China's plans to be a global currency player on the right track
Niv Horesh says China's economic might and record of monetary management should allay scepticism overits efforts to turn the renminbi into a global reserve currency
The plan to groom London to be a launch pad for turning the renminbi into a global reserve currency remains on the drawing board. Yet, given the recent fiscal debacle in the US, market pundits might for the first time be feeling some insecurity about the long-term future of the US dollar.
That insecurity was also not just a result of the upbeat rhetoric that London mayor Boris Johnson sounded during his recent trade mission to Beijing, or talk of the British nuclear power industry being taken over by cashed-up Chinese state-owned enterprises.
China is no longer a cold war enemy, and its huge economy is closely intertwined with the West
Rather, it has to do with the streak of news for China this quarter: its economy still seems to be growing much faster than other economies. A few important new studies further suggest that the transition of the Chinese economy towards a greater share for household consumption, as compared with infrastructural and industrial investment, is happening much faster than previously thought.
In other words, Beijing's measures to curb the investment glut and manufacturing overcapacity that are associated with its post-global financial crisis stimulus package may be working, at least in part.
So the global economy's centre of gravity continues to shift steadily eastwards, and China's economy may have begun to slowly decouple from America's after decades of dependence on exports to that part of the world.
The renminbi has, however, not been floated globally, although its share of cross-border transactions worldwide is steadily growing, and although Chinese agencies have symbolically downgraded America's credit rating.
Renminbi sceptics and "China bears" often invoke the argument of China's insular financial market to explain why the renminbi is not likely to assume reserve-currency qualities before 2025. After all, China still readily buys into US dollar- denominated assets so as to help America tide over its trade surplus with China.
Memories of the initial euphoria surrounding the euro may also play a role here. A decade ago, economists predicting that the euro would one day supplant the US dollar as the preferred global reserve currency were not uncommon. In fact, today's talk of renminbi internationalisation owes much to euro-zone disillusionment and downbeat predictions concerning the prospects for Japanese economic recovery.
Is today's talk of the renminbi becoming one of the next few global reserve currencies premature and misguided to the same degree? The answer is a clear "no" to my mind. One reason why doubts linger may have to do with the fact that most analysts consider the prospect of renminbi internationalisation based only on the US dollar trajectory over the course of the 20th century. This is where economic historians can make a contribution to the conversation.
Awareness of the competent manner in which the renminbi was propagated and stabilised in a country as vast and diverse as China during the 1950s might perhaps make one a fraction less sceptical of that currency's potential to play a greater role. Ironically, the fact that the renminbi is managed by a party state credited with three decades of breakneck economic growth rather than by a monetary union of fractious, developed nation-states might also be more reassuring to financiers, as might China's responsible monetary conduct during the Asian financial crisis in 1997.
But, quite apart from all these factors, one should recall that the Nixon Shock of 1971, when the US unpegged the dollar from solid gold, could only have been countenanced in a world divided by the cold war. This is not the case today, as China is no longer a cold war enemy, and its huge economy is closely intertwined with the West's. In other words, inflationary measures in the US are likely to prod China to let its currency gradually float on world markets.
Libertarians are nowadays so alarmed at the US government's rising debt level that a return to an international gold standard may not sound so far-fetched to their ears. There is, in that sense, an uncanny similarity between the position of Zhou Xiaochuan , governor of China's central bank, and the position advanced by US Republican figures like Ron Paul or Robert Zoellick for gold to be given greater weight in settling international accounts. Influential columnists like Philip Coggan have, moreover, diagnosed the Nixon Shock, namely the abandonment of the post-war gold-exchange standard, as the original sin that led to the 2008 global financial crisis.
If early-modern history is anything to go by, then a lapse back to commodity money may be somewhat less implausible than it currently sounds. However, a more likely scenario still would be for the renminbi to assume more global-reserve properties over the next few decades, including freer capital flows from and into China.
This does not necessarily mean the US dollar will lose its leading position, but its share in cross-border transactions not involving the US itself will probably diminish in the near future. If and when this transpires, the renminbi will be the first global reserve currency issued by a nation-state to have never been historically linked to any precious metal.
