Essays on renminbi internationalization

The international use of domestic currencies is highly path dependent and hierarchical. Nonetheless, between 2010 and 2019, the renminbi climbed from the world's 35th to the 5th most used payment currency. This cumulative dissertation, which consists of three independent articles, investigates the drivers behind the renminbi internationalization process. The first paper, “Financial statecraft and transaction costs: the case of renminbi internationalization”, focuses on actors’ decision-making regarding currency used. I draw on interviews with Chinese senior officials from the PBOC and the Ministry of Commerce, manufacturing companies, and bank staff, and inductively develop a model that explains the mechanisms which push firms and banks away from the incumbent international currency to a new entrant. The model highlights that changes in currency transaction costs, influenced by changes in domestic and international conditions, impel economic agents to increase their use of currencies with relatively lower transaction costs. Empirically, this article shows that RMB usage has been boosted not only by Chinese statecraft but also by economic actors’ recent difficulties in using the dollar. American financial sanctions against Chinese trade partners, the cyclical instability of international finance, as well as peripheral countries' low inflows of dollars have encouraged firms and banks to use the renminbi as an alternative to the dollar. By acknowledging the intertwined nature of the international monetary system, this article contribution consists of systematically identifying economic and political drivers that lead to currency competition. The second article, “The Chinese highways: building up payment infrastructures for RMB internationalization”, sheds light on the specific channels supporting the circulation of international currencies. Using interviews conducted with Chinese banking sector representatives, including the central bank, and by comparing the dollar’s and the renminbi’s institutional context, this article shows that - regardless of their different historical backgrounds and contrasting public sector participation - the creation of payment infrastructures is a necessary condition in both cases for currency internationalization. Moreover, I show that new entrants to the selective group of international currencies must “catch-up” with extant payment infrastructures. This article contributes to the debate by showing that, apart from the economic and political characteristics of the issuing countries, the design of payment systems with international reach is an essential pre-condition that new entrant currencies must meet. The third study, “The role of institutions: a cross-country analysis of renminbi trading in foreign exchange markets”, assesses the reasons for the different levels of renminbi acceptability across countries. Specifically, we check whether geographically-targeted policies for renminbi internationalization (swap agreements, clearing banks, investment quotas, direct trading between renminbi and non-USD currencies), alone or in combination, explain different use patterns of renminbi trading in offshore markets. Utilising a fuzzy set Qualitative Comparative Analysis (fsQCA) and BIS cross-country data of renminbi trading in foreign exchange markets for 2010, 2013, 2016, and 2019, this paper finds that institution building has lowered the barriers for renminbi international adoption by enabling access to the renminbi payment system, providing renminbi liquidity in offshore markets, and opening the channels to “recycle” offshore funds to mainland China. This article contributes not only to the debate on currency internationalization, by empirically showing the impact of policies, but also offers insights on the ongoing debate about the global monetary system structure since it demonstrates that institutional innovation can open space for emerging market currencies to be used in overseas markets