China, US Sit Atop The Economic Tower – But Nothing Is Forever

It is a question which has been asked before – will the Chinese yuan replace the dollar as the world’s reserve currency? Although primarily an academic debate for the moment, Le Monde’s Marie Charrel contends that a recent agreement between China and the European Central Bank for the establishment of a “currency swap” mechanism could be a signal that the discussion is moving from the academic to the real world.

Noting that some foreign central banks already use the yuan and that it ranks in the top ten most-exchanged currencies in the world, she says the “rapid evolution” is surprising since the currency is only partially convertible.

“Beijing started to soften its positioning in the middle of the 2000s. In 2005, the Chinese authorities partially unlinked the yuan from the dollar, pegging it instead to several currencies. But the first major change took place in 2010 when the government authorized companies to use the currency to pay for imports and exports, which until then were paid in dollars.”

Daniel McDowell echoes this pessimistic view of the dollar’s future. In a piece in The World Politics Review, McDowell argues the mismanagement of economic policy since the financial crisis has weakened the standing of the US on the world stage.

In fact, he says, the reserve status of the dollar – which presently accounts for about 60 percent of all international foreign exchange reserves – is “not so much a credit to itself but rather a reflection of the lack of a good alternative.” But, it is a position that is not set in stone.

“Beginning with the 2008 crisis and intensifying with each manufactured political crisis thereafter, an emergent consensus has popped up in capitals around the world: The global economy needs to become less dependent on the U.S. dollar and the increasingly unreliable government that backs it. While no viable alternative exists at the moment, increased demand for a rival to the dollar is speeding up the process by which change in the global monetary system is taking place,” posits McDowell.

And that mismanagement has consequences beyond American shores.

“Economies around the world, but particularly those in the increasingly integrated Asian market, suffered the collateral damage of American financial mismanagement. At the center of the Asian economy lies the Chinese behemoth. The world’s second-largest economy and, as of 2012, the world’s top trading state did not sit idly by and watch as firms within its own economy and the broader region were starved of vital trade financing. Responding to demand in the region for an alternative to the dollar, Beijing began signing a series of bilateral “currency swap” agreements with foreign central banks.”

China’s Economy Also Has Underlying Weaknesses
Rob Schmitz of The Los Angeles Times highlights imbalances in China’s economy as current positive economic hides underlying weaknesses.

“On the face of it, China’s latest economic data look pretty strong: GDP growth, exports, industrial output and electricity production have all rebounded in recent weeks. But the number that matters most for the long-term health of China’s economy — urban household income growth — has slowed from 9.7% in the first half of last year to 6.5% during the same period this year,” reports Schmitz.

The imbalance is most striking between China’s public proclamations against corruption (a progressively modern approach) and its regressive economic policy that harkens to the days when state-run enterprises were the favored sector.

“Despite calls for change from within the party’s new leadership, China’s economy seems to be falling back on what it knows best: opening lines of credit at government-run banks not for small businesses but for state-owned enterprises to build roads, high-speed rail and gleaming office towers. This formula ensures that the bulk of China’s money supply flows between the Communist Party’s network of state banks and state companies rather than into the pockets of everyday Chinese,” writes Schmitz.






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