Sunday, March 5, 2017

Foreign Affairs: The Renminbi Goes Global

Foreign Affairs looks at the efforts by China to gain more global acceptance for the Renminbi. Their article concludes that while China has taken some important first steps, they are still far from gaining widespread global acceptance for their currency. Below are a couple of excerpts from the article. 


. . . . .

"China’s ambitions notwithstanding, the U.S. dollar remains unchallenged as the dominant international currency. The dollar accounts for more than 60 percent of the foreign exchange reserves held by central banks worldwide. Nearly 45 percent of all foreign exchange market transactions involve dollars. Virtually every transaction in the global oil market is denominated in dollars. Put simply, the dollar reigns supreme. So why would China attempt to challenge the dollar’s dominance, or even try to establish the renminbi as an alternative global currency?"

. . . . .

"When asked why Beijing is trying to turn the renminbi into a global currency, many in China have a ready answer: a first-class country should have a first-class currency. But beneath this nationalist sentiment lie other, more practical motives. Chinese officials see internationalizing the renminbi as a way to free themselves from dependence on the dollar."

. . . . .

"Progress on economic and structural reform alone, however, would not allow China to mount a real challenge to the dollar’s dominance. The dollar is not just the leading international reserve currency: it is also a safe haven, into which foreign investors rush during episodes of financial turmoil—even when the United States is itself the source of the turmoil, as was the case in the crisis of 2008. “Rock-solid faith that the U.S. federal government will honor its debt obligations has made its Treasury securities the instrument of choice for panicky investors,” Prasad writes. Other currencies, such as the Swiss franc, also function as safe havens, on a limited scale. But the renminbi does not. The question is why—and whether this will change.

To be a safe haven, a currency has to be traded in deep and liquid markets; during a crisis, investors value nothing more than liquidity. The U.S. Treasury bill and bond market is the single largest and most liquid financial market in the world. This is an advantage that the market in renminbi-denominated securities does not begin to approach."

. . . . .

My added comments: 

Key points in this article:

- China badly wants to increase global demand for their currency
- National pride and a way to bypass the US dollar are key motivators
- They are still very far from achieving their goal (US dollar still far ahead)
- They must open up their system (allow free movement of capital in and out)
- They must increase global confidence in the stability of their internal systems
-  Chinese leaders are reluctant to give up control and open up their system
-  The election of Donald Trump increases unpredictability going forward

The article concludes that while it is possible for China to make progress on its goal to increase global demand for the renminbi, the road ahead appears to be long and hard. The process would take a long time under present conditions and the election of Donald Trump makes the process even more uncertain. 


Added note: Here is an article by Carmen Reinhart on Project Syndicate that is along the same line as this Foreign Affairs article. Below is an excerpt:

"Now as then, the US could meet the rest of the world’s appetite for dollars by issuing more dollar debt. This would require the US to run sustained current-account deficits, mirrored in fiscal deficits. Of course, while the link to gold is passé, any domestic fiscal objective to curb US debt growth would be at odds with the international role as sole provider of the reserve currency."

Added news notes: Washington Examiner article on upcoming debt ceiling (3-15-17)

David Stockman repeats his forecast that a debt ceiling crisis is imminent, this time on CNBC. We covered his original interview with Greg Hunter here.

In that same monthly Crisis Watch Update, we noted that if we are to see a major crisis that could lead to major systemic change, it might well revolve around the Trump Administration and the political environment that exists these days. Less than a week later we have President Trump alleging the former Administration bugged his office during the election. We have a spokesman for the Obama Administration denying that and the Director of the FBI telling the NY Times to deny that the FBI approved any kind of inappropriate activity. Former US Attorney General Mukasey suggests in this ABC News interview that the problem may be more semantics and miscommunication resulting from 140 byte tweets. Congress says it will investigate it all, but who knows when that will actually happen or if anything will ever be disclosed to the public.

We are now living in a situation where it is almost impossible to know what the truth is. Whenever we can find credible information to try and help readers, we will share it. However, that is becoming harder and harder in terms of knowing what media articles can be viewed as credible. We'll do our best to keep trying to report accurate information without political bias if it is relevant to what we watch for here (a crisis that could lead to major change). But we are all pretty much on our own these days in trying to assess what information is accurate or who to believe. We can say that this kind of uncertainty is not helpful to systemic stability for sure.

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