HONG KONG — A growing feeling that the dollar has had its day is still being spoiled by the lack of a ready alternative and by inertia and lack of global political vision or leadership. China’s unwillingness to assume international responsibilities is another important factor.
Chinese President Hu Jintao signaled his wish for change on the eve of his state visit to Washington in January when he declared bluntly in answering written questions that “the current international currency system is a product of the past.”
China is sitting on a huge pile of mostly dollar-denominated assets liable to huge losses with every quantitative easing of the dollar or rise in China’s currency. For his own cause, Hu and colleagues are only prepared to contemplate slow moves to “internationalize” China’s renminbi. Hu also said that “making the renminbi an international currency will be a fairly long process.”
Fred Bergsten, director of the influential Peterson Institute for International Economics and hitherto a strident critic of the undervalued renminbi, announced in February “encouraging signs that a breakthrough may have been achieved in the long-running debate over the exchange rate of China’s currency.”
Separately, in an opinion article in the Financial Times, Bergsten argued that the role of the dollar as the dominant international currency had become a burden on the United States. “It is now time for the United States to anticipate, and begin to build, an era in which there will be several global currencies to rival its own.”
The problem is that although nearly everyone grumbles about the dominance of the dollar, the greenback fulfills all the leading attributes of an international reserve currency. Other contenders are a long way behind. More than 85 percent of international foreign exchange transactions are trades involving dollars; more than 60 percent of foreign exchange reserves of governments and central banks are in dollars; trading of oil, the most important commodity, is in dollars.
Almost everyone doing international business, whether big corporations or ordinary tourists, finds dollars as the acceptable currency from Buenos Aires or Bogota to Cape Town, Conakry, Seoul or Tokyo. Try taking yen to Latin America or Africa and you risk having no ready cash, since banks even in capital cities don’t offer a rate and will look at bank notes with their strange writing with utmost suspicion.
There were great hopes when the euro was born and the euro has maintained its value on foreign exchange markets. Now there is widespread political uncertainty whether the euro will survive or at least keep all its constituent countries. More than 60 percent of all dollar bank notes are held outside the U.S.; only 14 percent of euros are held outside euro land.
According to the Bank of International Settlements, last year, the euro limped in second to the dollar with 39.1 percent of global foreign exchange transactions, far behind the 84.9 percent of the dollar. (Because these are two-way trades, they add up to 200 percent, not 100 percent.) Other currencies were far behind, the yen with 19 percent, the pound with 12.9 percent, the Australian dollar (7.6), the Swiss franc (6.4), the Hong Kong dollar (2.4), and the renminbi (0.9).
The International Monetary Fund did its bit for the euro last year in revising the basket of currencies making up special drawing rights (SDRs). The share of the dollar in the SDR basket was revised down to 41.9 percent, the euro up to 37.4 percent and the pound and yen were given 11.3 and 9.4 percent shares, respectively.
Surely now would be an ideal time for the renminbi to come in to the global equation, especially since China has emerged as an economic and trading superpower. It would be better to have three legs on the stool of international foreign exchange dealings. China has emerged as the world’s second-biggest economic power (and maybe the biggest according to purchasing power parity estimates), the world’s biggest exporter, the second-biggest importer, and the holder of the biggest pile of foreign exchange reserves ever seen.
But if the international role of a currency depends on four attributes — size of the economy and its international trade, size of the financial market, capital account openness, and stability of economic and political conditions — China lags. Though it has become a behemoth trader, use of the renminbi even in its own international trade is still small. In terms of a currency’s annualized foreign exchange turnover to its international trade, the ratio was 3.0 for the renminbi, 30.9 for the Hong Kong dollar and 270 for the dollar.
China has been encouraging expanded use of its currency in trade settlements with a series of bilateral currency swap arrangements, but even so, the values of renminbi trade settlement last year was less than 2 percent of its total trade.
Hong Kong has become a laboratory for offshore renminbi transactions, including issuance of so-called Dim Sum bonds (denominated in renminbi and issued in Hong Kong), of which 24 had been issued as of the end of January, worth more than 60 billion renminbi.
International organizations have also helped expand the yuan offshore market through the issue of Panda bonds, renminbi-denominated but issued by foreign institutions in China, which helps to develop the shallow local bond market. China in 2009 also bought 32 billion in SDR-denominated notes from the IMF and paid in renminbi.
One defining difference between the development of the offshore eurodollar market and use of offshore renminbi is that China is cautiously trying to create the offshore market itself rather than see it developed by market forces, which is something of a contradiction.
Beijing has issued instructions that the developing renminbi market in Hong Kong should be devoted to trade settlement and not to market-making or speculating. This is the crux of the matter. The dollar will become less and less attractive because it is the currency of a profligate country. Surely trillion-dollar budget deficits will take their toll.
But unless Beijing is prepared to take the responsibilities and the risks and the potential loss of control involved, the reserve currency renminbi is a pipe dream. The alternative would be to create a new global currency or change the status of the SDR from quasi- currency to a real one, but that would require global political action, of which there is no idea.
Kevin Rafferty is editor in chief of PlainWords Media, a group of journalists interested in economic development issues.