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Now might be a good time for China to push its currency, the yuan, as a global currency. It has US$2 trillion in reserves in the United States, making the powerful nation its debtor. It also has a list of other debtors that includes Europe. China holds all the cards to be a powerful global power.
The United States and Europe have dug their own graves with their financial excesses, an emphasis on globalization and an unnecessary war in Iraq. If it pushed hard, China could make the yuan the gobal currency.
While the United States and Europe were busy showing off their wealth and power for the last 20 years, China was taking away all the Western world’s manufacturing. This resulted in the West importing everything from socks to desktops from China – which imported next to nothing.
When the United States and Europe were struck by the financial meltdown in 2008, they turned to China for cash.
China’s trade surplus rose from a mere US$18 billion in 1999 to a staggering US$297 billion in 2008, thanks to its low-value currency. Its trade has made China the world’s manufacturing giant and its strong cash reserves have given it power to manipulate world opinion.
In 2007 China hinted at its intention to promote the yuan as an alternate reserve currency. And at last month’s G-8 Summit in Italy China pushed for enhanced status for the yuan. While Russia endorsed the idea, there was lukewarm support from both India and Brazil.
Although high-ranking U.S. government officials have visited Beijing to discuss the issue, President Barack Obama’s administration has been more engaged with domestic issues like the recession and rising unemployment than Beijing’s ambition to promote its currency.
Due to the global recession, the gross domestic product of the West is predicted to drop by 3 to 4 percent. In comparison, although China’s GDP has also been hit by the recession, its manufacturing sector and US$2 trillion in cash reserves – mostly loaned out to other countries –place it in a commanding position. China’s growing military might also places it in a more dominant position in the world.
The next two years will be a period of “rest and recovery” for the United States and other world economies. Although China has suffered on the export front, its economy is still humming at the rate of 6-7 percent annually. It has put its unemployed to work with its own version of a stimulus package, and surplus goods that could not be exported have been diverted for local consumption.
Since the end of World War II the West has been arrogant and overconfident. Western countries have ignored talk of reducing the role of the dollar and giving a greater role to the yuan or any other currency. But with almost all Anglo-Saxon economies in bad shape, they may have no choice.
China recently signed currency swap deals – in which dues are settled in yuan instead of the U.S. dollar – with Indonesia, Malaysia, South Korea, Brazil and Russia. These countries support the idea of reducing the U.S. dollar’s dominance in world finance and business. This is the first in a series of steps China plans to upgrade the yuan and make it fully convertible in global financial markets.
The rise of the dollar was Europe’s gift to the new world after World Wars I and II. Until then the British pound was the world currency for trade, commerce and international transactions. When the British position began to erode after the wars, the United States outmaneuvered Britain into transferring international banking transactions to the United States. As a result its military power began to grow by leaps and bounds.
Then came the Cold War. Europe submitted to U.S. machinations and yielded all power. The value of the dollar rose and it maintained its lofty position until about 1990, with massive U.S. government support. The whole world recognized it and every nation, including oil producers, Japan, South Korea, Taiwan, India and China, began maintaining U.S. dollar accounts.
Then China emerged on the world economic stage. The United States did not anticipate that China would take away its entire manufacturing sector in such a short time. Initially, the United States transferred its labor-intensive smokestack manufacturing to China. But once the floodgates opened, there was no stopping China.
U.S. President Bill Clinton assisted this process, calling it prosperity. Unfortunately that was only on paper, with financial gains in stocks, bonds and other speculative markets proving worthless in 2008.
Next, after the 9/11 terror attacks former President George W. Bush’s administration got busy fighting wars in Afghanistan and Iraq, putting the economy into a low-priority lane. The country’s surplus cash – which actually belonged to oil producers, China, India and Japan – was made available to domestic consumers by way of cut-rate mortgages. Within eight years post-9/11, the U.S. economy and its mighty dollar suffered catastrophic losses.
Now China is in a position to take the yuan to the world stage, similar to the U.S. dollar. When the yuan becomes fully convertible it will move into the world league.
However, there is an inherent weakness in the Chinese economy that may muddy the water. Its exports depend on the goodwill of the West. If those markets close, China’s economy could fall flat. The rest of the world cannot absorb Chinese exports the way the United States does. Also, the West may opt to rebuild and redevelop its manufacturing base, like India, Indonesia and Brazil, which will be a big setback for the yuan. Although China may resist such moves, this would not help its cause in the face of a determined effort by the West.
Chinese exports have benefited from the low value of the yuan, which has not been revalued in the last ten years to reflect the current status of China’s economy. If it is revalued upward by 15 to 20 percent, then 30 percent of Chinese exports will become pricey. Demand will drop and so will exports.
In such a scenario, other countries may step in to fill the void. India is in line, with massive cash at its disposal; it had US$40 billion from foreign direct investment and foreign institutional investors, and another US$40 billion in remittances from abroad in 2008. India could build a manufacturing base as fast as China did in the last 20 years. There is only one drawback in this scenario: the West has not fully realized the implications of China’s moves.
China will eventually move to displace the dollar and replace it with the yuan as the world currency. Such a move could deal a painful blow to the United States unless it starts moving manufacturing back from China and revisits the yuan-dollar relationship.
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(Hari Sud is a retired vice president of C-I-L Inc., a former investment strategies analyst and international relations manager. A graduate of Punjab University and the University of Missouri, he has lived in Canada for the past 34 years. ©Copyright Hari Sud.)
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