China has long way to go to dislodge dollar
By Geoff Dyer
Published: May 21 2009 18:47 | Last updated: May 21 2009 18:47
China is on the offensive. Long a bystander in international economic affairs, Beijing has in recent
weeks announced a string of initiatives for remoulding the global financial system. And they all have one target – knocking
the US dollar off its perch.
Last month, China said it hoped eventually to see the US dollar replaced as the main global reserve
currency by a basket of significant currencies and commodities. Zhou Xiaochuan, head of the central bank, argued that the
current dollar-based system was too vulnerable to financial crises.
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China has set up a series of swap arrangements with other central banks, including Argentina, South
Korea, Indonesia, Malaysia and Belarus, through which it will make its currency available to the other countries if they run
out of foreign exchange.
This week’s initiative involves trade. China and Brazil are to begin talks on a scheme for bilateral
trade to be settled in the renminbi and the real, rather than the dollar. Beijing has found a willing partner in the Brazilian
government, which mixes conservatism in economic policy at home with developing worldist flourishes abroad.
Big changes will not happen quickly. The dollar’s position is the result of powerful economic
realities, not the decision of a room full of bureaucrats. But China is putting down some important long-term markers and
all of a sudden, the dry arena of international financial arrangements has become loaded with the symbolism of economic power
shifting from west to east.
China’s language may be impeccably multilateral but the goal is to boost its position in international
economic affairs and limit space for the US to do its own thing.
Yet the curious thing about China’s attacks on the dominance of the dollar is just how much they
are motivated by short-term, domestic politics. And in the process, the really important questions about China’s growth
model and its future role are being pushed to one side.
The government has been stung by domestic criticism of its $2,000bn (€1,440bn, £1,250bn) in foreign
exchange reserves, about 70 per cent of which are invested in US government securities.
Why is a country that is still poor, people are increasingly asking, lending so much money to a rich
country – especially when officials warn constantly about a possible slump in the dollar. Beijing has also reacted angrily
to anyone who suggests its huge build-up in foreign currency reserves contributed to the orgy of liquidity in global financial
Some of the outrage is understandable – who does not believe that profligacy in the US was at
the heart of the crisis? Yet China’s huge exposure to the dollar is partly a trap of its own making.
If the Chinese currency had appreciated more rapidly in recent years, the economy might not have experienced
such turbo-charged growth rates – but its reserves would not have exploded so quickly and the much-needed shift to domestic
demand would be more advanced.
It is all very well for Beijing to criticise irresponsible behaviour in the US, but for China to run
a current account surplus of 8-9 per cent of gross domestic product, as it has been doing, someone on the other side of the
ledger must be running big deficits.
If China wants a bigger international role for its currency, it will have to make other difficult shifts.
For a start, the renminbi is not yet fully convertible and there are still a battery of restrictions on bringing funds in
and out of the country. Why would a Brazilian exporter to China choose to be paid in renminbi, when the dollar is so much
easier to trade and hedge against?
China’s international leverage would also be enhanced if it could lend money overseas in its
own currency– to the US, for instance. But until China has a deep and open bond market where interest rates are set
by the market and not the government, there will be only limited takers for such renminbi assets.
There are plenty of reasons for China to be cautious about such changes – after all, the financial
crisis is unlikely to have made Beijing more comfortable about lifting its capital controls.
But if China really does want to promote the renminbi and reduce the space for US economic unilateralism,
it is these questions – and not toothless agreements about using the renminbi for bilateral trade – that it needs