Global Reserve Currency: Little Real Alternative To Dollar
Calls by China and Russia for a new global reserve currency – possibly based on the IMF’s special drawing rights (SDRs) – reflect Beijing’s and Moscow’s concerns about a potential decline in the US dollar, and by extension, the value of their own substantial dollar holdings. Indeed, yesterday was the second time in as many weeks that China has adopted this line – previously it expressed concerns about the safety of its investments in US government securities.
Truth be told, it’s difficult to see a viable alternative to the dollar. I am not sure if Chinese central bank governor Zhou Xiaochuan actually has in mind the yuan as a potential reserve currency, but the fact that the People’s Bank of China has in recent months extended the yuan equivalent of tens of billion dollars in swap lines to South Korea, Hong Kong, Malaysia, Belarus and Indonesia suggests that it sees the renminbi as a regional anchor of sorts.
Even so, could the yuan – or any other currency – usurp the dollar? Let’s look at the alternatives. The euro is still too tenuous. There’s no guarantee that the euro will survive in the long run. Meanwhile, the yen isn’t widely used enough (the carry trade notwithstanding), and Japan’s long-term economic decline suggests that its currency will also lose significance. Moreover, investing in Japanese Government Bonds (JGBs) instead of US Treasuries is hardly appealing, given the low yields on offer for such a high debt pile (170% of GDP).
With Japan being overshadowed by a rising China, it is thus natural to speculate about the possibility of a yuan block in Asia. But the yuan is not even fully convertible, and while this will eventually change, it’s difficult to see it outshining the dollar – especially on a popular level. In fact, I’d wager that most people outside Asia could not name the yuan as the Chinese currency, let alone commit to shifting their cash holdings into yuan.
Furthermore, while I think it is natural for countries such as China and Russia to want to diversify their reserves, I’d say that their calls for a new reserve currency also have a strong political whiff to them. Not coincidentally, both countries would like to see the end of US hegemony, and one way of achieving this might be to erode the dollar’s dominance – although not quickly, obviously, lest a dollar collapse hurt their own economies.
March 25th, 2009 at 3:46 am UTC
This is great, they model themselves somewhat after our system of business. Then they pull companies like Wal-Mart, Briggs&Stratten, etc,etc, ( and the list goes on). They also learn what sweat shops are and 90% of their people suffer while the upper 10% have controlling interest. Wow, this and still remaining communist! Maybe its time for the American companies to come home before the workers Unionize…….
March 25th, 2009 at 2:37 pm UTC
I see the political in this as well. Why can’t China just diversify its reserve holdings like Russia already has done… splitting between euros, dollars and a smattering of JPY, GBP and CAD? Diversification is a basic investment rule taught to any elementary retail investor, which China flagrantly ignored. Now, they want to overhaul the world financial system to have others pay for their mistake.
March 25th, 2009 at 5:52 pm UTC
A few facts/thoughts for you:
The US dollar is used in 86% of daily currency transactions worldwide, and no other currency comes close. It is also used as a middle step between converting two currencies.
Saddam Hussein himself was captured while holed up with US$750,000 in cash, not the equivalent in euros, yen, nor Chinese renminbi.
All main oil price benchmarks are priced in dollars.
The dollar accounts for more than 60% of global forex reserves. Nothing else comes close.
I will be surprised if characters in Hollywood gangster films start carrying suitcases full of Chinese renminbi any time soon.
March 25th, 2009 at 9:32 pm UTC
Be careful, who would have thought 30 years ago that Toyota could ever overtake GM? China has been a civilized nation for thousand of years, something tells me that can wait another 50 or so. Make no mistake, they intend to dominate the world in their own sweet time.
March 26th, 2009 at 9:05 am UTC
Its also important to recognize that the vast majority of world currencies are pegged to the dollar or euro, leaving only about two dozen fully independent currencies, of which only about 8 have strong independendent demand drivers (US$, EUR, GBP, JPY, CAD, AUD, CHF, SEK). The Chinese Yuan is pegged to the dollar and the Russian rouble managed against a dollar/euro basket. There is no point in even considering either of these currencies as playing a greater role in an international reserve system until they are fully floating. Otherwise, you might as well just be holding dollars and euros and cut out the RMB/RUB middleman.