Financial statecraft and transaction costs: the case of renminbi internationalization

Between 2010 and 2019, China’s total renminbi cross-border transactions increased from 630 billion to 15,86 trillion renminbi. This change occurred mostly by substituting the dollar’s share. Although the economic theory explains that everybody would be better off if operations are concentrated in a key currency (in this case, the dollar), why did some Chinese and overseas economic actors decide to switch currencies? Many authors indicate the role of Chinese official policies as the main drivers of this change. Although the importance of these policies is indisputable, puzzles remain. First, the decision on which currency to adopt is done on a micro-level, by what mechanism can policymakers influence firms, banks, and other central banks' choices? Added to that, are the Chine official policies the only impetus for renminbi internationalization? Can the American policies also influence the move away from the dollar and towards the renminbi? Based on interviews conducted in China during Fall 2018 and 2019 with the country’s central bank senior officials, manufacturing companies, commercial and development bank staff, as well as news reports and speeches both in Chinese and English, this article finds that the switch from dollar operations from renminbi operations is explained by the reduction of relative transaction costs of the latter. Two major forces diminished the relative transaction costs of the renminbi, the first one is Chinese statecraft. Chinese officials, especially from the PBOC, to protect the country against global shocks and imbalances have designed a set of policies that reduce the transaction costs for domestic and foreign actors adopting the renminbi for cross-border purposes. Since 2010, it has become easier, faster, and cheaper to make international payments using renminbi. Yet alone those policies do not explain the switch of currencies. My interviews show that for some companies and banks, the dollar liquidity shortage and American financial sanctions have substantially increased dollar transaction costs. Once actors choose currencies on a comparative basis, the decrease of renminbi transaction costs combined with the increase of dollar transaction costs led many companies to migrate to renminbi operations. This article contributes to two debates in the international political economy. The first one is to the literature on international currencies. For a long time, authors have adopted the concept of transaction costs to explain the existence of international currencies. Yet, this concept is understood narrowly, mostly emphasizing the role of economic size and currency trading volume in reducing transaction costs. Here I show that beyond the market, governments also can shape the transaction costs of currencies on purpose (like China) or unintendingly (like the USA). I also contribute to the debate on financial statecraft (FS). The renminbi internationalization is already recognized as an FS tool, yet little is known about how such statecraft could be put into practice. Here I show that, by giving inducements, not to other states but to firms and banks, states can shield their economy from global imbalances and shocks.