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The second and the third largest economies of the world after the United States, China and Japan, are in Asia. The Japanese economy has been shrinking after this year’s earthquake and tsunami and due to an appreciating yen. Real and substantive action is expected of from China, the leading member of the high-growth league. With ownership of $1.1 trillion in US treasury bills and total foreign exchange reserves of $3.2 trillion, she is the largest external creditor of the US and the largest foreign currency holder of the world. Her trade surplus in July alone was $32 billion. Leaving aside their traditional circumspection on economic matters, the Chinese have admonished the sole superpower on living beyond its means. They are also worried about the security of their dollar-denominated assets. US Vice-President Joe Biden is visiting China to complain, yet again, about the undervaluation of the renminbi (RMB) and a restrictive import regime. China will be asked to import more and export less. This will spur demand and jobs in the West. The proposed mechanism is to allow the Chinese exchange rate to appreciate. The IMF estimates the RMB’s undervaluation at 20 per cent. For years, China has resisted the pressure to appreciate its currency. Now this may begin to happen under the pressure of economic forces. In fact, the RMB is already beginning to appreciate. The resulting cheapening of imports will be an antidote to inflation, running at 6.5 per cent and threatening to rise. Costlier exports will yield fewer reserves, investment of which is becoming riskier and unmanageable. Exports are also beginning to be expensive as labour costs rise. Although labour costs are far lower in China than in the United States, they are rising to the extent that some Chinese manufacturers are resorting to substitute robots for labour. This will have its own implications in a country which still has a vast pool of surplus labour in rural areas. Such efforts will undermine plans to develop the domestic market. As for gains to the United States, the latest IMF estimates suggest inconsequential impact on job creation. Another study shows that more than half of a dollar spent on an import from China is attributable to the services sector in the United States. These gains could increase if the two central banks coordinate policy. The Federal Reserve’s announcement to keep nominal interest rate near zero for the next two years does provide such an opportunity. Whether China will respond in kind is another matter, especially when economists in Germany, with the third largest trade surplus in the world, are proposing a farewell to eurozone rather than bailing out weaker EU economies.
These currency battles are hastening the internationalisation of the RMB, but not its convertibility. The war to overcome the might of the dollar does not enter a decisive phase until the 2030s, when China is likely to become the largest economy of the world.
Published in The Express Tribune, August 19th, 2011.
COMMENTS (10)
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@Meekal Ahmed: "Stable currency" does not mean the value of it should not fluctuate. When we compare the basket of currencies as of today the $ has only lost against Yen due to appreciation of Yen rather than lost value of $, and it is terribly affecting Japan's economy.
When China convinces the energy and commodity market to take RMB in trade instead of $, then RMB will become a possible reserve currency. Will Karachi traders or Lahore farmer take RMB in exchange today or tomorrow?
US deficit is a US problem, and it is not going to affect the intrinsic trust of the $. The entire world banking and trade is denominated in $ and US federal reserve (a quasi private enterprise) and treasury (gov dept) take this responsibility very seriously, ( although not politicians, a different story) which is reflected in the investor confidence in US treasury bonds.
Deficit(Budget and trade) and reserve currency status are two separate issues altogether but people always mix these issues. In 2030 China may be a biggest economy, along with India, US, and japan but it does not mean RMB will become a reserve currency.
The day China asks the world to pay in RMB, the world will move its import to PAK, Bangladesh, India, other s. Asian countries, Africa, s. America etc. Whatever China is producing, the other part of the world is also producing now and can also produce.
Stable currency in your opinion should retain its value the same yesterday,today and tomorrow. There is no such thing for any currency including the gold.
Euro is still struggling to become a reserve currency with traders even after so many years. RMB in 2030 as a reserve currency? Will Indians and Australians accept it for the iron ore export or will OPEC accept it for oil, or will Pakistan accept it for its cotton? Will Japan, S. Korea, Taiwan, US, and Germany will accept it for its semiconductors, software, finished products, commodities etc.
Now one can understand why it is difficult for RMB to be a reserve currency.
@Dr Pervez Tahir: Nice one.
@Dr Pervez Tahir:
Yes, PT, 2030 is not something we should be worried or excited about.
I don't know where John gets his "stable currencies" idea from. The US$ has dropped by some 40% over the last decade; the Euro is near collapse. The Pound Sterling almost irrelevant. Only the Swiss Fanc is strong but who trades in or keeps the Swiss Franc as a reserve asset?
Except China is only calling for international supervision over the dollar :)
@Meekal Ahmed: So 2030 was a safe bet!!
@John: Thank you John for making these very interesting points.
Wealth is neither created nor destroyed. It merely changes hands. At present China may have trade surplus but such trade surplus depends on the west. The excess foreign reserve eventually have to be moved to the issuing nation for China's prosperity. Until that slow reverse flow of capital happens, the present stagflation in the west will continue which will only decrease the cash flow to China's exchequer. RMB appreciation is a quick fix but China is cautious that it will affect its export which is a bread and butter for China. Weakening dollar is not in China's best interest as it will only wipe out its trade surplus. Alternatively China could buy land, mines, and gold with its excess reserve around the world for its future use without appreciating the RMB and this is what China is doing now. However such a strategy can only go so far, for eventually China would have to find the buyer for its industrial output and by then there would be many around the world can offer the same what China is offering to the world toady. When China went into partnership with West (US) in 1970s for it's economic progress, the fate of RMB is tied with the dollar. It was never the other way around and it is difficult to shed the cord without affecting her own progress.
Global currency position is an earned credibility of trust and for better or for worse dollar reigns as the king even in these worst economic times, despite two rounds of quantitative easing. As much as China would like RMB to be a reserve currency, it is only a wishful thinking. With so many stable currencies plus time tested precious metals are available as an exchange medium why would any central bank or export house want one more currency denomination in trade? Trade surplus alone does not give credibility to a currency. Independent treasury, central bank, government, market, banking system, populace and judiciary are key for any reserve currency status. At present in China all the systems are one and the same as in age old monarchy and I rather would receive my payment in dollar or in gold for my export than in RMB.
Once the populace are satisfied of their daily needs they want more and one such want is age old freedom( of expression, religion, movement, assembly, protest, and power) and at that time no one will want RMB as a reserve currency. In case any one doubt that please look back at history of USSR. Still Russia is struggling to find its position in global economy.
Hmmm. 2030?
Then you and I don't have to worry too much, eh? We won't be around!
As someone said, news of the demise of the dollar is greatly exaggerated. After S&P downgraded the US, there was a rush to buy the very treasuries that had been 'downgraded', pushing yields down further.
The day countries want to keep the RMB as a reserve asset is not near. China is testing the world market through Hong Kong but it will take more time.
I am not as sanguine as you on Asia. They have a serious over-heating problem and as they resist currency appreciation, it makes matters worse. Next door, the RBI has raised interest rates to combat inflation TEN times so far and I don't think they are finished with tightening. China too has a serious inflation problem though at 6% it would be the envy of much of the developing world.
China will appreciate but only gradually and at their own pace. To do it faster would send a shock to the export sector and cause massive job losses (never mind the loss of export revenue).
what gonna happend after power moved to asia from american contienent??????????????