the consistence, coherence, and publicity of its national currency and financial policies, which will
directly affect the followers’ choice of international currencies. 53 Such stable political commitment
will eventually add to the leader’s long-term reputation, becoming its tremendous intangible assets. 54
In addition, a country’s choice of world currencies in the international market is highly sensitive,
51
Charles P. Kindleberger, The World in Depression, 1929-1939, London: The Penguin Press, 1973.
52
See Oran R.Yong, “Political Leadership and Regime Formation: On the Development of Institutions in
International Society,” International Organization,vol.45, no.3, 1991, pp.281-308; G. John Ikenberry, “The Future of
International Leadership,” Political Science Quarterly, vol.111, no.3, 1996, pp.385-402; Sandra Destradi, “Regional
Powers and Their Strategies: Empire, Hegemony, and Leadership,” Review of International Studies, vol.36, no.4,
2010, pp.903-930; Joseph S. Nye, The Powers to Lead, Oxford: Oxford University, 2008; Yan Xuetong, “The
evolution of International Leadership and Institutions”, Quarterly Journal of International Politics, 2011, no.1, p.9.
53
Li xiao et al. Studies on the regionalization of the renminbi, Beijing, Tsinghua University Press, 2010, p.108
54
Keith Blackburn and Michael Christensen, “Monetary Policy and Policy Credibility: Theories and Evidence,”
Journal of Economic Literature, vol.27, March 1989, pp.1-45
 Li Wei

insomuch that it has to do with financial security and even with the overall national security,
representing the country’s faith in the diplomatic policy of the issuing country. Unless being under
coercion, a country is unlikely to heavily use its enemy state’s currency. Therefore, the public trust
here also includes, as on its second level, the ability to make the followers feel secure and amicable in
diplomatic relations. A higher level of the public trust involves the world reputation built by the
political regimes and economic model of the leading country, which not only provides the follower
with the sense of security, but also appeals to other countries which may emulate the success.55
Therefore, the public trust, as one kind of the “soft power”, is the emotional identification with
the leading country that the followers has developed over multiple fronts on the basis of on their
historical memory, a spiritually contagious power that can sway the decisions of other countries, and
a magnet for drawing more followers.56 A high level of public trust provides vital non-material
foundation for the country to demonstrate its political leadership ability as the world currency issuer.
It also helps the followers to build constant trust in the leader. Once they become its stable monetary
partners, they may lend support to the leader’s initiatives for building international institutions.
Since the 1970s, Germany and Japan - two nations on the economic ascent - have both started to
launch efforts in improving the status of their national currencies. However, the difference in public
trust between the two countries led to a vastly different outcome in their attempts to win over
potential partnership. Germany has won the trust of its European monetary partners through the
reflection on its war crimes and a firm posture for integration into Europe. 57 Japan, on the other hand,
has been reluctant to take practical action to achieve regional political reconciliation, hence unable to
gain enough public trust and the consequent political support of other East Asian countries as the
followers of the yen.58 In addition to the advantage in pursuing monetary partners, a high degree of
public trust is also a fundamental condition for creating international institutions that are favorable to
the leading country. For instance, the spontaneous emulation of the British monetary system was the
source of the public trust in Britain, leading directly to the formation of the international gold
standard and of the dominant position of the pound sterling.59
The aforementioned centripetal force here refers to the leader’s attraction to its followers formed
by providing public goods for the latter, that is, the leader’s ability to provide “free rider”
opportunities.60 The purpose of supplying public goods is to provide material incentives to the
followers. In the international system, most of the state behaviors are based on maximization of the

55
Jonathan Kirshner, “Same as It Ever Was? Continuity and Change in the International Monetary System,” Review
of International Political Economy, vol.21, no.5, 2014, pp.1007-1016.
56
Li Wei: “Transformation of international orders and the theoretical formation of Realistic Institutionalism”, Foreign
Affairs Review, 2016, no.1 pp.31-59.
57
Kathleen R. McNamara, The Currency of Ideas: Monetary Politics in the European union, Ithaca: Cornell
university press, 1998, pp.69-71.
58
Benjamin J. Cohen, “Will History Repeat Itself? Lessons for the Yuan,” in Barry Eichengreen and MasahiroKawai,
eds., Renminbi Internationalization: Achievements, Prospects, and Challenges, Washington, D.C.: The Brookings
Institution Press, 2015, p.42.
William T.Bianco and Robert H. Bates, “Cooperation by Design: Leadership, Structure, and Collective Dilemmas,"
American Political Science Review, vol.84, no. 1, 1990, pp.133-147.
59
Charles P. Kindleberger, A Financial History of Western Europe, translated by Xu Zijian et al., Beijing: China
Finance Press, 2007, p.69
60
David Lake, “Leadership, Hegemony, and the International Economy: Naked Emperor or Tattered Monarch with
Potential?” International Studies Quarterly, vol.37, no.4, 1993, pp.459-489; Michael Petrowsky, “Leaders, Followers,
and the Logic of Collective Action: Leadership as a Public Good,” Perspectives in Public Affairs, Spring 2004, pp.36-
45.

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interests.61 If lacking stable incentives, it would be difficult to form a “lead and follow” relation. 62
Therefore, in order to enhance its centripetal force, the currency leader must be strike a balance
between its short-term interests and macroscopic monetary ambitions.
To enhance its centripetal force in the monetary field, the leading country needs to supply its
followers the following basic public goods: a stable anchor, an open financial market, necessary
financial assistance, an open commodity trade market and the requisite institutional arrangement.
Moreover, the leading country sometimes needs to provide with its followers the safeguard as the
public good of paramount importance. Therefore, strengthening the centripetal force is in some sense
the cost that the leading country must pay to improve or maintain the world status of its national
currency.
In the two key stages of the dollar’s rise, the United States made great efforts to provide
assistance and economic preferential treatment for other nations to gain the centripetal force. The first
period was between the late 19th and early 20th century, when the U.S. government pushed hard for
its “dollar diplomacy” in Latin America and gave large amounts of aid in dollars. As a result, the
dollar achieved wide popularity among Latin American countries, and the foundation was laid for the
formation of the dollar zone that became on a par with the sterling area and franc zone in the 1930s. 63
The second period was after the World War II, when the United States stepped up the assistance to
Europe through the "Marshall Plan". This helped to secure the position of the dollar as an
international currency circulated in Europe, thereby establishing the dollar hegemony over the
globe.64 In the course of leading European monetary cooperation, the Germany, too, sacrificed its
own short-term interest while being active in providing public goods for European monetary
integration, whereby its centripetal force has been enhanced. Since the creation of the European
monetary system in 1979, Germany has been offering support to its monetary partners through
financial assistance, economic cooperation, special preferential terms on trade and investment to help
its currency partners, and has undertaken a number of asymmetric obligations. Germany did pay an
economic price for the support of its currency partners; however, its generous benefit provision has
been a source of its centripetal force.65
Furthermore, the centripetal force of the political leadership is also reflected in the benefits the
followers may enjoy by being a part in the creation of international institutions led by the leading
country. When the IMF was founded, the United States, with the largest quota in it, once contributed
up to 60 percent of the funding. 66 The benefit-sharing opportunities brought to the member states has
increased the U.S. centripetal force toward its partners, making them more inclined to back up the
U.S. institutional initiatives calling for setting up the dollar-centric Bretton Woods system.
The so-called coercive force refers to a country’s ability to punish those competing with, or
showing hostility to, its national currency, and to coerce them into upholding, or at least, not
sabotaging it. Coercive force, demonstrated in a nation’s power to cause fear among other countries
61
William T. Bianco and Robert H. Bates, “Cooperation by Design: Leadership, Structure, and Collective Dilemmas,”
American Political Science Review, vol.84, no. 1, 1990, pp.133-147.
62
Rick K. Wilson and Carl M. Rhodes, “Leadership and Credibility in N-Person Coordination Games,” The Journal
of Conflict Resolution, vol.41, no.6, 1997, pp.767-791.
63
Francis Adams, Dollar Diplomacy: United States Economic Assistance to Latin America, Aldershot and Burlington:
Ashgate Publishing, 2000.
64
Zhang Yuyan, “Compete for Monetary Hegemony”, Business Watch Magazine, Jan.5, 2009, pp.30-31.
65
Matthias Kaelberer, “Hegemony, Dominance or Leadership? Explaining Germany’s Role in European Monetary
Cooperation,” European Journal of International Relations, vol.3, no.1, 1997, pp.35-60.
66
Randall W.Stone, Controlling Institutions: International Organizations and the Global Economy, p.19.
 Li Wei

who may act according to that nation’s will out of fear, works by means of political pressure,
economic sanctions, and military threats. As a hard power, although less commonly used in modern
society, it is still an important device that builds the foundation of political leadership.
Using coercive power to defend the status of international currencies is quite common in history.
In the 1960s, Germany's support for the dollar was based on the military protection provided by the
United States.67 The U.S.’s strong actions taken on Iraqi Saddam regime, Iran and Venezuela,
including military strikes, economic sanctions, and political isolation, were at least partially due to
these countries’ attempts to challenge its interests on the petrodollar issues. 68 Some scholar believes
that the U.S.’s strong strategic capability in East Asia is the key to ensure that the Dollar Standard is
still adopted in the area.69 This is exactly the coercive power built on military strength and the
coalition system. It was Britain’s coercion power to influence its colonies (as an important tool for
stalling the fall of the pound) that enabled the status of the currency to have been preserved over the
periods of two world wars.
The full-blown European debt crisis in 2010 became a major setback to the expanding euro,
exposing a primary political flaw in the euro as an international currency, that is, either the European
Commission and the European Central Bank, or Germany as the regional leader, lacked the adequate
coercive power to discipline the member states -especially Greece and other weaker countries- and to
promote further institutional reforms for improving the governance structure of the euro area. As
Cohen said, what stands behind the euro has not been a sovereign state. 70 At present, the sovereign
state is an institutional form with the strongest coercive force.
In brief, for countries following a world currency, while public trust is being the role model, the
centripetal force is the “carrot”, and coercive power, the “stick”. Strong political leadership is usually
the integrative result of these three factors. In the rise of the renminbi, China's monetary diplomacy,
whose aims are to reinforce the monetary partner network and the international institutions, also
depends on the government using the combination of these three kinds of power. However, from the
historical experiences, international currencies in different stages require different combinations of
the above power. In its growth stage when use of an international currency has not yet formed a
stable path dependence, the country on the rise of its currency needs to outperform the monetary
hegemon in many ways to overcome the “incumbent’s advantage”. 71 Therefore, setting the “role
model” and giving out the “carrot” is more important for a rising currency. On the other hand, in its
maturity when an international currency has achieved a stable international position, the leading the
country may use the “stick” as well, defending the currency’s position with coercive power. In this
early stage of renminbi’s ascent, to foster the country’s political leadership needs to gain more trust of
the monetary followers by improving the nation’s credibility, to enable the followers to share more
benefits by strengthening its centripetal force, and to be highly prudent with exerting coercion. 72 In a
67
Hubert Zimmermann, Money and Security: Troops, Monetary Policy, and West Germany’s Relations with the
United States and Britain, 1950-1971, Cambridge University Press, 2011
68
Zhang Wenmu, “The Structure of U.S. Politics and its Diplomatic Policies: Also about U.S. Strategic Shift to East
and the Future Direction of its Diplomacy”, Journal of International Relations, 2013, No.3, pp.8-16.
69
Doug Stokes, “Achilles” Deal Dollar Decline and U.S. Grand Strategy After the Crisis," Review of International
Political Economy, vol.21, no.5, 2014, pp.1071-1094.
70
Benjamin J. Cohen, Currency Power: Understanding Monetary Rivalry, p.187.
71
Barry Eichengreen, Exorbitant Privilege: the Rise and Fall of the Dollar and the Future of the International
Monetary System, Oxford: Oxford University Press, 2011, p.7.
72
See Yin-Wong Cheung, “The Role of Offshore Financial Centers in the Process of Renminbi Internationalization,”

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 Social Sciences in China

word, China’s monetary diplomacy today calls for exhibiting “charismatic leadership”, rather than
showing off the “muscle”.

V. Conclusion

The history of international money has fully shown that a strong monetary partner network and a
favorable system of international institutions provide an international currency with strategic support
and political protection beyond purely market forces, which constitute the two major political
foundations upholding the currency’s world status along with requisite economic condition. To
consolidate the political foundation of the currency calls for a full play of international leadership
ability that is based on the public trust, the centripetal force, and the coercive power. The rivalry for
world monetary status is the competition between currency issuers in both economic power and
political leadership.
Since 2009, the Chinese government has taken a number of important measures to promote the
rise of the renminbi as an international currency. These measures include domestic policy
adjustments and international monetary diplomacy. The former is mainly to ease restrictions so as to
release the market forces for the renminbi to go global. The latter is to strengthen the international
political foundation for the renminbi to play its world role with the “two wheel drive”: building
monetary partnership and creating the system of international institutions. The combination of market
forces and the government’s diplomacy is the core content of the renminbi internationalization
strategy.
The success of China's monetary diplomacy relies on showing its own international political
leadership, a joint use of its public trust, centripetal force and coercive power. In the upcoming
decade, with China’s international political leadership coming into play, with more partners to be
secured and more institutions created, with its financial reform to be deepened and economic power
continuing to grow, the renminbi will be likely to become an influential world currency that keeps
pace with the dollar and euro. The renminbi in ascent will serve as an important check and balance to
the dollar hegemony, helping to establish of a diversified international monetary system that is more
fair and rational.

Notes on Contributors

Li Wei is Associate Professor of the School of International Studies. He graduated with a Doctorate of Law from
School of International Relations and Public Affairs, Fudan University. His research interests include theories of
international relations, international political economy, the U.S. international economic policies and China's economic
diplomacy. His representative works include To Check and Counter the U.S. dollar: Political Leadership and a
Currency on the Rise ( 《 制 衡 美 元 ： 政 治 领 导 与 货 币 崛 起 》 , Shanghai People's Publishing House, 2015),
Currencies and Coercion: the political economy of international currencies (《货币与强制：国际货币权力的政治
经济学》 , Shanghai People's Publishing House, 2013), “Institutional Changes and the U.S International Economic
Policies” (《制度变迁与美国国际经济政策》, Shanghai People's Publishing House, 2010). He has also published
over twenty papers on core journals. E-mail: liwei09@ruc.edu.c

in Barry Eichengreen and Masahiro Kawai,eds., Renminbi Internationalization: Achievements, Prospects, and
Challenges, p.231.
 Li Wei

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