KGRI Working Papers
No.2

A Cautionary Tale of Market Power and Foreign Policy:
Beyond the Geoeconomics of Renminbi Internationalization

Version1.0
March 2017

June Park1

Keio University Global Research Institute© Copyright 2017 June Park
Postdoctoral Fellow, Centre on Asia and Globalisation, Lee Kuan Yew of Public Policy,
National University of Singapore
1E-mail: junepark@nus.edu.sg.

A Cautionary Tale of Market Power and Foreign Policy:
Beyond the Geoeconomics of Renminbi Internationalization
June Park 1

Abstract
This paper attempts to spark a policy discussion on the effects of China’s renminbi
internationalization and foreign policy. Defining China’s market power as a form of structural
power in geopolitics backed by China’s consumption power, it unravels the ramifications ofrenminbi internationalization based on China’s market power beyond the geoeconomic
perspective. It argues that, such ramifications are an outcome of the strategic bind that has been
gradually developed by China and its trading partners via economic transactions, owing to themarket power that China possesses. Such binds are often asymmetric in bilateral relations, andincrease China’s bargaining leverage in foreign policy used for wielding power on the global
stage. The paper therefore emphasizes that renminbi internationalization should not be simply
considered as China’s earnest efforts toward global currency diversification to assuage the sideeffects of the dollar dominance, but rather be understood as a subset of China’s global strategem,
in which the renminbi is translated into a medium of power projection for Chinese foreign
policy. The paper presents two case studies of renminbi internationalization – a) electronic
payment services via China UnionPay, and b) oil transactions denominated in renminbi and thesale of China’s renminbi-denominated oil futures that signal to the beginning of the end of thepetrodollar dominance that has existed for decades since the 1970s.
Keywords: market power, foreign policy, electronic payment services, petrodollar, renminbi

1 Postdoctoral Fellow, Centre on Asia & Globalisation, Lee Kuan Yew School of Public Policy, National University ofSingapore. Address: Oei Tiong Ham Building, 469C Bukit Timah Road, Singapore 279772. E-mail:junepark@nus.edu.sg. Note: This draft version has been prepared for the CAG-GSEC Workshop on ‘The Asian
Century and China-Japan Cooperation’ at Keio University, January 16-17, 2017. Grant: JSPS-NUS Joint Research andBook Project, ‘Geopolitics of the Financial System in Asia’. The author would like to thank Professor Junko Shimizu of
Gakushuin University for her invaluable comments.

I.

Introduction: Why the Cautionary Tale?
In the midst of the renminbi’s gradual rise, we often fail to question its externalities orconsequences outside the economic spectrum – the ramifications of the renminbi’s full or partial
convertibility in the future beyond pure economic impacts. But the renminbi’s influence on
foreign policy could be larger than expected. The lack or avoidance of discussion on noneconomic impacts of the renminbi stem from the reluctance to assume anything else besides thedollar standard as the predominant setting in the global financial system, which has been the
primary mode of international financial transactions since the breakdown of the Bretton Woods
system. We also refrain to assume the kind of world in which the renminbi plays a significant
role equivalent to other key currencies. In contrast, there is a widespread recognition of China’s
trade volumes. While China’s trade policy is often accompanied by warnings of its
consequences, its policy on renminbi internationalization does not go that far nor gathers asmuch attention - because we fail to assume a world in which the dollar is significantly challenged
by another currency. In turn, the renminbi’s inclusion in the International Monetary Fund(IMF)’s special drawing rights (SDR) 2 is often viewed only as a symbolic change to the existing
global monetary system, as the proportion of the renminbi in the currency basket is still veryminimal and the currency plays a minor role in the context.
The renminbi’s rise is an admirable achievement in that, its value has risen as a result ofChina’s rapid economic development in a relatively short span of time, and has begun to play asignificant role in China’s recent projects that are transforming the global economic order. The
launch of the Asian Infrastructure Investment Bank (AIIB) and the OBOR (One Belt One Road)
initiatives are the most notable projects associated with internationalizing the renminbi. 3 Thusfar, the dominant view in evaluating renminbi internationalization is that, at a glance, with therenminbi constituting about 1.1 percent of official reserves around the world (the dollar is at 63.7

2 On October 1, 2016, the Chinese yuan (hereafter renminbi) officially joined the Special Drawing Rights (SDR) basketof currencies designated by the International Monetary Fund (IMF). Along with the US dollar, the Euro, the Japaneseyen, and the British pound, the renminbi became part of SDR that can be exchanged for freely usable currencies. The
decision toward the international acceptance of the renminbi was reached after years of China’s lobbying within theinternational organization, spearheaded by Zhou Xiaochuan of the People’s Bank of China (PBOC). Zhou’s argument in
a 2009 essay pointed towards the inherent vulnerabilities of the international monetary system largely dominated by the
US dollar. Currently, the yuan enjoys the third-largest weighting in the IMF’s SDR at 10.92 percent of the whole basket.
See IMF SDR (http://www.imf.org/external/np/exr/facts/sdr.htm).
3 OBOR began with an official statement by Xi Jinping in Kazakhstan on September 7, 2013.
(http://www.fmprc.gov.cn/mfa_eng/topics_665678/xjpfwzysiesgjtfhshzzfh_665686/t1076334.shtml)

1percent), and only 2 percent in currency trades involve the renminbi (as opposed to the dollar at
90 percent and the Euro at 40 percent), the renminbi has a long march toward
internationalization. 4 5This paper acknowledges the shortcomings of renminbi internationalization in global finance,but offers an alternative perspective by turning to the other side of renminbi internationalization– its effects on shaping China’s foreign policy, backed by its market power. China’s market
power, in this context, can be defined as a form of structural power based on purchasing or
consumption power, which empowers the Chinese authorities to utilize it toward other objectives– in large part for China’s global strategy.
For a nation state, economic and financial policymaking are indeed inseparable, and areclosely intertwined. Thinking about China’s foreign policy agenda in accordance with its therenminbi’s movements enables us to read into China’s strategic mindset, and it is a task that is all
the more essential for countries that are largely dependent on trade with China, as theunderstanding of China’s motivations is required for policy responses to China’s interventions.
The point of argument here is that, although using the renminbi-denominated market power may
not have been China’s pure and original policy intent, China can indeed utilize it toward its
foreign policy interests as the renminbi becomes internationalized toward full convertibility.
The paper proceeds as follows: following this introductory section, the second section
develops the logic of China’s market power as a foreign policy measure in geopolitics. The third
section compares China’s power projection via the renminbi with the US dollar domination andpower projection in Asia. The fourth section provides case studies of China’s renminbi
internationalization that impacts geopolitics – via the electronic payment services China
UnionPay and China’s transactions for oil denominated in renminbi – or PetroYuan, which
signals to the end of the petrodollar system. Finally, the concluding section provides policy

4 ‘Renminbi as a reserve currency’, Central Banking, August 11, 2014 (http://www.centralbanking.com/central-banking-journal/advertisement/2357296/renminbi-as-a-reserve-currency)

5 According to international political economist Benjamin Cohen, a currency must be competitive in order to operate as

an international currency. He elaborates on the criteria for international currency as the following: 1) widespreadconfidence in the currency’s future value backed by financial stability in the country of origin, 2) qualities of “exchange
convenience” and “capital certainty”, and 3) the promise of a broad transactional network with the prospect ofacceptability by others. See Cohen, B., ‘Will History Repeat Itself? Lessons for the Yuan’, in Eichengreen, Barry J., andMasahiro Kawai eds., Renminbi Internationalization: Achievements, Prospects, and Challenges. Tokyo: AsianDevelopment Bank Institute/Washington DC: The Brookings Institution, 2005.

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implications as to predicting China’s geopolitical moves based on renminbi internationalization
and responding to such moves from the Asian perspective.

II.

The Logic of China’s Market Power as a Foreign Policy Measure

The Projection of Market Power and the Role of the Renminbi
In economics, particularly in industrial organization (IO), market power is defined as a firm’s
ability to raise the price of goods or services above the marginal cost. 6 But market power inpolitical science and international relations – particularly in international political economy (IPE)– is broader in concept than it is in economics. In the field of IPE, market power is directly
associated with a state’s political and economic capacity on the global stage. Market power is aform of structural power in geopolitics. In explaining structural power, Susan Strange makes itvery clear that finance – the control of credit – is the facet which has come to be of decisive
importance in international economic relations and in the competition of corporate enterprises. 7
Projecting market power requires the economic capacity of a state, and the recognition of sucheconomic capacity by its trading partners. A state with the currency that is internationallyrecognized is able to project a significant level of market power in the global market. China has
strived to achieve this goal since its entry into the global economy, although it still has ways to
go in fully internationalizing the renminbi as a safe-haven currency that can overthrow theexisting international monetary system that is dominated by the dollar. China is not theinternational ‘lender of last resort’, it may never be, and it will take time to confirm whether
China wants to play such role, but it has been made clear by China’s initiatives that it wants toincrease its bargaining leverage globally using its accumulated reserves.
The definition of market power is important in explaining how China projects it and puts it touse. Simply defining China’s market power requires looking at it from two angles: China’s
imports – manifested by its consumption power; and its exports – manifested by thecompetitiveness of their products. China’s ability to consume resources – especially oil and gas –for continued economic development is a crucial component of its market power. China’s export
competitiveness is still questionable, as China’s labor costs are on the rise, and despite the

6 Tirole, J. p.284. Tirole distinguishes an economist’s definition of market power from that of a policymaker, which

generally means pricing above average cost instead of marginal cost.

7 Strange, S. 1988. p.30.

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incremental appreciation of the renminbi in recent years, China’s relatively low price of goods
largely depends on the renminbi-dollar exchange rate. Bearing the limitations of its financial
market and dwelling on the time frame for increasing export competitiveness, China has pursued
very rapid and aggressive promotion of its currency internationalization but with capital controls
remaining, reflecting the Chinese government’s recognition that they have yet to possess the fullfledged market power. For the purposes of analysis in this chapter, I consider the ‘consumption
power-based’ market power.

Table 1. China’s Recent Policies toward Renminbi Internationalization
Policy-Driven Efforts

Market-Driven Forces-Bilateral Currency Swap (BCS) agreements to ensure-Pilot schemes set up for renminbi use inliquidity of renminbi for trade and direct investment

settlements(33 swap agreements with foreign central banks-Direct renminbi trading with non-USD currencies

worldwide)*-Offshore market renminbi (CNH, or Chinese Yuan

-Promotion of cross-border trade and direct investment

traded outside the Chinese mainland)

denominated in renminbi-Official renminbi clearing banks designated across
22 locations around the world*** For a complete list of countries that have entered in a BCS agreement with China, see Aravind Yelery. 2016. "China’s Bilateral Currency Swap
Agreements: Recent Trends". China Report. 52 (2): 138-150. Also see Prasad’s ‘Gaining Currency’, pp.138-139.
** The renminbi offshore clearing banks are located in Hong Kong, Macao, Taiwan, Singapore, United Kingdom, Germany, South Korea,
France, Luxembourg, Qatar, Canada, Australia, Thailand, Malaysia, Chile, South Africa, Argentina, Zambia, Switzerland, United States, Russia,
and United Arab Emirates (as of March 14, 2017).

The maintenance of capital controls by China in the course of renminbi internationalization isa big departure from most advanced economies that have liberalized their capital accounts. 8 In
retrospect, taking the Japanese yen for instance, the amendment of Foreign Exchange andForeign Trade Controls preceded the internationalization efforts, and the amendment of theForeign Exchange and Foreign Trade Act ensued in 1998. 9 For the yen internationalization,
Japan’s moves were focused on convertibility of the currency and capital liberalization, but suchmoves were also accompanied by prolonged stagnation of the Japanese economy. What
propelled China’s efforts toward renminbi internationalization was the strong expectation of the

8 Prasad, E. 2016. p.37.

9 ‘The New Foreign Exchange and Foreign Trade Law and Japan’s Balance of Payments’, prepared by the Bank of Japanfor the Eleventh Meeting of the IMF Committee on Balance of Payments Statistics, Washington DC, October 21-23,
1998. (https://www.imf.org/external/bopage/pdf/121.pdf)

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renminbi to appreciate. Nonetheless, expectations on renminbi depreciation have been on therise, and the Chinese government has issued guidelines to limit capital outflows via issuing ten
guidelines. 10 It is expected that a sharp change in the renminbi’s international circulation would
expose Chinese domestic financial markets to greater volatility. 11 In this regard, renminbi
internationalization is far from stable and is largely dependent on the global economic shifts.
Beyond Geoeconomics: Market Power Projection as a Foreign Policy Tool for Global Strategy

Nation states today are engaged in geopolitical frictions and tensions, but not necessarily infull-scale combat involving human warfare. Since the Obama administration, drones were usedin air strikes intended for minimizing human casualties has proved otherwise, and nuclear arsenalbuildup is on the rise for deterrence in theory, but there is less and less guarantee for nuclear
weapons to serve as mere deterrence tools. Instead, new forms of wars have emerged – economic
wars such as cyber theft of commercial secrets via unchartered territories of cyberspace, or
resource wars emanating from energy pursuits and climate change among environmentalists,
developers of renewable energy and traditional forms of energy toward competition. The field ofgeoeconomics – the study of spatial, temporal, and political aspects of economies and resources– has been developing since the 1990s, since Luttwak coined the term geoeconomics as ‘thelogic of war in the grammar of commerce’. 12 Fast-forwarding to post-Global Financial Crisis of
2008, Blackwill and Harris have elaborated on the term by defining the statecraft ofgeoeconomics as ‘the use of economic instruments to achieve geopolitical goals’. They argued
that America’s geoeconomic policies that were established post-WWII are hampered by neglect
and resistance, making it overly reliant on its traditional military force. 13 Meanwhile, China is
engaged in geoeconomic expansion via the OBOR and giving out loans via the AIIB, but it

10 ‘Capital controls the talk of China parliamentarians: Official blackout on widespread discussion of measures to stop

outflow of money’, Financial Times, March 9, 2017 (https://www.ft.com/content/0ece9690-048c-11e7-ace01ce02ef0def9)
11 Research paper, Liu Dongmin, Gao Haihong, Xu Qiyuan, Li Yuanfang and Song Shuang International Economics
Department, The ‘Belt and Road’ Initiative and the London Market – the Next Steps in Renminbi Internaitonlaization,
Part 1: The View from Beijing, Chatham House: The Royal Institute of International Affairs, January 2017.
(https://www.chathamhouse.org/sites/files/chathamhouse/publications/research/2017-01-17-belt-road-renminbiinternationalization-liu-gao-xu-li-song.pdf)
12 Luttwak, Edward N. ‘From Geopolitics to Geo-Economics: Logic of Conflict, Grammar of Commerce’, The National
Interest, No. 20 (Summer 1990), pp. 17-23.
13 Blackwill and Harris, 2016. pp.23-24.

5certainly does not limit itself to geoeconomic activities only. 14 By providing loans and economic
deals through its initiatives, it forges ties with other nations – particularly those that stand against
America, and secures energy for further economic development and to expand its military power.
But none of such activities would have come about had it not been for the buildup of China’s
market power – mostly consumption power – post-WTO (World Trade Organization) entry. In
other words, China’s market power is an outcome of China’s economic activities since 2001,
which benefitted largely from the US-led neoliberal order and globalization. But it is no longer
mere market power – it is now China’s tool to bolster its foreign policy measures and affect othernations in their decision-making.
Domestically, China’s state-led, geoeconomic initiatives and foreign policymaking is
supported by China’s market power is also reflected in China’s joint ventures with foreigncompanies. Foreign firms that have vested interests in the Chinese market cannot afford toforego the attractiveness of the exponentially growing market that China offers, as consumption
levels are on the rise. In turn, foreign firms that are bound by its Chinese market shares end up
voluntarily or involuntarily contributing to China’s market power projection overseas. China has
been very proactive in developing its private sector, striving to develop its own standards forgoods and services and to brand them under Chinese brands and labels, and has been proactive inlaunching cooperation schemes with multinational corporations (MNCs) for sectors that it needs
improvement, particularly in sectors associated with science and technology. The economic
interests that are intertwined between Chinese authorities that control the Chinese market andforeign entities at firm levels are the sources of core strengths of China on which it can build its
power to compel others toward realizing its global strategy.

III. China’s Power Projection in Asia via the Renminbi andComparisons with the Dollar Dominance
China’s Strategic Binds in Asia: From Economic to Security, From Regional to Global
China’s expansion of power may be traced back to the very beginning of China’s economic
opening via Deng Xiaoping’s economic reform in 1978. But strictly put, the paths toward
14 ‘FT investigation: Beijing has spent billions expanding its ports network to secure sea lanes and establish itself as amaritime power’, Financial Times, January 12, 2017. (http://ig.ft.com/sites/china-ports/?segmentId=7005c83a-1f5c33ca-66c5-ca8c9d224ab6)

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renminbi internationalization were not clearly visible until China joined the WTO in 2001.
China’s global power projection via military means were accelerated only after the Global
Financial Crisis (GFC) and economic downturn in the US in 2008. 15 China’s impact on its Asian
economies grew exponentially as it developed into a manufacturing powerhouse and became thedominant exporter of the region.
The GFC was a turning point in which China came to understand the fundamental
shortcomings of the US economy and US global leadership. 16 Accumulating dollar reserves forfinancial crisis prevention proved to be less beneficial than originally expected. Moreover, China
saw opportunity on upping its game on Sino-US trade as its bargaining power. In the aftermathof the GFC, on the basis of understanding that China would need and should pursue a financial
system that adheres to its best interests in economic growth, it began to develop and exercise its
monetary policy aligned with its global strategy. China began testing its diversification initiatives
via accelerating the internationalization of the renminbi. Such initiatives led to the inclusion of
the renminbi in the IMF SDR basket of currencies, and the launch of the AIIB. Albeit in a
relatively smaller scale as opposed to the dollar, it increased its efforts toward expanding crossborder transactions denominated in renminbi. 17 These initiatives are clear indications that China
would seriously pursue renminbi internationalization, in rebuttal to the dollar dominance in the
global economy.
In all of these initiatives, China’s top-down decision-making structure by the central
leadership adds to the speed and power in pursuing its agenda and ulterior motives. But there arelimitations, because China’s ample foreign reserves alone cannot solve all the institutional issues.
Taking the AIIB for example – the system of lending for infrastructure building that China
pursues lacks mechanisms for audit and supervision, and relies on co-financing with the World

15 Coincidentally, the timing of China’s power launch was met with the technology boom of platforms that began around2007 with the release of the iPhone by the late Steve Jobs of Apple. This version of the paper will not dwell ontechnology spill-overs, but subsequent revisions will shed light upon how the technology sharing impacted Chinese
entrepreneurs to rise based on platforms.
16 Yong and Pauly, 2013.
17 Cross-border RMB Settlements, Mizuho Bank(https://www.mizuhobank.com/service/global/cndb/rmb/pdf/cross_border.pdf).

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Bank. 18 None of the applications for projects have been rejected by the AIIB thus far. 19 In otherwords, China is still in the early stages of exploring the methods of power projection through theuse of renminbi, and is figuring out how to consolidate it. Meanwhile, it has decided anddemonstrated through its actions that it would proceed with strategic military power projections
in tandem with internationalizing its currency. 20
US policymakers understand the need for China’s economic reform, but the Obamaadministration was not successful in bringing out a strategic response to China’s moves. The
Asia Pivot, for one, ended in a failed attempt by the Obama Administration to bring out the bestpolicy outcomes for the US and its Asian allies, both in economic and strategic terms. Because
China’s economic reform entails capital liberalization (albeit the remaining capital controls), andrenminbi internationalization is part of it, the US sees as one of its mutual economic interests.
With further capital account liberalization by China, US firms and investors will benefit from amore open environment for businesses operating in China.
Yet, there is a pushback factor – largely geopolitical and institutional – that lies in the US
reluctance for full convertibility of the renminbi. The concerns regarding full convertibility range
from anticipated worries on currency volatility and economic instability to bigger ones such as
geopolitical expansion (i.e., the plausible control and blockage of the Straits of Malacca thatwould deter freedom of navigation in the South China Sea, and the construction of silk roads
encompassing East and South, and Central Asia, as well as the Middle East and Europe - all in
the context of China’s energy pursuits and geoeconomic gains). Put another way, the US hascome to welcome the renminbi internationalization in the context of China’s domestic economic
reform, but is reluctant to welcome China’s dominance in global or regional finance. The US
seeks to sustain the dollar dominance, and wants to refrain from allowing for full convertibilityof the renminbi. It also does not think that China should be granted market economy status at the

18 On a side note, China has come to realize that domestic market expansion is necessary and a departure from an export

based economy. Although China’s position in exports would be pursued for the time being, it quite clear that its foreign
policy drives via the OBOR and the AIIB is also to resolve overcapacity issues in steel, metals, and other major (heavy)
sectors of manufacturing.
19 Personal interviews via Q&As on a lecture regarding the AIIB by an anonymous Thailand Ministry of Finance official
regularly attending AIIB board meetings, Bangkok, Thailand, January 7, 2017.
20 The attempted control over the South China Sea is a clear example of this endeavor.

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current stage (the anticipated date that China would be given market economy status was
December 11, 2016). 21

America’s Strategic Binds in Asia: From Security to Economics, as part of Global Strategy

In the postwar era, East Asian economies such as Japan and the Four Dragons - South Korea,
Taiwan, Singapore, and Hong Kong – and certain Southeast Asian countries considered to be inline with Kaname Akamatsu’s ‘Flying Geese Model’ were dependent on the US economy fordevelopment loans and trade. 22 But before mutual economic interests were met, many of thecountries were heavily reliant on military ties with the US and were placed under the US nuclear
umbrella via the ‘hub-and-spoke’ system that the US retained. 23 Under the US nuclear umbrella,country attempts to develop nuclear weapons were denied by the US government. 24 The US-led
neoliberal order manifested in East Asia was based primarily on mutual security interests, as East
Asia remained the hotbed of any potential conflict during the Cold War era. Building on themutual security interests, the US deepened bilateral economic interests in the region in order tosolidify the military ties, and East Asian countries benefitted tremendously (particularly Japan,
South Korea and Taiwan) from US sponsored aid programs and investment in the postwar years.
Japan, in particular, was discouraged from engaging in military activity excluding the operationof the self-defense force, and was expected to solely adhere to the Yoshida Doctrine. Instead, theUS would guard the countries from military threats – although such guarantees were questioned
by East Asian states at various points in time in their bilateral relationships. Amidst the crossstraits conflicts of the 1990s and the North Korean nuclear and missile threats from the 1990s
and into the 2000s, the US alliance system as the military stronghold in the region remained
intact.

21 For developing discussions on China’s Market Economy Status, see details on the two rapidly developing WTO

dispute cases, DS471: United States — Certain Methodologies and their Application to Anti-Dumping Proceedings Involving China(Complainant: China, December 3, 2016, https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds471_e.htm), andDS515: United States — Measures Related to Price Comparison Methodologies (Complainant: China, December 12, 2016,
https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds515_e.htm)
22 Akamatsu K. A historical pattern of economic growth in developing countries. Journal of Developing Economies,
1(1):3–25, March–August, 1962.
23 Cha, 2016. In Powerplay, Cha explains that the US built bilateral security networks with Asian states as opposed to theaggregate form of security alliance system such as North Atlantic Treaty Organization (NATO) in Europe, due to thecomplex political landscape in Asia.
24 Such cases include South Korea and Taiwan in the 1970s.

9In sum, in the case of US power consolidation in Asia, mutual economic interests were met
and pursued based on the foundations of security alliance that was served as the fundamental
pillars of the bilateral relationships. US dominance in Asia evolved from security dynamics andspilled over to the economic arena. In the Chinese case, it was vice versa: mutual economic
interests were met first, but security tensions remained, and military power projection followed
suit. It took almost half a century for the US (from 1971 to present) to first consolidate a security
architecture, then to exercise its economic power in tandem with the military pursuits. China is
working towards what America accomplished in Asia but in a different path, in a reversed order– gaining recognition for its economic significance first, then adding geopolitical expansion to its
economic stronghold, all in the scope of only a decade and a half (from 2001 to the present).
While China’s footsteps are not entirely a duplication of US power buildup in the postwar years,
there are foreign policy ideals that China pursues for power projection by building a similar
structure for itself in the global economy. For this reason, the ramifications of China’s renminbi
internationalization may be more than what is perceived only in the realm of global finance.

Superpower and Rising Power: The US-China Tension Buildup

There are two main critical junctures in the waxing and waning of US hegemonic power in
the new millennium since China’s WTO entry in December 2001. The first is the US decision to
wage war against Iraq in 2003 in response to the 9.11 Terror. In the aftermath of the 9.11
terrorist attacks, the Bush Administration waged war against Iraq, citing the need to abolish the
Saddam Hussein regime for developing the weapons of mass destruction (WMD). During the
Iraq War, the US bilateral security ties with Japan and South Korea were fortified. In response to
US requests to take part in the Iraq War, Japan’s medical assistance groups and South Korea’s
military troops to be stationed in Erbil, Iraq. Japanese and South Korean civilian deaths in Iraq
were minimal, but did occur, but the two countries did not engage further with Middle Easternpolitics nor voice concerns in such a way that would hinder their alliance with the US. But theBush administration’s inability to find WMD and involvement in petroleum and militaryindustries put American leadership under severe scrutiny, and US motivations and involvement10

in the Middle East conflict was looked upon with suspicion from the global community. 25 The
Iraq War led to increased defense spending for the US economy and exacerbated the twin deficit(fiscal and current account deficits).
The second critical juncture for US hegemonic power post-China’s WTO entry is the Lehman
shock and the US economic downturn that led to the Global Financial Crisis from 2008. In theyears leading up to the Global Financial Crisis, China’s moves indicated that it would part ways
with the US-led neoliberal order to a certain extent, by creating its own pathways based on its
core interests. China’s pursuit of an independent track was witnessed in the following moves:
China issued the Panda bond – Chinese renminbi-denominated bonds issued by non-Chinese
nationals to be sold within Chinese mainland for the first time in 2005; upon becoming weary of
the US dollar accumulation in its official foreign exchange reserves, China created the China
Investment Corporation (CIC) to manage China’s sovereign wealth funds (SWFs) in 2007 andbegan to heavily invest overseas; and the launch of the ‘indigenous innovation’ (zizhu
chuangxin) path for science and technology development to create China standards based on the
15-year Medium to Long Term Plan for the Development of Science and Technology. Tectonic
shifts followed in the global arena – upon the inaugural leaders’ summit in 2008, the G20 and its
leaders announced on September 25, 2009 that the G20 would replace the G8 as the maineconomic council of wealthy nations, paving the way toward a multipolar international system.
In the aftermath of the Global Financial Crisis, China began to engage with the US toward“cooperation” on a regular, bilateral basis in the US-China Strategic and Economic Dialogues
from 2009.
Into the 2010s, the Chinese Communist Party (CCP) leadership seized the opportunity to pushonward with domestic reforms to lessen China’s heavy reliance on exports (with the US as thenumber one trading partner) and to adjust its foreign policy direction in accordance with thewaning US leadership in the global arena. 26 In the aftermath of the financial meltdown, it
dawned upon US policymakers that they were left with the task to work towards domestic
economic recovery while also dealing with China. The US leaned towards “cooperating” with

25 As an alternative view, while many American and foreign observers appear to think that oil (particularly oil producing

states and oil companies as the real culprits) was the real motivation behind the invasion of Iraq in 2003, John
Mearsheimer and Stephen Walt in ‘The Israel Lobby and US Foreign Policy’ (2004) have suggested that the critical
driving forces behind the US Middle policy toward the Iraq War were Israel and the neoconservatives in the lobby.
26 Yong and Pauly, 2013.

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China by holding regular policy discussions and gaining economic benefit from the relationshiprather than coercing China to succumb to US security interests. By this time, the US-China
economic symbiosis since China’s WTO entry had become extremely vital to US businesses, as
US companies were heavily reliant on the Chinese market and US consumers were looking forcheaper products imported from China. The US government was also in a symbiotic bind with
China financially, as China became the primary holder of US treasury bills. 27 China
demonstrated its retaliatory measures in the WTO during this period against US tradeprotectionism. 28 However, because the bilateral economic relationship made the two economies
dependent on each other, it was difficult for the Obama Administration to force China to adhere
to US requests. On the security front, cautionary warnings were raised regarding China’s militarybuildup and expansion of geopolitical influence within the Asia-Pacific region and beyond.
The turnaround of the US-led neoliberal order has come with the election of Donald J. Trump
as the president-elect of the US on November 8, 2016 (sworn in on January 20, 2017). A
dramatic shift is to come in foreign policy and domestic policymaking. As the election results
started flowing toward the final vote count for the 2016 US presidential election, European andAsian stock markets went erratic, striving to absorb the shocks from the unexpected election
results. Because the world (and Asian economies in particular) had bet entirely on Hillary
Clinton’s win, it took time for the markets to absorb the shocks from the election results. Asian
local currencies went volatile – the Japanese yen plummeted and the Korean won plunged as
opposed to the dollar. But it is with skepticism that such currency volatilities can be resolved by
the renminbi’s rise. What would happen if the renminbi rose to full convertibility and the local
currencies responded frantically both to the dollar and the renminbi? What are the plausible
impacts of the renminbi if it becomes fully convertible? The next section of case studies onmarket power and renminbi internationalization provide possible scenarios of the ramifications.

IV.

Cases of Market Power in Renminbi Internationalization

27 The US Treasury’s December 2016 indicate Japan’s holdings slightly ahead of China.

(http://ticdata.treasury.gov/Publish/mfh.txt) In August 2016, China held more US treasury bills than Japan.
28 For further details on the poultry and tires cases in the WTO DSB that ignited the US-China trade frictions during thisperiod, see DS392 United States — Certain Measures Affecting Imports of Poultry from China (17 April 2009,https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds392_e.htm) and DS399 United States — Measures Affecting
Imports of Certain Passenger Vehicle and Light Truck Tyres from China (14 September 2009,https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds399_e.htm).

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The cases that demonstrate China’s market power in this section renminbi operating as a)credit, in a fiat money-based global economy, and b) transaction medium for oil, in acommodity-based global economy. Both are important cases that illustrate how China’s renminbi
internationalization backed by market power can be translated into foreign policy projection.

Electronic Payment Services in Renminbi: China Unionpay Challenging VISA and MasterCard

In a world of fiat money, the method of electronic payment services (EPS) plays a significant
role in delivering the exchange of goods and services. In recent years, electronic payment
methods such as Paypal, Apple Pay, Samsung Pay, and other forms of fiat money such as
bitcoins supported by the protocol of the blockchain technology came about as mediums ofelectronic payment. But the dominant players in fiat money are still credit cards. While inadvanced countries like Japan and Germany still have a preference of cash use for everyday
transactions and high rates of cash circulation domestically, credit cards issued by banks havegained a dominant position in goods and services trade. Right after joining the WTO, since theyear 2002, China has been developing and pushing for its own credit card for domestic andforeign use under the auspices of the People’s Bank of China (PBOC) – China UnionPay (CUP),or yinlianka. Headquartered in Pudong in Shanghai, China, China UnionPay has expanded
rapidly in terms of the number of countries it covers for transactions in the past decade and ahalf. It is now used in over 141 countries, and is the third-largest payment network by value oftransactions it processes behind VISA and MasterCard. By 2016, China UnionPay had become a
global leading bankcard association for credit cards. 29
But EPS was not an exception to the Sino-US competition and contest. On September 15,
2010, the US filed a complaint in the WTO with respect to “certain restrictions and requirements
maintained by China pertaining to electronic payment services for payment card transactions andthe suppliers of those services”. 30 The US questioned whether China was complying with WTO
29 It is said that the concept of a nationwide payment network in China dates back to 1993 when Jiang Zemin, the then-Chinese president, advocated for the ‘Golden Card Project’. China UnionPay is an outcome of China’s multiple attempts
at creating a unified Chinese bank card system since the 1990s. Launched on March 26, 2002 by then PBOC governor
Dai Xianglong, it started with four state-led banks of China as members: the Industrial and Commercial Bank of China(ICBC), the Agricultural Bank of China (ABC), the Bank of China (BOC), and the China Construction Bank (CCB).
30 For details on this case, see DS413 China – Certain Measures Affecting Electronic Payment Services, September 15, 2010(https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds413_e.htm). Japan and South Korea requested for third
party participation in the case, in addition to Australia, India, and the European Union among others.

13rules on market access, and alleged that China poses a series of requirements imposed by China
to constitute impermissible market access restrictions or national treatment limitations on foreign
suppliers of the electronic payment services (EPS). China UnionPay was expanding throughout
China, but VISA and MasterCard was facing difficulty penetrating into the Chinese market. The
US argued that a) China permits only China UnionPay to supply EPS for payment transactions
denominated and paid in renminbi, b) foreign suppliers of EPS can only supply the services forpayment card transactions in renminbi, c) requires that all payment card processing devices to becompatible with that the China UnionPay system bearing the China UnionPay logo, and that d)while China UnionPay has guaranteed access to all merchants in China that accept credit cards,
foreign suppliers of EPS must negotiate for access to merchants. The WTO Panel rejected claimsa) and b) but concluded that China UnionPay is a sole supplier of EPS issued in mainland China
and used in Hong Kong or Macao, or issued in Hong Kong or Macao and used in mainland
China, and found China’s demands for all payment cards issued in China to bear the China
UnionPay/Yinlian logo were inconsistent with China’s national treatment obligation under
Article XVII of the General Agreement on Trade in Services (GATS). Upon the adoption of thepanel report by the WTO Dispute Settlement Body (DSB) on August 31, 2012, China stated that
it will need time to comply with WTO obligations according to the panel rulings, and was given
11 months from the date of adoption of the panel report, which lapsed on 31 July 2013. The US
did not agree that China complied with the WTO panel rulings. China announced subsequently
in 2015 that it would open up the market for foreign payment networks from June 2016.
Realizing that the WTO is not where they can obtain satisfactory results, VISA and
MasterCard proceeded with the only other option – to cooperate with China UnionPay, but thecooperation did not last very long. On February 2016, China UnionPay and VISA signed a
Memorandum of Understanding (MOU) to collaborate on EPS. 31 China UnionPay ended
monopoly on domestic bank card clearing in June 2015, and gave foreign EPS providers directaccess to the Chinese market (valued at $6.84 trillion in 2014) for clearing bank cardtransactions. However, the co-branded cards (with both China UnionPay and VISA/MasterCard
logos) are to lose China market shares asthey will expire without the opportunity for renewal, as
announced by PBOC authorities banning the co-branded card renewals citing concerns of capital
31 CUP and VISA Sign MOU to Collaborate on Payments Security, Innovation and Financial Inclusion(http://investor.visa.com/news/news-details/2016/CUP-and-Visa-Sign-MOU-to-Collaborate-on-Payments-SecurityInnovation-and-Financial-Inclusion/default.aspx)

14

flight on December 5, 2016. 32 VISA and MasterCard were not available for comments on theabrupt decision. The ban on co-branded cards came shortly after US president-elect Trump
accepted a phone call from Tsai Ying-wen, upending the ‘One China’ policy.
In July 2016, China UnionPay overtook VISA in the global cards market (valued at $22
trillion in 2016) by value of card payments, resulting mainly from the rapid expansion of theChinese market. According to Retail Banking Research (RBR), The Chinese market power isdemonstrated in global card market shares – VISA and MasterCard maintained 50 percent and 31
percent respectively in global cards market, while China UnionPay remained predominantly
domestic with just 0.5% outside China. 33 The mission for China on EPS, it seems, will be
expanding that offshore marketshare in the next decade. China does not see eye to eye on
operations with foreign EPS providers such as VISA and MasterCard, and if cooperation isdeemed implausible, it would best expand globally based on its expanding domestic market.

Oil Transactions in Renminbi: Challenging the Petrodollar

During the postwar period, since the year 1974, the dollar was supported by the petrodollar
system, in the aftermath of the Bretton Woods breakdown. The petrodollar system was createdthrough series of Henry Kissinger’s secretive meetings with King Faisal bin Abdulaziz Al Saudof Saudi Arabia. The US and Saudi Arabia would come to an agreement that if the Saudis, theprimary exporter of oil among the Organization of the Petroleum Exporting Countries (OPEC)
nations to the US, priced all of its oil in dollars, it would be guaranteed military security andprotection from Israel by the US. By 1975, all of the OPEC member countries were producing oil
priced in dollars, and held their oil surplus proceeds in US government debt securities by the US
Treasury for military protection offered by the US. By this unofficial arrangement, it may well
be argued that the dollar became fully convertible for oil instead of gold. And in turn, the US
developed and maintained strong military presence in the Gulf states (of which the people arelargely Sunni muslims) - Bahrain, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, United Arab

32 ‘Bank Cards to Lose China Market Share’, Financial Times, December 5, 2016(https://www.ft.com/content/1f26b75c-bac2-11e6-8b45-b8b81dd5d080)

33 ‘UnionPay takes top spot from VISA in $22 trillion global cards market – RBR’, Finextra, July 22, 2016(https://www.finextra.com/pressarticle/65412/UnionPay-takes-top-spot-from-visa-in-22-trillion-global-cards-market--rbr).

15

Emirates, Egypt, Jordan, and Yemen. Under this system, the US balanced its power against Iran(of which the people are mainly Shia muslims) and protected Israel, the Jewish state, andprevented Soviet power from penetrating into the region.
During the Obama administration, however, two important factors that came into play madethe solidity of the petrodollar system into the mid-to-long term future questionable. First, the US
discovered fracturing methods to utilize its shale gas, and no longer became dependent on Saudioil. Second, the Iran Nuclear Deal (or the Joint Comprehensive Plan of Action, JCPOA) was
reached, paving the way toward oil transactions that are denominated in Euro. 34 Prior to the
JCPOA, Iran was accepting various currencies for oil – including the Chinese renminbi and theIndian rupee, because under US sanctions it could not trade its oil in dollars. 35 Although the
Iranians stopped accepting the renminbi and the rupee citing currency volatility, and requested
that all of its oil transactions be done in Euro post-JCPOA, China learned from its interactions
with Iran that oil transactions denominated in renminbi could contribute to theinternationalization of the renminbi.
So began China’s drive toward ‘renminbi-for-oil’. China’s activities in using renminbi as thecurrency for oil transactions are escalating. In June 2015, Russia’s third-largest oil producer
Gazprom Neft announced that it is now settling all of its crude sales to China in renminbi, down
the East Siberia Pacific Ocean pipeline to China. 36 This was even before the agreement wasreached on renminbi inclusion in the SDR at the IMF (November 30, 2015). Saudi Arabia, which
has been the number one oil exporter to China in the 2000s, is now also pressured to do oiltransactions in renminbi, because it is very close to losing its lead to Russia that is accepting
renminbi in the Chinese market share for oil. 37 The Saudis will be all the more pressured to doso, especially if a) US oil imports from the Saudis decrease significantly if self-sustainability in

34 The Iranian nuclear capability was becoming a threat to the region (particularly to Israel) and motivated the US, alongwith other P5 members – UK, France, China, Russia of the UN Security Council and Germany, to sign an agreement –the Joint Comprehensive Plan of Action (JCPOA) to lift EU and UN sanctions on Iran to halt (or delay for 15 years) its
nuclear development. Although primary US sanctions are still placed on Iran under the surveillance of the US Treasury,
lifting other sanctions paved the way for the reopening of the Iranian economy.
35 ‘Iran accepts renminbi for crude oil’, Financial Times, May 8, 2012 (https://www.ft.com/content/63132838-732d-11e19014-00144feab49a)
36 ‘Gazprom Neft sells oil to China in renminbi rather than dollars: Currency switch highlights impact of westernsanctions against Russia over Ukraine’, Financial Times, June 2, 2015 (https://www.ft.com/content/8e88d464-0870-11e585de-00144feabdc0)
37 ‘Russia Pips Saudi Arabia in Race to Grab China Oil Market Share’, Bloomberg News, June 23, 2015(https://www.bloomberg.com/news/articles/2015-06-23/russia-pips-saudi-arabia-in-race-to-grab-china-oil-marketshare)

16oil production is realized in the US or renewable energy production takes off, and if b) the
OPEC’s recent decision to control production does not lead to significant rebound of oil prices in
the longer run.
China’s market power is a definite source of support for renminbi use in oil transactions. Suchuse of the renminbi in oil transactions will only increase as China’s demand for oil increases
exponentially into the future. China’s onshore oil fields are already in decline, and its oil use is
only increasing, thereby contributing to its increased appetite in foreign imported oil. 38 The
International Energy Agency (IEA) estimated that by the year 2030, China will be the primaryconsumer of Iraqi oil. 39 Backed by the market power, China is able to demand the use ofrenminbi for payment. At the same time, China is ambitiously preparing to launch its oil futures
denominated in renminbi. 40
If China successfully challenges the petrodollar system by rendering the renminbi thecurrency of exchange for oil transactions, its current efforts in OBOR will bolster its geopoliticalleverage along the Straits of Hormuz and the Straits of Malacca, through which a dominant
percentage of the world’s oil exports pass. China appears to be interested in playing a politicalrole in the Middle East, with Xi Jinping calling for the creation of a Palestinian state during his
visit to Egypt in January 2016. 41 Xi Jinping was also the very first leader to visit Iran postJCPOA, and China’s longstanding ties with Iran make it very likely that China will be standing
against US domination of the region in the coming years. In this manner, China is advancing into
the Middle East with a foreign policy agenda, backed by its market power in oil consumption.
China’s ongoing efforts to challenging the petrodollar system with renminbi transactions for oil
is backed by its market power, which will only increase with time. It would be an understatementthat such efforts are purely for energy consumption – they are closely aligned with its
geopolitical motivations to decrease US influence in the Middle East.

38 ‘China's Oil Imports Will Keep Surging, Rebalancing Global Markets’, Forbes, September 14, 2016(http://www.forbes.com/sites/damonevans/2016/09/14/chinas-oil-imports-will-keep-surging-rebalancing-globalmarkets/#57b7ad6f5023)
39 ‘China said to be main buyer of Iraqi oil by 2030’, China Daily, November 13, 2012.
(http://www.chinadaily.com.cn/business//2012-11/13/content_15921354.htm)
40 ‘China’s ambitious oil futures contract delayed: Burst of speculation in metals futures gives regulators cold feet aboutcomplex contract’, Financial Times, September 15, 2016. (https://www.ft.com/content/dbd43e5c-78cc-11e6-a0c639e2633162d5)
41 ‘China's Xi calls for creation of Palestinian state: President says Palestinian problem "should not be marginalised" as
he outlines series of economic deals for Middle East’, January 22, 2016(http://www.aljazeera.com/news/2016/01/china-xi-calls-creation-palestinian-state-160122061202778.html).

17

V.

Conclusion and Policy Implications
This paper has dwelt on the impacts of renminbi internationalization from the perspectives ofmarket power and foreign policy, with comparisons between the Chinese and American
pathways toward economic and security binds in the Asian region, and case studies of Chinese
market power projected onto foreign policymaking via the renminbi, in fiat money-based andcommodity-based realms of the global economy. While it is unclear whether the renminbi willrise to replace the dominant as the main anchor, it is for certain that it is a leveraging tool for
China and that the push toward renminbi internationalization it is backed by its market power –via consumption power and via expectation of renminbi appreciation. We stand at a crossroads
where we see the practice of foreign policy not only convened with conventional military
engagements but with economic coercion, and where the direction of global hegemony could bealtered significantly.
For a sustainable cooperation among countries of Asia toward further economic growth, asystem of monitoring and checks-and-balances is needed, via the World Trade Organization(WTO) as necessary, particularly in economic sectors that have not been opened by China
through the market access protocols for China’s entry to the WTO, in concerted efforts torestrain negative consequences of China’s utilization of market power for foreign policy results.
Recent development of skirmish between China and South Korea – mainly economic retaliation
on sectors not included in the market access protocol that China signed onto upon WTO
accession – upon South Korea’s recent decision to deploy the Terminal High Altitude Area
Defense (THAAD) missile battery against China’s wishes 42 add to a serious of previous
economic retaliation behavior by China. For the record, China’s restriction of tourism flow to
Taiwan upon its election of Tsai Ing-wen as president in 2016 – who does not endorse the ‘One
China Principle’ advocated by China, or China’s export ban of rare earths upon the Japanese
government’s purchase of the Senkaku/Diaoyu Islands in 2012 43, were exemplary cases in which
China used its market power to coerce other countries to fulfill its foreign policy agenda, which
42 ‘Report: South Korea could file WTO complaint for China THAAD retaliation’, United Press International,

January 25,
2017. (http://www.upi.com/Top_News/World-News/2017/01/25/Report-South-Korea-could-file-WTO-complaintfor-China-THAAD-retaliation/9741485359801/)
43 ‘Fight against China on rare earths’, Financial Times, March 14, 2012. (https://www.ft.com/content/4c3da294-6cc211e1-bd0c-00144feab49a)

18

were a manifestation of China’s vehement contests. Ironically, such records are against Chinese
President Xi Jinping’s proclamations on abiding by the principles of free trade at the World
Economic Forum in January 2017. 44 As long as China claims that it is part of the global trading
system and benefits from it, checks-and-balances should be placed on the movements of therenminbi in cases of its usage toward economic retaliation.
The renminbi is clearly an aspiring currency that has the possibility to rise to counterbalanceother dominant global currencies in the future. Bearing in mind the nature of linkages between
renminbi internationalization and foreign policy, expectations that it would counterbalance thedollar does not equate to nor guarantee a more stable global order. On the contrary. Moreover, it
increases China’s bargaining leverage to deliver unexpected foreign policy consequences. It is
important to understand that renminbi internationalization is not just a question of avoiding
transaction fees for converting local currencies to the dollar and vice versa using VISA or
MasterCard, or being able to purchase oil in renminbi in rates that would be cheaper as opposedto the petrodollar system when the OBOR and pipeline projects come through. The
understanding that renminbi can be used as foreign policy projection just as the dollar has had isvital to understanding the global financial architecture of the future. This is a crucial task for all
countries that are engaged heavily in bilateral or regional economic relations with China foryears to come.

VI.

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