China's Influence on Monetary Policy in Developing Asia

For decades, the United States has enjoyed extensive policy influence stemming from its hegemonic position within the international monetary order – a position defined both by the dollar’s status as the principal reserve currency and U.S primacy in international financial forums and institutions. More recently, China has begun to amass many of the trappings of a great monetary power, accounting for 16% of global GDP-PPP, 11% of world merchandise trade, and more than 30% of global foreign exchange reserves. China’s emergence is among the key factors leading many analysts to forecast the emergence of a more multipolar international monetary system and diffusion of policy influence in that arena. This paper investigates the extent to which China has translated its growing economic capabilities into monetary policy influence in other capitals, focusing on South and Southeast Asia, one of the first regions in which Chinese influence might be expected to appear. The paper examines various mechanisms through which China could exercise monetary policy influence: through international institutions, regional initiatives, and bilateral engagement. The evidence shows that China’s monetary policy influence has been quite limited to date, lagging China’s capabilities by a significant margin. This is due largely to a continuing deficit in Chinese “structural power” in a dollar-dominated monetary system that continues to confer major legacy advantages on the United States and upon which China has relied heavily for its own economic development. The paper suggests that while many aspects of the global economic order have changed, it will be some time before China develops monetary policy influence commensurate with its overall economic capabilities.