CEE economies apathetic to renminbi's rise
Euro liquidity and regional interests take precedence
by Miroslav Singer
Wed 2 Nov 2016
The renminbi’s introduction into the International Monetary Fund’s special drawing right basket in October was received with a high level of publicity and attention at the annual autumn World Bank-IMF meetings and in world financial centres. Elsewhere, such as in central and eastern Europe, however, the event has gone largely unnoticed.
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This lack of regional interest is in part another expression of the generally minor notice paid by smaller central European countries to foreign policy. For example, many central European countries, including Slovakia and the Czech Republic, have not joined the stampede to become founder members of the Asian Infrastructure Investment Bank. But there are fundamental reasons for this lack of interest, some of which stem from the long forward leap of central European economies, and the consequent improvement in their financial standing.
For the Czech and Slovak republics, at least, a lack of interest in foreign affairs is nothing new. In these countries there is little tradition of foreign policy engagement. For centuries, the foreign policy driver of members of the Austro-Hungarian empire was Austria, joined by Hungary in the 19th century. Furthermore, the relatively small size of most central European economies makes them less likely to play a major role in global events, unlike, for example, Poland.
But despite its increasing role in global trade and foreign investments, the use of the renminbi as a currency in which foreign reserves may be usefully allocated has two key disadvantages. The gradual liberalisation of Chinese capital markets and the fact that China is still, in many respects, a command economy provides less guarantee that renminbi holdings will be helpful in any sizable global turmoil, at least so far as liquidity is concerned.
Most Czech and Slovak foreign trade happens within the euro area, and euro liquidity in foreign reserves is therefore more essential. Furthermore, while China and CEE economies could become more significant trading partners, the former’s importance in central Europe today is often dwarfed by its smaller neighbour, Taiwan.
In addition, the case for seeking additional sources of international liquidity is weak at present. The Czech Republic’s foreign reserves are robust, as are those of Poland. Poland also benefits from its access to the flexible facility of the IMF, and Slovakia is part of the euro area. As such, only Hungary may significantly benefit from access to the renminbi, which it has already secured. Regarding renminbi instruments, the Czech, Polish, and Slovak authorities could obtain them at very reasonable prices, given their current financial standing.
Overall, the lack of central European interest in the renminbi’s inclusion in the SDR basket paradoxically signals the same fundamental change in the global economy that spurred the currency’s introduction. Some emerging and now developed economies are becoming firmly established and solid components of the global financial system. This allows them to rely on their own strengths and pursue their own interests while remaining less interested in other events.
Miroslav Singer is former Governor of the Czech National Bank and a Member of the OMFIF Advisory Board. He lectures at CERGE-EI and the Prague School of Economics.