Debating the International Currency System
What’s in a Speech?
Gregory Chin and Wang Yong
The global economic crisis has ignited concerns about the functioning of the international currency system (ICS). Inside China, attention has focused on the inherent weaknesses of the current hybrid system, in which the dominant country reserve currency issuer, the United States, runs fiscal and external deficits, and there is no effective mechanism for bringing about adjustments between reserve-issuing and surplus countries. Concern is also growing over the future of the dollar. The Chinese government, exporters and individual investors are asking “where next” for the dollar? The value of China’s massive foreign exchange reserves, the fortunes of Chinese exporters and the flows of hot money into the country are all shaped by the USD/RMB exchange rate and the international currency system. China has a greater stake in the dollar system than many other countries because of its massive foreign currency reserve and heavy reliance on trade-related growth. China has found itself constrained by the enduring systemic power of the United States and the centrality of the dollar in the international monetary system.
[1]It was therefore a game-changing moment when, in the lead up to the G20 London Summit (April 2, 2009), the Chinese government issued a speech by respected central bank governor Zhou Xiaochuan, entitled “Reflections on Reforming the International Monetary System” (March 23, 2009).
[2] In the speech, Governor Zhou asked what “kind of international reserve currency we need to secure global financial stability and facilitate world economic growth,” and answered that the world needs an international currency option “that is disconnected to individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies.” The main message is that it is in the interest of the world to reform the international monetary system, namely by strengthening and expanding the role of the IMF’s “Special Drawing Rights” (SDRs) as a multilateral reserve currency option.
Some analysts have suggested that the governor’s speech was important because it marks the first time the Chinese leadership has publicly issued such a high-profile statement of concern about the ICS. However, even more significant, the speech is the first public indication that China is seriously reconsidering its reliance on the dollar and is beginning to cultivate options for reducing its international monetary dependence on the United States. This is not to suggest that it is ready to act fully on this thinking, nor has it already worked out the risk mitigation strategies for dealing with the potential consequences of such a shift. Yet the speech is more than simply a “shot across the bow” of the “US ship of state”, to send the message that China is “knocking at the G7 door” and “wants in” so that it can play a greater role within the existing global economic architecture.
[3] Instead, it indicates that Chinese strategists are thinking about international currency options that are beyond the dollar as the preeminent world currency.
The speech is important for a second reason. Inside China, the publication of Zhou’s speech and related statements from the senior Chinese leadership, such as President Hu Jintao, Premier Wen Jiabao and Vice Premier Wang Qishan, unleashed a torrent of debate among academics and think tanks on how best to implement the basic ideas on global currency reform contained in the governor’s speech, as the speech itself was short on concrete details of implementation. It has spurred related discussion on the root causes of the current macro imbalances, remedial options and discussion of broader themes such as Chinese currency internationalization, regional financial and monetary cooperation in East Asia, financial collaboration between China and other emerging and developing countries, and the future of US dollar hegemony.
[4]The domestic Chinese debates offer a sense of the evolving parameters within which China’s international monetary policymakers are operating.
[5] Furthermore, public opinion is gradually playing a greater role in shaping government policy on international money. What the public debate suggests is that Chinese strategists would like to see the international community work toward reforming the ICS and bring about changes that would entail a gradual shift from the dollar system to a “multi-polar global currency system”. They see such evolution as necessary for reducing the high level of risk that the non-reserve currency issuing countries currently bear within the dollar system when they have to hold another country’s currency as reserve currency and yet have no direct control over the supply of the reserve currency. However, what is unclear is the level of priority that the Chinese leadership and policymakers actually attach to the multilateral diversification option (SDRs) versus the bilateral option (RMB internationalization). What is clear from the public commentary thus far is that there is general sentiment in China that the leadership should not excessively antagonize the United States in advocating for a shift in the ICS. However, as far as we can see, the Chinese debate (in the public domain) has not advanced to the stage where detailed and concrete plans are being formulated to meet the global leadership and international coordination needs for managing what would likely be a more fractured ICS.
Recasting the ProblemMuch of the trans-Atlantic talk about currency within the global crisis has been about misaligned exchange rates and the need to correct the trade and financial imbalances between China and its major export markets, particularly the United States. By contrast, China is advancing a systemic conception of the cause of the world’s current economic problems. For China’s leading policy strategists on international monetary affairs, the financial crisis has laid bare the defects of the existing international currency system, and they suggest that the world should look to diversify beyond the US dollar system. Prior to the G8 Summit in Italy in July 2009, Li Ruogu, Chairman and President of China Export-Import Bank
[6] (and former central bank vice governor), stated that the financial crisis “let us clearly see how unreasonable the current international monetary system is.”
[7]Although the recent financial crisis brought China’s criticism of the ICS to a head, the disaffection of Chinese officials with the system predates the current troubles. As early as 2003, then Assistant Governor of the central bank Li Ruogu, represented the Chinese government at the spring meeting of the International Monetary and Financial Committee and called on the IMF to “tighten its surveillance of the macroeconomic and financial policies of the major industrial countries.”
[8] At that time, when China’s foreign currency reserves were only starting on their dramatic rise, Chinese authorities were already weighing in on the theme of growing global imbalances, emphasizing that overcoming the problem of imbalances required the establishment of a new equitable and reasonable economic and financial order. The assistant governor’s speech called on the IMF to examine the flaws in the existing international monetary system and gradually establish a new international monetary system that more fully reflects the interests of developing countries, while providing institutional safeguards for the sustainable growth of the global economy. At the same presentation, Li also called on the IMF to “actively promote the general allocation of SDRs; in particular that the IMF needed to complete the special one-time allocation of SDRs as soon as possible in order to strengthen the capacity of member countries to withstand crises.”
[9] Chinese concerns about the “irrationalities” of the dollar-centered ICS, and their globally destabilizing effects, thus predate the current crisis and have grown henceforth.
[10]Therefore, amidst the current global crisis, it should not have come as a surprise that People’s Bank of China Governor Zhou Xiaochuan’s speech on reforming the international monetary system focused on the Triffin Dilemma—the root cause of the crisis, according to many Chinese economic policymakers and academics. The governor’s reading of Triffin, as well as that of policy advisors in the Chinese academy, is that when the currency of a single nation is used as the global reserve currency—as is the case with the US dollar—the currency issuing country faces the dilemma of taking decisions on domestic monetary policy that serve national interests but which may not contribute to global economic wellbeing.
[11] Accordingly, Chinese view these “externalities” as a key contributor to excess liquidity throughout the world, which resulted in overly relaxed US monetary policy and ultimately the subprime crisis in the United States. Excess global liquidity pushed down interest rates in US financial markets over the long-term, which, in turn, resulted in the real estate and derivatives bubbles. According to Zhou, “Although crisis may not necessarily be an intended result of the issuing authorities, it is an inevitable outcome of the institutional flaws.” The view is that whereas the Gold Standard System had an inherent tendency to cause deflationary pressure, the “Dollar Standard System” has a tendency to induce macroimbalances, while also lacking an effective adjustment mechanism. Wang Jianye, chief economist of China ExIm Bank (and a former senior economist at the IMF), suggests that the “institutional drawbacks” of the existing ICS have been “a contributing factor” to the global crisis.
[12] One way out of the Triffin Dilemma is a supra-national or “super-sovereign” international reserve currency.
Chinese analysts trace the root causes of the current crisis, as well as the related global imbalances and exchange rate challenges, to the dismantling of the Bretton Woods dollar-gold system in the early 1970s, and the transition to a “US Dollar System” that came after the August 1971 Nixon shock, and formally with the Jamaica Accord.
[13] Unlike many Western observers, they do not see the source of current global macro problems in misaligned exchange rates. Accordingly, the problem of global financial and trade imbalances is not about an “artificially low” Chinese currency, which in turn has resulted in huge trade surpluses for China vis-à-vis the United States and the EU; these outcomes are seen as effects, rather than causes. These outcomes may worsen existing systemic deficiencies, but the Chinese analysts argue that the root of the current global problems is in the break from the previous Bretton Woods system, which had provided relatively stable exchange rates until the early 1970s. The current ICS is said to have allowed the United States to run consistent current account deficits, which, in turn, have led to its rising levels of external debt. Persistent net external debt eventually led to pressure on the US currency to depreciate. In turn, the depreciating global currency has “wreaked havoc” on the international monetary and trading systems. Chinese policy analysts also note that the system suffers from the lack of a “supra-national institution” (i.e. the IMF) that can effectively evaluate sustainable debt levels for the major currency-issuing countries and enforce macro-policy changes when such transgressions have occurred. The IMF can only exert such surveillance and influence changes in countries that borrow from The Fund. It has not been able to do so over, for example, the issuer of the dollar.
[14]Zhang Ming, director of the International Financial Research Institute in the influential Chinese Academy of Social Sciences, suggests that one of the most important differences between previous ICS (i.e., the Gold Standard System and the Bretton Woods System) is that the dollar system suffers from an inherent systemic gap: there is no effective multilateralized check-and-balance mechanism to provide adequate international governance over the supply of key currencies.
[15] Under the Bretton Woods System the limit on dollar issuance was the dollar’s peg to gold, and the threat that if the United States exceeded dollar-gold issuance limits, then other states could march on the US Federal Reserve to exchange their dollars for gold. A number of Chinese analysts believe that this disciplining measure on US money issuance was eliminated with the end of the dollar-gold peg and the shift to the current US dollar-centered ICS.
[16] Excess liquidity in the international monetary system has thus led to a situation where boom-bust cycles in asset prices have become the systemic norm. Chinese commentators further believe that world developments have eclipsed the other global governance mechanism that was created to help address these global macro-coordination challenges: the G7/8. The consensus view is that shifts in the world economy, related to the rise of the major emerging economies, have left the “Club of Rich Countries” both ineffective and lacking legitimacy.
[17] Wang Jianye, the chief economist of China ExIm Bank, notes that the existing ICS is “out-of-date”, as it does not adequately reflect the profound changes in the world economy of recent years and is simply no longer workable.
[18] Wang highlights that interventions from the G7 or G3 central banks were enough to move the key reserve currency exchange rates to facilitate international adjustment in the 1970s and 1980s, but this is no longer the case.
Chinese analysts note that problems of global financial and trade imbalances have been recurrent challenges since the shift to the dollar system and have merely worsened since the late 1990s rather than being a new phenomenon caused by China. Both Germany and Japan have run major surpluses vis-à-vis the United States and have also had to deal with American pressure to revalue their currencies throughout the era of the dollar system. China is now only the latest target. What has turned into “normalized” behavior for the United States—i.e. running consistent current account deficits—has finally led to unmanageable external debt. Yu Yongding, a former member of the Monetary Affairs Committee of China’s central bank and one of the country’s most influential economists, suggests that the inherent flaws in the dollar system are easy to miss because the importance of dollar assets in the investment portfolio of international investors has meant that foreign exchange funds have flowed back into the United States through purchases of US dollar-denominated financial products. This systemic tendency has allowed the United States to delay or deflect the necessary domestic adjustments to address its current account imbalance.
[19] The difference now is that the subprime crisis has dampened investor confidence in US financial products, and the US government’s bailouts have triggered investor concern about medium to long-term dollar depreciation.
Going MultilateralWhile many international observers see fixing the global imbalances as the priority amid the crisis, what does Beijing see as pivotal? As immediate near-term measures, Governor Zhou’s speech calls on the key reserve currency-issuing countries to take into account the global effects of their monetary decisions and not to worsen the current crisis. China is urging the IMF to not only accelerate its own internal governance reforms (e.g. changes in voting shares to reflect changes in the international balance of economic power), but to also take on greater responsibilities in crisis prevention and resolution, especially (and inescapably) ensuring that the fiscal and monetary policies of the key reserve currency countries are “responsible” and do not lead to “unsustainable financial imbalances”.
[20] This means strengthening IMF surveillance of the macroeconomic policy of all the leading economies, particularly the United States.
Zhou’s March 2009 speech, issued amid a global crisis, also elevated the internal Chinese policy debate on medium-term global reform options by laying out some technical options for reforming the international monetary system, especially multilateralized reserve currency options. To mitigate the effects of the Triffin Dilemma and reduce the world economy’s—and thereby China’s—dependence on the US dollar as the global reserve currency, Zhou suggested that it would be beneficial to expand the issue scale and circulation scope of the IMF’s SDRs over the medium term. The President of China Export-Import Bank and former PBOC Vice Governor, Li Ruogu, explains: it may “be feasible to reform the existing SDR into a payment currency in a real sense and further to substitute the dollar-denominated currency by a ‘basket of currencies’ commonly accepted by all countries. To be more specific, a new Bretton Woods System focusing on a ‘basket of currencies’ should be established.”
[21] He adds, “Of course, we need to discuss the selection of that basket of currencies by taking account of such factors as a country’s GDP, trade volume, reserves, population and share in the world market.”
[22] The medium term goal of the Chinese proposal is about reforming the ICS, in which a core component is rethinking the selection of standard currency for international reserves.
The governor’s speech was short on details on how best or exactly to implement the SDR proposals. Chinese authorities have been cautious in public about discussing the implications of the governor’s SDR proposal for the Chinese currency itself—specifically, whether China’s Renminbi will be included in the SDR currency basket—and they continue to weigh the potential risks of including China’s RMB involved in such a move.
[23] However, some scholars have run ahead of the official position, outlining proposals that go beyond the official statements from current PBOC Vice Governor Yi Gang that, “it is possible that the global financial crisis will facilitate the process of making the yuan internationally accepted, but there is no need to push for that.”
[24] Zhang Ming of CASS, for example, advocates for a greater international role for the RMB, in helping to expand the role of the SDR as a reserve currency. Zhang believes that the SDR currency basket should be expanded to include currencies of the major emerging economies, led by the Renminbi (RMB).
[25]Zhang offers three additional SDR expansion measures: to encourage the use of the SDR for pricing international trade transactions, commodities, investment and corporate accounting, and include consideration of the SDR in calculating the market value of a country’s foreign exchange reserves; to expand the use of the SDR in global trade and investment, by extending its use beyond the settlements of governments and the major international organizations, to private sector and corporate cross-border settlements; and to launch SDR-denominated financial assets in order to promote the attractiveness of the SDR as a reserve currency, with the IMF issuing bonds for using SDR as a pricing medium, and establishing open-ended funds that use the SDR as a pricing tool.
[26] Furthermore, Zhang suggests that a more equitable distribution of SDRs is needed so that the countries that really need crisis liquidity support can actually access the SDRs.
[27] This suggestion converges with the desires of developing countries (some since the 1960s) to focus attention on the inequality in the method of SDR allocations. Some developing countries have actually been disappointed that Chinese authorities have not pushed harder on this front in the current moment.
[28]Other Chinese economists, while generally favoring the SDR proposal, are more skeptical about its real world application. For example, Lu Qianjin, an academic expert at Fudan University and regular commentator in the Shanghai media, cautioned that “the world is still far away from departing from the Dollar Standard System, mainly because of the enduring strength of the US economy, the higher risk in non-dollar-denominated investments, and even the opposition of the creditor nations themselves to US dollar depreciation.”
[29] Li Ruogu similarly notes that despite the “irrationalities” of the current dollar-centered IMS, “…it would be difficult to find and implement a feasible replacement plan in the short term, so we will still have to travel a relatively long road for reform of the international monetary system.”
[30]Others, such as Huang Xiaopeng, note that it is unlikely that the United States will want to see a dilution of its monetary power, and would likely resist attempts to strengthen the role of SDRs.
[31] What these measured quasi-official and academic views show is that the Chinese debate on international money and ICS options is underpinned by a strong dose of realpolitik. Chinese strategists realize that uptake on the Governor’s SDR proposals will depend not only on their functional usefulness, but will also require a large measure of geopolitical persuasion to bring the multilateral reserve currency option into being. Beijing is wary of engaging in such arm-twisting at this stage as it would risk provoking the United States.
Strategic BalancingZhou’s March 2009 speech, issued amid the most severe global financial crisis since the Great Depression, galvanized international attention.
[32] The speech was followed shortly by a well-timed “op ed” article, ostensibly authored by Vice Premier Wang Qishan, that was printed in The Times (London) the week before the London G20. These statements from two of China’s most senior and influential economic officials could be interpreted as signaling a more confident and forceful China, which has been emboldened by its performance amid the global downturn, and is no longer willing to stand back from the global spotlight and limit itself to expressing its concerns behind closed doors.
[33]Zhou’s speech indirectly put the new US administration on the defensive about its future currency intentions and global macro-coordination priorities. After the release of Zhou’s speech, the White House press corps pressed the newly inaugurated President at his March 24, 2009 speech on the state of the US economy, noting that “the Chinese publicly expressed interest in an international currency” and weak confidence in the value and reliability of the US dollar. President Obama had to defend the US currency, and stated: “I don’t believe that there’s a need for a global currency.”
[34] President Obama added, “As far as confidence in the US economy or the dollar, I would just point out that the dollar is extraordinarily strong right now. The reason the dollar is strong right now is because investors consider the United States the strongest economy in the world with the most stable political system in the world.” A day later, however, US Treasury Secretary Timothy Geithner gave a slightly different answer, and sent the dollar tumbling, only to drive it back up by affirming that it should remain the world’s reserve currency.
[35] Geithner was asked at an event in New York about Governor Zhou’s call for a new international reserve currency. He said that while he had not read the proposal, that Governor Zhou is a very thoughtful person, and would anticipate that the plan is “designed to increase the use of the IMF’s special drawing rights. And we’re actually quite open to that.” For the new administration and currency traders, the episode highlighted investors’ sensitivity to any perceived weakened confidence in the dollar, as investors see power as shifting to a wider group of developed and emerging nations. For instance, the dollar slid as much as 1.3 percent against the euro within 10 minutes of news accounts of Geithner’s remarks. It recouped much of the loss about 15 minutes later, when Geithner then predicted no change in the US currency’s role.
[36] Citicorps’ global head of foreign exchange and local markets strategy, James McCormick, emphasized that it was “important” that Governor Zhou’s proposal came in the run-up to the London G20, because the contagion effects of the speech had sent the message to the US administration about the growing relative importance of the G20 versus the G7. He added, “We will feel that [shift in global power to a wider group] and see that [global power shift] for some time to come.”
[37]However, at the level of deeper motivations, Beijing’s SDR proposal has also been moved by concern about its massive dollar holdings. A sense of vulnerability underlies Zhou’s criticism of the dollar-centered monetary system, and the proposal for strengthening SDRs. This combination of strength and vulnerability is captured in the observation by Chinese analysts that the governor’s super-currency remarks were not meant to signal that China wanted its own currency to supplant the US dollar; that the intention was to register China’s “unease” about US monetary policy.
[38] The speech gave Beijing and the major emerging economies an opening to press on the issues of international money and exchange rate stability at the London G20 negotiations (April 2009), and at follow-up G20/G8 summits in L’Aquila (July 2009) and Pittsburgh (September 2009).
[39] International commentators focused on how China and the emerging economies had shifted international attention onto the destabilization of the international monetary and trading systems caused by loose US monetary policy, and how they effectively prevented Washington from hammering on the view that China and other surplus countries should bear the burden of adjustment in addressing global financial and trade imbalances.
[40] However, equally important was how the BRICs grouping was able to secure agreement at the London G20 that the IMF’s SDR funds would be replenished and significantly increased, and made available to countries in need without the traditional IMF conditionality of the 1990s.
[41] These gains then set the groundwork for further multilateral cooperation in the lead up to the Pittsburgh G20. The key breakthrough was that the US and China reached accommodation on how to address the imbalances in their economic relations, i.e. that America needs to increase its savings rate, and that the Chinese government would take the necessary measures, including a major domestic stimulus package to increase domestic consumption in China. In return, Beijing gave its support to the identification of “balanced and sustainable” global growth as a priority in the agenda of the G20, and to including this wording in the official communiqué of the Pittsburgh G20.
Despite the diplomatic gains that were achieved after the publication of Zhou’s speech, Chinese strategists are under no illusion that just because the dollar may be weakened, and because some progress has been made in resuscitating the multilateral currency option, that this can be equated with a situation where another currency is ready to replace the dollar as the preeminent global reserve currency. They note that even if the transition from the dollar system begins immediately, it would be a while before a super-sovereign reserve currency were in a position to replace the US dollar as the global reserve currency. For example, Huang Yiping, professor at the highly regarded China Center for Economic Research at Peking University, notes that although the subprime crisis has weakened confidence in the dollar, most of the rival currencies that are already established as reserve currencies, such as the yen and pound, have also been weakened by the fallout from the current global crisis. The euro is the exception, but Chinese commentators see the euro as a balancing option rather than a real alternative as the predominant reserve currency. They are skeptical that the euro will be a long-run challenger to the dollar.
[42] Most important, Chinese commentators emphasize that resistance from the United States to any substantial efforts to deepen and expand the use of SDRs should not be under-estimated. The working assumption is that although the so-called hegemonic position of the US dollar is weakening, the US dollar will probably continue to play a predominant role, and the shift to a multi-currency system is “still far away”.
Based on their awareness of the likely resistance from the US to multilateralized currency diversification, Chinese authorities have made sure to also give themselves a unilateral or bilateral option via internationalizing the use of the Chinese currency for traders and investors. The internationalization of the RMB is the other risk mitigation measure that China is now pursuing to reduce its excessive reliance on the US dollar. A series of incremental steps have been taken to gradually increase the use of the RMB as an international currency, including: 1) currency swap agreements worth US$95 billion with Indonesia, South Korea, Hong Kong, Malaysia, Belarus, and Argentina; 2) agreements with Brazil and Russia to encourage trade settlement in each other’s currencies; 3) “settlement trials” to allow a group of export firms in the trade-heavy Guangdong and Shanghai areas to settle their trade in RMB; 4) a “net settlement system” to increase liquidity and trading volume in the domestic interbank currency market; and 5) for select Hong Kong banks and Chinese banks based in Hong Kong to issue RMB-denominated bonds in Hong Kong.
[43] For RMB internationalization to advance, China will need to loosen the band for its managed floating exchange rate and gradually allow for a greater range of currency convertibility (capital account).
What is not clear in the Chinese debates (at least in the public domain) is the exact mix of the multilateral versus bilateral currency diversification options. These two tracks, together, constitute China’s gradual dedollarization strategy. What is noticeable is that there has been little public debate on the multilateral SDR option inside China since late 2009, and attention has largely shifted solely onto RMB internationalization.
[44] This could suggest that the SDR proposal was mainly a short-term diplomatic maneuver, used to gain leverage at the G20 and G8 leaders’ summits, and that Beijing has now dropped it after largely achieving the intended tactical results. Or equally possible, is that Chinese authorities have tracked the response of the United States and its G7 allies to the Chinese SDR proposal, and decided that since the IMF has already instituted some SDR expansion measures following the London G20, it makes sense to lay-off further agitating the US and its G7 allies on SDRs at this time. If the latter is the case, it would be rational for China to put more emphasis into pursuing the unilateral/bilateral diversification option of RMB internationalization—an option that China can control more directly, by tying its persuasion of other countries, foreign traders or investors to use the RMB to economic or political inducements at the bilateral level.
The Long GameAlthough the release of Zhou’s speech before the London G20 did bring short-term benefits to China in terms of strengthening its bargaining hand at the G20 and G8 leaders’ summits from April to September 2009, it is important to recognize that the governor’s speech is more than maneuvering. The Chinese SDR proposals embody part of China’s medium to long-term strategy to gradually move toward reforming the ICS. It is also important to recognize that the Chinese calls for putting more emphasis on SDRs predate the onset of the current global crisis.
[45] At the same time, the crisis has brought the Chinese authorities to the point of calling for a broader role for SDRs as a global reserve currency option. Moreover, as confidence in the value and reliability in the dollar has weakened among the BRICs
[46], these countries have gravitated toward the SDR as a potential reserve diversification tool that may provide China and the emerging powers with a de-dollarization mechanism to facilitate diversification while minimizing alarm in currency markets.
[47] Beijing realizes that it is not in its interest to take rash actions that could cause a sudden fall in the value of the dollar. The SDR proposal is one experiment in gradual de-dollarization. Despite the initial international pushback on Zhou’s ideas, some of the SDR policy proposals are now being implemented
[48], as well as endorsed by some of the world’s most prominent economists.
[49] It can be said that some practical steps have been taken since the crisis to work toward the goals in the second amendment of the IMF’s Articles of Agreement for making the SDR the “principal reserve asset in the international monetary system.”
Chinese observers have noted that the current crisis could well turn out to be a watershed in the primacy of the dollar and the life of the dollar system. Huang Yiping notes that we are now already in a transitional phase where the dollar will not be as dominant coming out the other side of the crisis.
[50] The consensus Chinese view is that a multi-reserve currency era is coming, even if only gradually, and that it would be in China’s strategic interests to promote such a scenario.
[51] The general preference appears to be an ICS that, on balance, is more decentralized and diffused in terms of the distribution of power among states, where the preeminence and seigniorage privileges enjoyed by the United States are reduced, and where “privatized” authority does not play as prominent a role in global economic governance.
[52] One vision of such a multi-polar, decentralized and diversified currency system that has been offered by Chinese analysts is one in which the dollar, the euro and a “regional Asian currency” share the role of global reserve currency – and are together backstopped by SDRs. The view is that a multi-polar reserve currency system could provide the needed competition mechanism to ensure discipline of the key currency issuing countries. The idea is that if the US issued too much currency, international investors could then shift their holdings (or a portion) to euros or the “Asian yuan”.
[53]While some Chinese commentators celebrate the shift to a multi-polar currency system, others recognize that the likely result is a more fractured ICS. For example, Lu Qianjin suggests that the most pragmatic option for China and the world is to move toward a more diversified international monetary system, with more national currencies functioning as reserve, trade settlement, and pricing tools. His solution is to “let different currencies compete, and balance each other.”
[54] However, Huang Xiaopeng, the editor of Securities Times newspaper, warns that “rule-less bilateral or multilateral coordination in monetary relations” is the likely trend for the foreseeable future.
[55] China is in a difficult position here – it wants change and yet it craves stability. Managing gradual change for the sake of maintaining stability has been the watchword of the domestic reforms over the past thirty years, but this is more difficult to achieve internationally, when there are other powerful actors involved.
[56]What needs more thorough research is how volatile a more “fragmented currency system” may be, and the ways in which the issuing countries can achieve a necessary degree of coordination in order to provide for some stability in a multi-currency system.
[57] Where the Chinese commentary has been especially thin is on the details of the transition mechanism to the multilateral “basket of currencies” system. One transition channel that has been discussed by Chinese experts is for China to work together with other emerging economies and neighboring East Asian countries, to promote their currencies in international markets, to balance the influence of the US dollar, and speed up the “arrival of a multi-currency order.”
[58] But here, the Chinese debates are short on the specifics on how the emerging powers, or BRICs, would work together, or if and when, with the traditional financial powers, to provide international coordination and shared leadership in a more fractured ICS.
Chinese strategists suggest that the transition to a multipolar reserve currency scenario is in keeping with the overall trend of global change to a multipolar balance of power. In terms of going “beyond US monetary hegemony” over the longer-term, Chinese officials and policy analysts appear to want to see a transition to a global monetary system that is based on two principles: ‘supra-nationality’ and ‘negotiation’. Their preference is for an international currency regime that is based on a balance between a certain degree of collective adherence to the decisions of a supra-national institutional configuration and a greater degree of shared responsibility and decision-making than currently exists – rather than relying on a self-disciplining regime that is organized around a single state with privileges and responsibilities as the leader. Yin Jianfeng, a CASS financial expert, predicts rather hopefully that such a multi-reserve currency scenario would be more “sustainable” over the long-term.
[59] He suggests that one of the (unintended) positive spinoffs from the current financial crisis has been the implementation of better monetary and fiscal policies and improved cooperation among leading countries in the financial sector. Moreover, it can be added that since the global crisis, monetary and financial cooperation in East Asia has reached a new level of multilateralized coordination. However, history also suggests that unless the challenge of leadership over such a more diffused ICS is not adequately addressed, then we could be heading toward a period similar to that between the two World Wars, when the British pound sterling was in decline and the dollar on the ascent, and neither was dominant. If this is the case, the outcome could be heightened struggle for leadership over the longer term, and a rising threat of increased tension in international currency affairs.
*We thank Paul Bowles, Benjamin Cohen, Paul Evans, Eric Helleiner, Paola Subacchi and Baotai Wang for their comments, and Eric Hagt, Matthew Durnin and the anonymous reviewers for their suggestions. The authors thank the Social Sciences and Humanities Research Council of Canada, the Centre for International Governance Innovation, Peking University’s Center for International and Strategic Studies, and China’s Ministry of Education for supporting the research.
[1] Gregory Chin and Eric Helleiner, “China as a Creditor: Rising Financial Power?”, Journal of International Affairs Vol. 62, No. 1, (Fall/Winter 2008), pp. 87-102.
[2] The Chinese and English language versions of the speech can be accessed at the official website of the People’s Bank of China: http://www.pbc.gov.cn/detail.asp?col=4200&ID=279 and http://www.pbc.gov.cn/english/detail.asp?col=6500&id=178
[3] Dexter Roberts, “China Talks Tough with Call to Dump the Dollar”, Business Week, March 25 2009.
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[4] Some of these debates were initially outlined in Gregory Chin and Wang Yong, “China Debates: The Dollar System and Beyond” (Chatham House report on Remaking the International Monetary System for the 21st Century, January 2010).
[5] The Chinese policy circle for formulating policy on international monetary affairs is quite tight, including select members of the Monetary Affairs Committee of the central bank, such as Governor Zhou Xiaochuan, Vice Governor Yi Gang and the heads of China’s state banks that are involved in trade and concessional financing in the international arena, such as Li Ruogu. The policy-formulation group reports upwards to the Central Financial and Economic Affairs Leading Groups of the State Council and the Chinese Communist Party for overall guidance and policy approval on major decisions. The policy network for implementation options and gathering policy feedback is broader and encompasses influential think tank and academic researchers.
[6] The Export-Import Bank of China is one of the country’s three policy banks.
[7] Simon Rabinovitch, “China officials call for displacing dollar, in time”, Reuters, July 6 2009, .
[8] Li Ruogu, “Statement by the Assistant Governor of the People’s Bank of China at the Seventh Meeting of the International Monetary and Financial Committee”, April 12, 2003. The IMFC is responsible for advising and reporting to the Board of Governors of the IMF as it manages and shapes the international monetary and financial system. It also monitors developments in global liquidity and the transfer of resources to developing countries, considers proposals by the Executive Board to amend the Articles of Agreement, and deals with unfolding events that may disrupt the global financial system. The IMFC usually meets twice a year, in September or October before the Bank-Fund Annual Meetings and in March or April at what are referred to as the Spring Meetings. The Committee discusses matters of concern affecting the global economy and also advises the IMF on the direction of its work. At the end of the meetings, the Committee issues a joint communiqué summarizing its views. These communiqués provide guidance for the IMF’s work program during the six months leading up to the next Spring or Annual Meetings. See: http://www.imf.org/external/np/exr/facts/groups.htm#IC
[9] Ibid.
[10] For example see Li Ruogu’s remarks at the Lujiazui Forum in Shanghai in summer 2008.
[11] Benjamin Cohen suggests that the main dilemma identified by Triffin, in his landmark study, is actually that an international reserve system based on a national currency cannot simultaneously sustain both growth of reserves and confidence in the currency. Private correspondence: December 2009. See: Robert Triffin, Gold and the Dollar Crisis (New Haven: Yale University Press, 1960).
[12] Wang Jianye, “China’s Intellectual Contribution to Addressing the ‘Once-a-Century’ Financial Crisis”, China Daily, March 25, 2009, .
[13] The ‘Nixon shock’ refers to the jolt to the international monetary arrangements that occurred on Aug. 15, 1971 due to former US President Nixon’s declaration of the New Economic Policy of the United States, which suspended the convertibility of officially held dollar liabilities into gold. The ‘Jamaica Accord’ was reached in January 1976, as a result of negotiations between the US and European countries that started in 1972. The new Article IV of the IMF Agreement was approved by the Board of Governors in April 1976 and ratified by 2/3 of the member states in 1978. The content of the Second Amendment includes: 1) legitimacy of floating exchange rates, that is member countries are free to choose their own exchange rate system (freely floating, managed float, pegged to a currency or a group of currencies or SDR, but not gold); 2) the IMF will exercise surveillance over the exchange rate policies and formulate specific policies to guide member countries; 3) the IMF may reintroduce a system of adjustable peg by an 85% majority (however, a member may remain without par value), and the United States can veto; 4) downgrade the monetary role of gold (gold will no longer be used for international transactions); 5) designate the SDR as the principal reserve asset in the international monetary system.
[14] Gregory Chin, “Debating Macro-Imbalances and Global Currency”, in A.F. Cooper and D. Schwanen, “Flashpoints for the Pittsburgh Summit”, CIGI Special G20 Report (September 2009), pp.54-55,
[15] Zhang Ming, “Adjustment of Global International Payment Disequilibrium and Its Impact on the Chinese Economy”, Shijie jingji yu zhengzhi [World Economy and Politics] Vol. 7, (2007), pp.75-80.
[16] Benjamin Cohen notes that bilateral checks on US currency policy do exist in the existing currency system, namely that China and other surplus countries could choose to stop buying dollars and let their currencies appreciate, as this would put pressure on the United States to live within its means as well as bring about a reduction in dollar reserves. Personal correspondence, December 2009.
[17] The Chinese views on the G7/8 are discussed in detail in Gregory Chin, “China’s Evolving G8 Engagement: Complex Interests and Multiple Identities in Global Governance”, in Andrew F. Cooper and Agata Antkiewicz (eds.), Emerging Powers in Global Governance: Lessons from the Heiligendamm Process (Waterloo: Wilfred Laurier Press, 2008), pp.83-115.
[18] Wang Jianye, “China’s Intellectual Contribution”, (March 25, 2009)
[19] Yu Yongding, “Avoiding the Dollar Trap and Promoting International Monetary System Reform”, Caijing [Caijing Magazine], Vol. 8 (2009), .. Scholars in international political economy, namely Susan Strange, Benjamin Cohen and Eric Helleiner, have long noted that the greater depth and convenience of the US Treasury bill market, and the depth, liquidity, openness and growth-orientation of US financial markets, backed by secure property rights and a trustworthy legal infrastructure, have given an enduring advantage to the greenback. See: Susan Strange, “The Persistent Myth of Lost Hegemony”, International Organization, Vol. 41, No.4 (1987), pp.551-574; Eric Helleiner, “Money and Influence: Japanese Power in the International Monetary and Financial System”, Millennium: Journal of International Studies, Vol. 18, No. 3 (December 1989), pp.343-358; Benjamin Cohen, “Global Currency Rivalry: Can the Euro Ever Challenge the Dollar?”, Journal of Common Market Studies, Vol. 41, No. 4 (2003), pp.575-595.
[20] Wang Jianye, “China Intellectual Contribution”, (March 25, 2009).
[21] Li Ruogu, “Global Financial Crisis and Restructuring the International Monetary System”, in Marl Uzan (ed.), Building and International Financial and Monetary System for the 21st Century: Agenda for Reform (New York: Reinventing Bretton Woods Foundation, 2009), p.219 (emphasis added).
[22] Currently, the SDR basket consists only of the dollar, the euro, the pound, and the yen.
[23] Interview with senior representative of the Hong Kong Monetary Authority: Hong Kong, August 2009.
[24] Zhang Ming, “China Says No to the Dollar Standard”, Nanfang zhoumo [Southern Weekly], April 9 2009, .; Yi Gang’s statement is quoted in Liu Jie and Zhang Chongfang, “Yuan’s Role Presents Dilemma for Chinese Policymakers”, Xinhua, (April 8, 2009). (http://news.xinhuanet.com/english/2009-04/08/content_11150610.htm)
[25] Zhang Ming, “China Says No to the Dollar Standard”, (April 2009).
[26] IMF members could then use their foreign exchange reserves (specifically their US dollar holdings) to purchase the SDR-denominated funds.
[27] Zhang Ming, “China Says No to the Dollar Standard”, (April 2009).
[28] We thank Eric Helleiner for this point. The share among IMF members of the general SDR allocation is based on each country’s existing IMF quota. In the increased general SDR allocation to US$250 billion on August 28, 2009, low-income countries merely account for just over $18 billion, while emerging market economies and developing countries as a group only account for almost $100 billion of the total. See: “Special Drawing Rights: Questions and Answers”, International Monetary Fund (online: https://www.imf.org/external/np/exr/faq/sdrallocfaqs.htm)
[29] Lu Qianjin, “A More Diversified International Monetary System is Needed to Restructure the International Financial Order”, Zhongguo zhengquan bao [China Securities News], November 7 2009, .
[30] S. Rabinovitch, “China Officials Call for Displacing Dollar, In Time” (July 6, 2009).
[31] Huang Xiaopeng, “In Reforming the International Monetary and Financial System, China Should Be Pragmatic”, Zhongquan shibao [Securities Times], October 31 2009, .
[32] See: Wang Qishan, “The G20 Must Look Beyond the Needs of the Top 20”, The Times (London), March 29, 2009. (www.timesonline.co.uk/tol/comment/columnists/guest_contributors/article5982824.ece) Wang Qishan is the Chinese lead on the economic side of the US-China Strategic and Economic Dialogue.
[33] Pieter Bottelier, “China, the Financial Crisis, and Sino-American Relations”, Asia Policy Vol. 9, (January 2010), pp.121-129.
[34] “President Obama’s News Conference”(transcript), The New York Times (March 24, 2009, online).
[35] Rebecca Christie, “Geithner Remarks on IMF Roil Foreign Exchange Market”, Bloomberg (online), March 26, 2009. (www.bloomberg.com/apps/news?sid=aSZTgpL48TZQ&pid=20601068)
[36] On the same day, the dollar was down 0.22 percent at $1.3553 per euro as of 12:13 p.m. in Tokyo.
[37] Ibid.
[38] Liu Jie and Zhang Chongfang, “Yuan’s Role Presents Dilemma”, (April 8, 2009).
[39] Simon Rabinovitch and Matt Falloon, “China Demands Currency Reform, France Backs Debate”, Reuters, July 9 2009 (www.reuters.com/article/idUSPEK20673520090709); Gregory Chin, “Global Finance: China Let’s Cat Out of the Currency Bag”, Global Development (Berlin), August 2009, pp.18-19 (downloadable e-copy at: http://www.global-perspectives.info/download/2009/pdf/Whither_G8_and_G5_July_2009.pdf).
[40] Benjamin J. Cohen, “The Future of Reserve Currencies”, Finance and Development, 46(3), September 2009, pp.28.
[41] The “BRICS” refers to the diplomatic grouping of Brazil, Russia, India, China and South Africa that has emerged over the past four years.
[42] Huang Yiping, “Evolution of the International Monetary System and Renminbi Internationalization”, Guoji Jingji Pinglun [International Economic Review], 3, 2009, pp.20-25.
[43] G. Chin, “Global Finance: China Lets the Cat Out”, (July 2009), pp.18-19.
[44] We thank Simon Rabinovitch for highlighting this point.
[45] Similarly, as part of their longer-term developmental re-strategizing, even before the onset of 2008-09 crisis, Chinese researchers had already begun to turn their attention to how to increase domestic consumption, in order to facilitate a shift from the China’s heavily reliance on export-oriented growth, i.e. to shift China’s growth model. See: Wang Yong, “Domestic Demand and Continued Reform: China’s Search for a New Model”, Global Asia, 3(4), Winter 2008. (e-copy can be accessed at: http://globalasia.org/pdf/issue8/v3n4_Yong.pdf)
[46] “Nations Eye Stable Reserve System”, BBC News (online), June 16, 2008 (http://news.bbc.co.uk/2/hi/business/8102216.stm); Brendan Kelly, “Brazil, Russia, India and China (the BRICs), Throw Down the Gauntlet on Monetary Reform”, East Asia Forum (online), June 28, 2009 (www.eastasiaforum.org/2009/06/28/brazil-russia-india-and-china-the-brics-throw-down-the-gauntlet-on-monetary-system-reform/); Huang Qing, “Dollar and Future of BRIC May Dominate Summer”, People’s Daily, June 16, 2009. (http://english.peopledaily.com.cn/90001/90780/91343/6679535.html)
[47] The idea is that China and other monetary authorities could convert their dollars into Special Drawing Rights through off-market transactions that would have no effect on exchange rates or any other economic variable. See: C. Fred Bergsten, “We Risk Calamity Unless China Safely Unloads Unwanted Dollars”, Financial Times, April 22, 2009. (e-copy can be accessed at: www.iie.com/publications/opeds/oped.cfm?ResearchID=1191)
[48] Eric Helleiner, “The IMF and the SDR: What to Make of China’s Proposal”, in Bessma Momani and Eric Santor (eds.), The Future of the International Monetary Fund, Special Report of the Centre for International Governance Innovation, August 2009, p.18-21.
[49] Jeffrey Sachs, “Sustainable Developments: Rethinking the Global Money Supply”, Scientific America Magazine, June 2009 (www.scientificamerican.com/article.cfm?id=rethink-the-global-money-supply); C. F. Bergsten, “We Risk Calamity”, (April 22, 2009). Joseph Stiglitz’s support for Governor Zhou’s call for a global reserve currency is cited in Andrew Baston, “China Takes Aim at Dollar”, New York Times, March 24, 2009.
[50] Huang Yiping, “Evolution of the International Monetary System”, (2009).
[51] This is discussed in Yu Zhonghua, “To Check the Hegemony of the US Dollar by Cultivating a Multi-Polar Balance”, Guoji jinrong bao [International Financial News], August 6, 2009 (online: http://ifb.cass.cn/show_news.asp?id=18591). Yu Zhonghua is a professor and deputy director of the Institute of International Finance at Liaoning University.
[52] Benjamin Cohen has identified increasing “privatized authority”, the role of non-state actors in deciding such fundamental matters as currency values or access to credit, as one of the key trends in the evolution of the international monetary system. See: Benjamin Cohen, “The International Monetary System: Diffusion and Ambiguity”, International Affairs, 84(3), 2008, pp.455-470.
[53] Zhang Ming, “China’s New International Financial Strategy amid the Global Financial Crisis”, China & World Economy, 17(5), September-October 2009, p.33.
[54] Lu Qianjin, “A More Diversified International Monetary System”, (November 2009).
[55] Huang Xiaopeng, “In Reforming the International Monetary and Financial System”, (October 31, 2009). Securities Times is the only official newspaper in China that is authorized by the China Securities Regulatory Commission to release news on Chinese listed companies. It mainly reports on China’s securities markets, and is read primarily by decision-makers in financial institutions, stockbrokers, institutional and individual investors, domestic and foreign-invested companies.
[56] We thank Paul Bowles for highlighting this point.
[57] On a more fragmented currency system and the need for coordinated leadership for stability: Benjamin J. Cohen, “Toward a Leaderless Currency System”, in Eric Helleiner and Jonathan Kirshner (eds.), The Future of the Dollar (Ithaca: Cornell University Press, 2009), pp.156-158.
[58] For example see: Yu Zhonghua, “To Check the Hegemony of the US Dollar by Cultivating a Multi-Polar Balance”, (August 2009); Huang Xiaopeng, “In Reforming the International Monetary and Financial System”, (October 2009).
[59] Yin Jianfeng’s views are cited in Liu Jie and Zhang Chongfang, “Yuan’s Role Presents Dilemma”, (April 8, 2009).
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