by Radhika Desai

Just like it changes everything else, China is destined to change the international monetary system. However, exactly how China can and should change it deserves careful, historically informed consideration. The matter is not a simple one of following the path of the U.S. dollar, nor should it be. 

Much of the discussion of de-dollarization assumes that it is. However, a consideration of the twin processes that occasion this discussion—the decline of the United States, which has been caused by the very financial system that the dollar’s role in the world has required since 1971, and the rise of China, which has been powered by practically the opposite sort of financial system—should give us pause. 

Since the growth slowdown of the 1970s, the neoliberal reform of the U.S. financial system has resulted in low growth, low investment, skyrocketing economic inequality, stagnant wages, and a radical weakening of production and technological innovation. The only sector that has grown significantly is the so-called FIRE sector of Finance, Insurance and Real Estate. By contrast, China’s economic advance was based solidly on advancing its manufacturing prowess in terms of productivity and technological progress. Indeed, the latter has reached the point where, even according to many Western observers, China is leading on the overwhelming majority of critical technologies while the government is prioritising the reduction of poverty and inequality. 

U.S. decline and China’s rise have led many to suggest that the renminbi is now poised to replace the dollar as the world’s money. Not so fast! The change that China is destined to usher in will be far more radical than that. It will involve rejecting the false ideas about world money that have accompanied the dollar system and will shunt the locomotive of the world’s monetary relations from the wrong track it has been on to the right one. 

The idea that the currency of any one country, even the most economically powerful, should be the currency of the world is simply wrong. The roots of this idea lie in the aspiration of U.S. ruling elites to replace the weakening British world dominance with U.S. dominance, if not by acquiring an empire comparable with Britain’s, then at least by making the dollar the world’s money on the model of the pound sterling. Theories about U.S. hegemony are little more than this aspiration in disguise, and moreover, the dollar system never actually worked.¹ Not only did the dollar’s postwar link to gold need to be broken in 1971, but thereafter, the system required precisely the burgeoning of the FIRE sector as its foundation, and has subjected the U.S. to economic decline and the world to a series of destructive financial crises. 

With U.S. decline becoming more palpable every day, talk of de-dollarization has migrated from the fringes of scholarship, where it had been kept by the mighty exertions of primarily U.S.-based scholarship on the dollar system—the purpose of which was to eternalise, naturalise, and promote it under all circumstances—to the highest-level policymaking meetings of our time, particularly those in which China plays a leading part. However, the radical transportation of these discussions must also be accompanied by a radical transformation. 

Today’s Discussion of the Dollar System

In the face of clear U.S. decline, U.S.-based dollar-boosting scholars have taken to arguing that the dollar will nevertheless continue to dominate world payments because there is no alternative currency that can displace it. 

This argument assumes that the currency of the economically most powerful and dominant country must be the currency of the whole world, and so the dollar can only be replaced by a rival currency, just as it once replaced the pound sterling. They even go out of their way to praise the UK and the U.S. for successively stabilising the international system by providing the “public good” of world money. 

In particular, they point out that the renminbi is in no position to be such a successor. Chinese authorities, the argument goes, are either unable or unwilling to internationalise the renminbi on the model of the dollar and therefore cannot pose a challenge to it.

It would be understandable if many Chinese and China-sympathetic scholars reacted to such assertions by claiming that they are wrong, and that the renminbi can be, should be, or even is being successfully internationalised, just like the dollar. However, understandable though this reaction may be, it would be a dangerous error. If such a reaction led to the design and implementation of policies that would set in train an internationalisation of the renminbi on the model of the dollar, it would prove a disaster for China’s economy, put a brake on its impressive growth and technological development, and render it the same sort of neoliberally financialized and productively weakened economy as the United Kingdom has long had, and as the U.S. has today.

The Historical Background: Two Models of Finance

Finance and money predate capitalism. Karl Marx had expected that, as it emerged and matured, industrial capitalism would take the inherited forms of money and finance, with their orientation to short-term commerce, predatory and usurious lending and speculation, and transform them to serve its own productive expansion.² The result would be a financial sector providing long-term patient capital for industrial expansion. 

Marx’s expectation was fulfilled, though in a rather unexpected manner, as Rudolf Hilferding showed.³ Along with the works of Rosa Luxemburg and Nikolai Bukharin, his Finance Capital had provided a major theorization of capitalism and its relation to imperialism in the early twentieth century which many considered a “fourth volume” of Marx’s Capital and upon which Lenin relied considerably when writing his own later and more famous work, Imperialism: The Highest Stage of Capitalism.  

The industrial revolution that made Britain the first industrial country dominating nineteenth century capitalism was possible despite the archaic, short-term pre-capitalist form of finance it had inherited, because the sums needed at the time for industrial investment were relatively small. While most financial institutions remained focused on short-term finance for commerce and speculation, the accumulated wealth of rich families sufficed for the amounts of industrial investment that powered Britain’s industrial revolution, while Britain’s banks concentrated on commercial rather than industrial credit. 

It was in the countries to industrialise next, chiefly Germany, the United States, and Japan, that, as Hilferding explained, Marx’s prediction of capitalism taming inherited financial forms for its own purposes was fulfilled. These countries industrialised in opposition to Britain’s dominance over the world market. Their industrialization was, moreover, not a replication of the one that Britain had accomplished, but an advance over it, a veritable “second industrial revolution” to Britain’s first. It involved the production not of consumer goods but of investment goods, requiring immensely greater amounts of capital, much more sophisticated technology, the concentration of more and more workers in firms, and vastly more energy. This required protectionism against British market dominance, industrial policy, and other such methods of state intervention, including the construction of financial systems capable of providing long-term “patient” capital for investment in large quantities and for long periods. This industrialization leapfrogged over British industry, leaving it behind. In these countries, the transformation of inherited institutions of money and finance into institutions that would serve industrial development had become imperative because the vast amounts of capital required could not come from individual fortunes. Banks were essential, a point Hilferding signalled by labelling the type of capitalism in these countries “finance capital”. 

Hilferding explicitly contrasted finance capital with Britain’s more archaic financial system. While there were pressures for Britain to move towards the finance capital model, the financially and commercially inclined capitalist classes of Britain, which had retained their dominance over industrial capital.⁴ and whose inclinations were reinforced by the empire and the sterling system which rested upon it, resisted them. 

Today’s U.S. dollar-denominated financial system, upon which the dollar’s world role rests, is not the “finance capital” sort of financial system geared towards facilitating industrial expansion. Rather, it is of the British type, geared towards short-term speculation and predatory lending—essentially, towards skimming off incomes generated in production, whether as wages, profits, or government revenues. This is because although the United States had started life as an industrial power with the financial system that closely resembled Hilferding’s finance capital model, and though this orientation was reinforced by Depression-era regulation of the U.S. financial system, it began, after the dollar’s link to gold was broken, to transform its financial system into one resembling the arcane British sort in pursuit of its goal to keep the dollar as the world’s money. 

The Dollar-Denominated Financial System and the Dollar’s World Role

The dominant narratives of the dollar system portray the dollar as following in the footsteps of the pound sterling. However, they forget a critical difference: sterling was not a national currency, but an imperial one. Empire was central to its functioning. Britain extracted vast sums as surpluses from its non-settler colonies such as British India, Africa and the Caribbean and exported these funds—its famous “capital exports”—to Europe and the white settler-colonies in Canada, the United States and Oceania, enabling their industrialization⁵ just as, in a previous era, these surpluses had enabled British industrialization.⁶

When the U.S. sought to replace the sterling with the dollar, without colonial surpluses to export, it had to resort to providing the world with liquidity by running deficits. This was always problematic. It created the the famous Triffin dilemma;⁷ the greater the deficits—that is to say, the greater the liquidity provision—the greater the downward pressure on the dollar’s value, making it less desirable for the rest of the world to hold. Inevitably, the Europeans refused to accept dollars for their exports to the U.S. and demanded gold instead. This drained the U.S. of gold and left it unable to back the dollar with gold as early as 1961. After spending a decade exhausting all avenues for artificially preserving the gold link, the U.S. finally had to break it in 1971.⁸ 

After 1971, the U.S. has been able to maintain the dollar’s status as the world’s money only by promoting a succession of what we may call financializations: a series of discrete expansions of financial activity to generate demand for dollars and counteract the downward pressure that U.S. trade deficits put on the dollar. Each of these financializations has involved distinct assets, regulatory frameworks, borrowers, lenders, and speculators. Each has been more volatile than the one before and more destructive when it crashed. The U.S. financial system had been of the “finance capital” variety and heavily regulated to prevent speculation and predatory lending and promote productive investment, but starting with the lifting of capital controls in the 1970s, waves of deregulation transformed this system into one that more closely resembled the British style: archaic, short-term, speculative and predatory finance.⁹

Each financialization ended in a distinct disaster: the early 1980s Third World Debt crisis, various currency and financial crises of the 1990s, the 1997-8 East Asian financial crisis, the 2000 dot-com crash, the 2008 crisis, and the 2023 banking crisis, which is merely the herald of a much greater crash to come. 

This is the background against which we must try to understand why internationalising the renminbi on the model of the dollar would be ill-advised in the extreme, and how China can and should change international monetary and financial relations to serve its own and the rest of the world’s development, instead. 

The Chinese Financial System and Developing World Economic and Monetary Sovereignty

China’s financial system has come a long and complex way in the last several decades. Well into the reform period, it was essentially a banking system without asset markets, and Western analysts considered it to be nearly insolvent. Today, however, China is home to three of the world’s five biggest banks, which enjoy a remarkably low rate of non-performing loans, and Western investors are lining up to invest in them.¹⁰ As the pace of liberalising reforms of China’s banking system increased, so did Western interest. However, Western and Western-oriented scholarship on China ignores the fact that these liberalising reforms took place to achieve the goal of a more dynamic socialist economy, not that of ever-greater neoliberal financialization. 

Such scholarship, as Guy Williams points out, judges the Chinese financial system “according to the degree of implementation of free market policies”¹¹ complete with the full paraphernalia of elements associated with neoliberal financialization of the sort that has transformed the U.S. financial system for the worse since the 1970s. They include:

• central bank independence, which amounts to regulatory capture of the regulators by those to be regulated; 
• private ownership, which constitutes a licence to produce money for private gain; 
• stock markets, which are arenas of speculation rather than sources of capital;
• unrestricted foreign ownership, which detaches finance from the needs of the domestic economy; 
• and greater “financial inclusion”, which simply extends the financial system to anyone who can be usefully indebted. 

These scholars do not criticise the extensive damage done by the U.S.-dominated financial system to its own productive economy, not to mention to that of the rest of the world, nor do they discuss the critical importance of long-term “patient finance” in China’s spectacular industrialization and development.¹² 

For instance, Walter and Howie praise the liberalising reforms that culminated in China’s entry into the World Trade Organisation and criticise limitations and reversals on the way to full financialization. The resulting financial system, they say, is still largely confined to banks, with underdeveloped asset markets. It underserves “China’s heroic savers” with low interest rates. Since China’s large state-owned banks typically focus on financing the state-owned and/or closely monitored corporations that remain at the commanding heights of China’s economy, it leaves many smaller businesses without any reliable source of capital. Further, not only do they fault the party-state for protecting this system from competition or failure, particularly by keeping foreign banks confined to a marginal role, but they complain that “the Party treats its banks as basic utilities that provide unlimited capital to the cherished state-owned enterprises” and that “at the end of each of the last three decades, these banks have faced virtual, if not actual, bankruptcy, surviving only because they have had the full, unstinting, and costly support of the Party”¹³ which resolves matters by the “traditional problem-solving approach of simply shifting money from one pocket to another and letting time and fading memory do the rest.” This, they think, cannot go on forever. They look forward to the moment when, “[t]ied up as it is in financial knots, the system’s size, scale, and access to seemingly limitless capital can [no longer] solve the problems of the banks.” This would, they argue, provide the opening for further market reforms that were abandoned after 2005. 

Such writers ignore many rather obvious facts. Stock markets have rarely provided long-term patient capital. High interest rates strangle industry. Public services and investment should obviate ordinary people’s need for savings. Finally, providing small businesses with capital will likely require the expansion of China’s financial system on its present basis downwards into the economy, and not its neoliberal reform. Above all, they blithely ignore the regularity with which Western countries have bailed out their own banks—which is precisely “shifting money from one pocket to the next”, but done so in the aftermath of the bursting of socially, economically and politically destructive asset bubbles, and not, as in China, after some proportion of patient productive investment has gone sour, as it must. 

China’s banking system has historically had a very different role in its economy. The banking system was long dominated by a single bank, the People’s Bank of China. After the official adoption of a socialist market economy in the early 1990s, market reforms were gradually introduced to liberalise it.¹⁴ However, contrary to Western views, this liberalization did not have neoliberal aims.

To be sure, reformers have learned and borrowed a great deal from Western banking techniques as they introduced competition, reduced the inevitable moral hazards in a system ultimately protected by the state, allowed carefully calibrated private ownership, including some foreign ownership, and imposed prudential limits on lending and risk-taking.¹⁵ However, reformers have proceeded with caution, bearing in mind the Chinese adage about “crossing the river by feeling the stones.” Their borrowings have been governed by the party-state’s aims, usually articulated as principles arising from an understanding of China’s history and economic needs. Reform has sought to “transform the banking system to a market-oriented one that is viable in the long run thereby better serving the economic development of the country”,¹⁶ that is, serving the needs of the productive economy rather than those of a tiny financial elite.¹⁷ Unlike the neoliberal financialized banking systems, China’s banks have played a critical role in maintaining the remarkably high investment rate that has been so critical to China’s economic success.¹⁸  

Internationalization of the Renminbi

Like the Chinese financial system, the internationalization of the renminbi is also found wanting by Western observers who measure it against the benchmark of the unstable, predatory and volatile dollar system.¹⁹ Since the party-state is unable or unwilling to internationalise the renminbi in the same way, the dollar’s position, we are told, is secure. Benjamin Cohen, for instance, assuming that currency internationalization is desirable in itself, finds that Beijing’s internationalising ambitions are checked by episodes like the outflow of nearly a trillion dollars in 2015 that forced devaluation²⁰ and by the fear that it will undermine the Party’s political hold. Thus, Cohen concludes that the dollar remains “the indispensable currency—the one money the world cannot do without” thanks to the “depth of [U.S.] financial markets”²¹ along with the U.S.’s “still broad network externalities in trade, a wide range of political ties, and vast military reach.” While Cohen is careful not to doubt China’s ability to internationalise the renminbi and even agrees that it has “achieved tangible results, particularly along the trade track”, he concludes that progress is doubtful: “On its own the gravitational pull of China’s economic size will not suffice. Other factors—above all, a well-developed and open financial structure—must also come into play” and China is unlikely to be willing to engage in the necessary financial liberalization because it would entail “a significant modification of Beijing’s authoritarian economic model”.²² For Cohen, the restrictions placed on private enterprise in all sectors, including the financial, to bend their efforts towards China’s economic development are authoritarian, and he demands that China replace it with precisely the archaic, short-term, speculative and predatory financial structure sported by the U.S. and the UK—which would no doubt bring an end to the spectacular growth China has experienced thanks to its contrasting financial system. 

The dollar system is reaching the limits of its viability, particularly with the recent rise in inflation. Inflation itself is a result of the diminishing ability of the U.S. to compel the rest of the world to yield primary commodities and consumption goods at low prices, and compels interest rate increases that imperil the multiple asset bubbles needed to keep money flowing into the system²³ It is no wonder that, since at least the 2008 financial crisis, critical voices pointing to the costs the U.S. itself has had to pay for its financialized dollar internationalization are becoming louder.²⁴ 

The real alternative to the dollar system is not a renminbi system, which would be subject to the same problems, but the sort of system John Maynard Keynes had proposed—based on a multilaterally created currency to be used exclusively for settling international imbalances while national monies continue to operate as national money. This system was envisioned to reduce imbalances, produce growth and, above all, secure economic sovereignty for all countries.²⁵ Barring that, regional, bi- and multi-lateral agreements will be the realistic options, particularly considering that only a fraction of the astronomical financial flows necessary for the highly financialised dollar system will be necessary to serve the trade and investment needs of the world’s productive economy. 

Indeed, financial systems of the finance capital type have historically been reluctant to internationalise their currencies in the same manner²⁶ and for good reason. The internationalization of the renminbi is therefore proceeding according to the domestic and international needs of China’s productive economy, as it should, and it is likely to proceed further along the same path, rather than the radically different and destructive path taken by the dollar. 

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¹Radhika Desai. 2013. Geopolitical Economy: After US Hegemony, Globalization and Empire. London: Pluto. 

²Karl Marx. 1894/1981. Capital (Vol. III). London: Penguin, 735. 

³Rudolf Hilferding. 1910/1981. Finance Capital: A Study of the Latest Phase of Capitalist Development. Edited with an Introduction by Tom Bottomore, Tr. Morris Watnick and Sam Gordon, London: Routledge.

⁴Ingham, Geoffrey K. 1984. Capitalism Divided?: The City and Industry in British Social Development. Basingstoke: Macmillan.

⁵On this point, see Radhika Desai, ‘John Maynard Pangloss: Indian Currency and Finance in Imperial Context’ in Sheila Dow, Jesper Jespersen & Geoff Tily (eds), The General Theory and Keynes for the 21st Century, Cheltenham: Edward Elgar Publishing Ltd, 2018; Patnaik, Utsa; and Patnaik, Prabhat. 2016. A Theory of Imperialism. New York: Columbia University Press; and Patnaik, Utsa; and Patnaik, Prabhat. 2021. Capital and Imperialism: Theory, History, and the Present. New York: Monthly Review Press.

⁶Patnaik, Utsa. 2006. The Free Lunch: Transfers from the Tropical Colonies and Their Role in Capital Formation in Britain during the Industrial Revolution, in K. S. Jomo (ed.) Globalization under Hegemony. Oxford University Press, New Delhi.

⁷Triffin, Robert. 1961. Gold and the Dollar Crisis; the Future of Convertibility. Rev. ed. A Yale paperbound Y-39. New Haven: Yale University Press.

⁸See Desai, Geopolitical Economy, pp. 103-123. 

⁹For a brief summary, see Desai, Geopolitical Economy, 239-241. 

¹⁰Guy Williams, The Evolution of China’s Banking System, 1993-2017 (London: Routledge, 2020), pp. 1-2.

¹¹Williams, The Evolution of China’s Banking System, 3. 

¹²William Byrd, China’s Financial System, London: Routledge 1983 is an early example while Marlene Amstad, Guofeng Sun and Wei Xiong, eds., The Handbook of China’s Financial System (Princeton, NJ: Princeton University Press, 2020) is a more recent one. 

¹³Carl Walter and Fraser Howie, Red Capitalism: The Fragile Financial Foundations of China’s Extraordinary Rise 2012), New York: Wiley, 2012, pp. 27.

¹⁴For the early history, see Chunxia Jiang and Shijie Yao, Chinese Banking Reform: From the Pre-WTO Period to the Financial Crisis and Beyond (London: Palgrave Macmillan, The Nottingham China Policy Institute Series, 2017), pp. 15-20.

¹⁵Ibid, p. 35-38.

¹⁶Ibid, p. 55.

¹⁷Williams, The Evolution of China’s Banking System.

¹⁸John Ross, ‘Why China maintained its strong economic growth,’ LearningfromChina.net, 2020. https://www.learningfromchina.net/why-china-maintained-its-strong-economic-growth/. 

¹⁹Cohen, Currency Power; Eswar Prasad, Gaining Currency: The Rise of the Renminbi (Oxford: Oxford University Press, 2017); Kai Guo et al., ‘RMB Internationalization’ in The Handbook of China’s Financial System, eds. Marlene Amstad, Guofeng Sun and Wei Xiong (Princeton, NJ: Princeton University Press, 2020) are typical works.

²⁰Daniel McDowell, ‘From tailwinds to headwinds: The Troubled Internationalization of the Renminbi,’ in Handbook on the International Political Economy of China, ed. Ka Zeng (Cheltenham: Edward Elgar, 2019), pp. 194.

²¹Cohen, Currency Power, p. 6)

²²Ibid, 236, emphasis added.

²³See Radhika Desai, “Vectors of Inflation’ and ‘Soft Landing?’, Sidecar, 2022 and 2024. 

²⁴Fred Bergsten, ‘The Dollar and the Deficits: How Washington Can Prevent the Next Crisis,’ Foreign Affairs 88, no. 6 (November/December 2009); Fred Bergsten, ‘Why the World Needs Three Global Currencies,’ Financial Times, February 15, 2011. https://www.ft.com/content/d4845702-3946-11e0-97ca-00144feabdc0.

²⁵Radhika Desai. 2009. “Keynes Redux: From World Money to International Money at Last?” Wayne Anthony and Julie Guard eds. Bailouts and Bankruptcies. Halifax: Fernwood Books.

²⁶See, for instance, Randall C. Henning, Currencies and Politics in the United States, Germany and Japan (Washington, DC: Institute for International Economics, 1994); Eric Helleiner and Anton Malkin, ‘Sectoral Interests and Global Money: Renminbi Dollar and the Domestic Foundations of International Currency Policy,’ Open Economic Review 23 (2012): 33-55. For a good overview, see Hyoung-Kyu Chey and Yu Wai Vic Li, ‘Chinese Domestic Politics and the Internationalization of the Renminbi,’ Political Science Quarterly 135/I (2020): pp. 37-65.

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Radhika Desai is a professor of political studies at the University of Manitoba, and is currently serving as visiting professor at the London School of Economics. She is the director of the Geopolitical Economic Research Group, and a founder of the International Manifesto Group. She is the author of numerous books, including Geopolitical Economy: After US Hegemony, Globalization and Empire (The Future of World Capitalism) and Capitalism, Coronavirus and War (Rethinking Globalizations).