FROM THE SOUTH CHINA MORNING POST
IS THE CHINESE DOLLAR REALLY READY FOR OPENING NIGHT?
TOM PLATE
The long
march of the American campaign that ends in the crowning of our new president
is well underway, as you have noticed. But I am not sure the great
Chinese people should be allowed to watch.
Former top U.S. national-security official Zbigniew
Brzezinski, who, at a fairly bouncy 87, is moving into the professor-ish throne
of foreign policy zen-master, the one long filled by Henry Kissinger, 92, tells
people he has this worry: “… an increasing uncertainty as to what exactly ought
to be the definition of China’s role in the world.”
Tell me
about it!
“… And
the more we can talk to them seriously and responsibly… , the greater the
chance that perhaps we can do more together instead of increasingly becoming
preoccupied with suspicions that each is deliberately turning against the
other.”
Let us give that a standing ovation – but also note the limitations of a
process that works best only when trust is maximized.
Our own advice to them hasn't
always that great, and our conduct hasn’t always been that inspirational. They are
as aware of our flaws as we of theirs. Neither one of us always does the walk
after giving the talk.
In our bad advice category:
Let’s start with the early ‘90s when we began pounding Beijing on the need to
swing open its capital-conversion door. Ah hah! - then comes the Asian
Financial Crisis to reveal exactly what happens when you mix wide-open
currencies with pathetically weak institutions. Surveying all the currency
carnage around Asia back then, Beijing drew back.
That financial-crisis may well have been the tipping point:
“… Chinese policymakers studied the 1997-98 financial storms, and they
drew the right lessons,” admitted Barry Eichengreen, professor of economics and
political science at the University of California, Berkeley (and a former
senior adviser to the International Monetary Fund), in an enlightening
interview in the October issue of The Oriental Economist, the smart New
York-based monthly newsletter. Added the influential Berkeley Prof: “More than
a century of historical experience teaches that open capital accounts can be an
engine of volatility, that capital flows can reverse on a dime, and that
financial markets, economies, and political systems can find it hard to cope
with the consequences.”
Even so, there would be a big upside to easy convertibility
of the renminbi. Banks and corporations have a constant need to accumulate
reserves in real money or liquid securities. Over the last several decades,
something like 60% of all central bank reserves have been deposits of dollars,
which even today account for no less than 85% of worldwide foreign-exchange
transactions. Close to half the world’s exports get priced in dollars.
In Washington
and New York, this does amounts to a tremendous ego trip – the almighty dollar
lives! – and yields absolutely enormous global U.S. financial leverage. But
given the pressures of the expanding global economy, the smart money is betting
that before long another currency will have to step up to the plate; by itself,
the U.S. dollar is spread too thin. Would logic not suggest that the currency
of the world’s other largest economy be an option? The Euro has been a weak
player, and the world long ago lost its yen for the yen when the Japanese
economy went sleepy-weepy in the ‘90s.
So who’s left? The Franc?!
Beijing’s reluctance
about swinging wide open its currency to global interchange is certainly
understandable. You run huge risks if you have an open capital account without
strong markets and financial institutions. No one needs to lecture the Chinese that they’re not there
yet. Explains the Berkeley economist: “China is trying to
build deeper and more liquid financial markets, but in the last few weeks, it’s
tightened a variety of capital controls because of the weakness of the currency
and the instability of financial markets.” Rocked by sinking equity price
levels and a slowing economy, the Chinese have been knocked off balance.
They do want to rely
less on foreign trade and grow more from domestic demand. So Beijing would be
doing everyone a favor – not just itself -- to stay the course that is best for
them, even if it seems slow for us. Internationalizing the renminbi has to follow reform. Go the other way and you
might just blow up the stability of the world economy in trying to firecracker
reform into existence overnight.
Beijing is the first to admit much is to be done. The dark
side - the shadow banking system - needs to be lit up like the Lunar New Year;
the corporate bond market has to move toward international standards; and the
stock market brought into at least some measure of transparency before the
Chinese dollar can go major-league global. After all, a prematurely totally
open currency could trigger floodgates of renmimbi outflow – and would have the
wholly ironic effect of reducing its value in international currency markets. (Tired Congressional hectoring about
the evils of their artificially weakened renminbi has no real currency today –
and from the get-go was always overstated by U.S. politicians fronting for Wall
Street.)
A solid Chinese dollar
as an international option for currency holders could be a very desirable development.
But on this issue – unlike, for instance, global warming – Beijing will be
listening to its own best voices and not U.S. advice. They have heard it from
us all before. As Brezinski put it, in a larger context: “We have to face the fact
that we’re now living in a world that has the United States preeminent but not
really dominant….” Our money still talks but we’re getting near bottom with the
dollar as the only real glue for the international currency system.
Prof.
Tom Plate is a columnist for the South China Morning Post, the author of the
'Giants of Asia' series, and the Distinguished Scholar of Asian and Pacific
Studies at Loyola Marymount University in Los Angeles.
No comments:
Post a Comment