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.
It is important to realize that inflation had been the curse of economies in developed and developing countries, but that largely ceased to be an issue in rich countries with low consumer prices of Chinese goods and availability of credit for almost anything and everything.
Partly, of course, the credit availability was the China magic with their surpluses invested in US dollars and partly, a number of Western countries and the US deciding to float all kinds of credit instruments, creating an illusion of ever-increasing economic prosperity.
Former US Federal Reserve chairman Alan Greenspan called it irrational exuberance, but he kept the credit flowing as if the economy was on autopilot, not needing any regulation or direction. The resulting global financial crisis is still causing havoc, with periodic political and financial gridlock in the US. China, though, has so far weathered the global crisis relatively well.
Ever since the Sept. 11, 2001, terrorist attacks in the US and the subsequent invasions of Afghanistan and Iraq, things have not gone too well for the US. In the midst of it all, the US experienced the worst recession since the economic depression of the 1930s.
Even as the US has been preoccupied with these wars, China has been consolidating its position and expanding its political horizons, particularly in the Asia-Pacific region, laying claims to a number of islands and waters around them in the South China Sea and the East China Sea.
However, its claims are contested by a number of countries, some of them with security pacts with the US. Except for the US presence and involvement in the Pacific, China would hope to sort the disputes out with its regional neighbors.
China seemed to be cruising along well in its region with the US stuck in its wars in Afghanistan and Iraq. However, US President Barack Obama’s announcement of the US “pivot” to Asia with a renewed and expanded commitment to the region complicated China’s regional strategy.
Beijing would hope that the US’ financial and political problems, over time, constrict it increasingly from over-extending its reach into the Asia-Pacific. It is not so much a matter of the US presence and involvement, as the perception of its seriousness and capacity to stand by its allies against China.
And this recently took a hit when Obama could not even attend the APEC summit in Indonesia and the East Asia summit in Brunei because of the crisis at home over the budget and the debt limit. Even though Obama’s absence was understandable, the US image as a dysfunctional superpower did not go down well in the region.
It is this perception that might push regional countries into making peace with China on the latter’s terms.
Even if this were to happen over whatever period of time, China is not yet prepared to replace the US dollar as the world’s reserve currency or a basket of currencies.
With European economies in the doldrums and Japan still seeking to emerge from 20 years of economic stagnation, it would be difficult to put together a credible basket of international currencies to replace the US dollar.
And, as for China, it is economically and politically not yet in a position to become the world’s currency repository. In other words, the world might have to live with the US dollar as the world’s reserve currency for an indeterminate period.
Sushil Seth is a commentator in Australia.