Nice article from Martin Wolf of the Financial Times on China’s currency policy. Below are some excerpts.
Why China hates loving the dollar By Martin Wolf, Financial Times
“The current international currency system is the product of the past.” Thus did Hu Jintao, China’s president, raise doubts about the role of the US dollar in the global monetary system on the eve of last week’s state visit to Washington. Moreover, he added, “the monetary policy of the United States has a major impact on global liquidity and capital flows and therefore, the liquidity of the US dollar should be kept at a reasonable and stable level.” He is right on both points.”
Staggering currency reserve accumulation.
“The Chinese and other heavy interveners have a peculiar way of showing their distrust of the dollar. Between January 1999, just after the Asian financial crisis, and October 2010, the global stock of foreign currency reserves increased by the staggering total of $7,450bn. China alone added $2,616bn. During the recent financial crisis, global reserves did provide a cushion to holders, falling by just $473bn from July 2008 to February 2009 (6 per cent of the initial stock). But then purchases restarted: between February 2009 and October 2010, reserves rose by another $2,004bn.”
Mercantilist Motivations
“Why have relatively poor countries made these huge investments in the low-yielding liabilities of the world’s richest countries and, above all, of the US?
The answer is that this is the by-product of efforts to keep the currency down and exports competitive. It is no longer, if it ever was, the product of an effort to purchase insurance: the risks to Chinese wealth created by its huge reserves are surely greater than any insurance benefits. That is probably now true of other heavy interveners.”
On the prospects of the renminbi becoming a global reserve currency.
“What about turning the renminbi itself into a global reserve currency? In the very long run, this must happen. But any swift move in that direction would raise two difficulties for China. First, it would only make sense if the currency were to be unpegged from the dollar, in which case the mercantilist strategy would collapse. Second, for a currency to become global it must be freely convertible and traded in deep and liquid financial markets. China would have to abandon exchange controls and liberalise its financial system. It would become impossible to force Chinese people to hold vast quantities of low-yielding bank deposits. Above all, the authorities would lose their most important source of economic control: the banking system. This is surely close to inconceivable in the near term.”
Jeremy Jones, CFA
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