By hanging its dirty laundry out for open display during the recent fiscal crisis, the US political establishment rightly invited some serious criticism of its dysfunctional system. And the most telling came from Xinhua, the official Chinese news agency. Its commentary called on “the befuddled world [by events in the US] to start considering building a de-Americanized world,” including a new international reserve currency.
Hitting the US hard by blaming it for the global economic crisis in the first place, Xinhua said: “The world is still crawling its way out of economic disaster thanks to the voracious Wall Street elites.”
Not letting off the US easily and highlighting risks to China’s investments in the US currency, Xinhua said: “The cyclical stagnation in Washington for a viable bipartisan solution over a federal budget and an approval for the raising debt ceiling has again left many nations’ tremendous dollar assets in jeopardy and the international community highly agonized.”
Apart from exulting at the US’ political embarrassment, the Chinese have a real stake in the proper management of the US economy because they have invested more than US$1 trillion in US treasury notes and bonds.
Any US default would have seriously damaged their investment in what has been generally regarded as ‘good as gold’ US currency instruments. They should, therefore, be pleased, for that reason alone, that the US has come back from the brink, at least for the time being.
However, one may ask if the Chinese are really serious about “a de-Americanized world,” with a new international reserve currency? They certainly would like that, but have never spelled out the alternative.
As Jin Canrong (金燦榮), professor of International Studies at Renmin University, has reportedly said: “We have talked about it for many years... but in fact, the majority of China’s foreign currency reserves are still in US dollars.”
Amplifying it, he added: “Since the late 1980s China has raised the idea of establishing a new world order, both politically and economically, but no one has any idea what that could be. China has been a beneficiary [of the present system], so what is the reason to change it?”
How has China been the beneficiary? The answer is China’s currency was not freely convertible, so it has been able to keep its exchange rate artificially low, giving it an enormous competitive advantage in pricing of its goods for export; as well as from low (depressed) wages at home.
Yet it has not been an entirely one-way street. China’s low-valued exports helped to control inflation in developed countries, not only through direct export of cheap Chinese goods, but also with the US and western outlets setting up their own production lines in China to take advantage of its low production costs.
Of course, China’s massive exports enabled it to build up large trade surpluses. However, by investing these surpluses in US treasury notes and the like, it made available the same credit to the US and other developed countries.
Even though the US and other Western countries often complained about their trade deficits, and sought revaluation of the Chinese currency to make trade competitive and balanced, they were never serious about taking on China about this, principally because it kept inflation under control in their countries.