Doublewood: China’s Currency Strategy

After the financial tsunami of 2008, China has strengthened its belief that the era of US dollar hegemony should be reformed.  Recognizing that the USD has served the world very well for some periods (notably the 2 decades after WWII) and the US continues to lead the world in economic size, trade volume and financial infrastructure, China is willing to accept the USD as the major world currency, but not the exclusive one (for as long as the US is not giving up its de facto veto power in the IMF and the World Bank).

Therefore, China will try to prevent the Euro from going defunct, in order to counter US hegemony.  In the meantime, it is entering into bilateral currency exchange agreements with its many trading partner nations to enable transactions to be settled in each other’s currencies (i.e., gradually reducing the exclusive use of USD).  This effectively creates what it calls “pools” of RMB circulating in designated regions of the world as foreign exchange (FX).  In addition, together with the four other BRICS nations, it is entering into a “development bank” proposal to act as an additional form of IMF and World Bank among the BRICS member nations(China is slated to make the largest capital contribution to that).

If the US and China decide to proceed with an unprecedented cooperative partnership of “special relations between big nations” (that is Xi Jingping’s characterization of the desired Sino-US relations, which resounds what Kissinger and Bryzynski had been suggesting), a plausible step in the all-important currency realm may be the setting up of the biggest currency exchange agreement between the two nations, say US$ 1 trillion .  This will not only confirm the US acknowledegment of the potential RMB status in the upcoming world order, but also the Chinese commitment to the USD in the foreseeable future (that is “if I hurt you, I hurt myself” or, as the Chinese like to say “there is me in you, and you in me.”)

There is still too much unnecessary mistrust between the 2 nations.  This is one of the most concrete ways to build trust in the real sense.  The key is that each side will have to engage the other to act responsibly.  I will not be surprised if the two sides can begin to discuss this process, if the Xi-Obama summit this week goes well.  Let’s hope so.  It will yet take some time to negotiate the details, but it will be a worthwhile dialogue for the future of the world.

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