Buying Monetary Status: Chinese Foreign Aid and the Rise of the Renminbi

How do states attain monetary status? States can attain monetary status by taking actions that promote the use of their currency. By linking diversification into its currency with policies that benefit the investing state, a reserve currency issuer can promote its currency even if the economic factors of the currency alone are insufficient to attract other nations to invest. Scholars have long studied the influence geopolitical and security considerations have on the rise and persistence of reserve currencies. Security guarantees have often been linked to monetary status, but these are not the only commodity that reserve currency issuers can leverage to enhance their monetary status. The author proposes that foreign aid is an alternative tool that a reserve currency issuer can use to encourage states to invest in its currency. Using an instrumental variable, the present study demonstrates how China has used foreign aid to induce other nations to invest in the renminbi (RMB) and thereby enhance its monetary status. The findings show that the probability that a country will adopt the RMB as a reserve currency increases as the number of Chinese-financed aid projects the state receives increases. When a state’s currency lacks the economic factors to achieve international reserve currency status, states can turn to foreign aid to buy monetary status.