O yuan (China) supera o euro como moeda de comercio internacional

E, por acaso, a Alemanha é o único país da zona do euro a ter saldos positivos no comércio  bilateral com a China.

Paulo Roberto de Almeida 

El yuan pasa al euro como segunda moneda del comercio mundial

El Pais Economia, 3/12/2013

El yuan se ha convertido en la segunda moneda más usada en el comercio mundial por delante del euro, según los datos actualizados hasta el pasado mes de octubre por la organización de servicios a las transacciones financeras SWIFT. El adelanto ha tenido lugar gracias a lanueva política del Gobierno de Pekín, que ha tomado medidas para potenciar la internacionalización de su divisa.
En concreto, el uso de la moneda china alcanzó en octubre una cuota de mercado del 8,66%, muy por encima del 1,89% registrado en enero de 2012, frente al del 6,64% del euro, que ha visto como su uso ha caído desde enero del año pasado, cuando representaba el 7,87% del total.
Los cinco países con mayor uso del yuan durante el pasado mes de octubre fueron China, Hong Kong, Singapur, Alemania y Australia, precisó la organización.
"El yuan es claramente una monedatop en los intercambios financieros globales y aún más en Asia", destacó Franck de Praetere, responsable de pagos y mercados comerciales para Asia Pecífico de SWIFT. No obstante, el uso del yuan aún está lejos de amenazar el dominio del dólar, cuya cuota de mercado se situó en octubre en el 81,08%, según los datos aportados por SWIFT.
Por otro lado, en cuanto al volumen de pagos en yuanes, la moneda china se mantuvo estable en octubre en decimosegunda posición con una ligera caída de la actividad al 0,84% del total, frente al 0,86% de de septiembre.
Sin embargo, durante el mismo periodo los pagos en yuanes aumentaron su valor un 1,5%, mientras que el crecimiento para el conjunto de monedas fue del 4,6%.

A ascensao financeira da China e o declinio do dolar - Arvind Subramanian

Why the Dollar-Renminbi Transition Is Getting Much Closer Despite Debt Deal

by Arvind Subramanian
Foreign Policy, October 17th, 2013

The debt deal will do little to delay the day of reckoning for the dollar as the world’s reserve currency.
In my book, Eclipse: Living in the Shadow of China’s Economic Dominance, I argued that the renminbi could overtake the dollar as the world’s premier reserve currency sometime during the next decade. My prediction was based on an econometric analysis of the fundamental economic determinants of a reserve currency (chapter 3) and applying the lessons from the sterling-dollar transition (chapter 5). Such a shift was definitely already imaginable—it was memorably fictionalized in American novelist Gary Shteyngart’s dystopian Super Sad True Love Story, where the only worthwhile currency in America is yuan-backed dollars.
At the time, my prediction elicited three criticisms:

• First, it took nearly 60 years after the US economy overtook the UK economy for the sterling-dollar transition to occur. This was said to imply that even if the fundamentals were moving in China’s favor, the renminbi’s ascendancy was some long way off.
• Second, deep and liquid financial markets, and especially an open capital account were essential for maintaining a reserve currency, and China did not fulfill these requirements.
• Third, and perhaps most important, even if China fulfilled them, reserve currency status for the renminbi was nowhere close to imminence because that status is fundamentally based on trust—and not just any trust, but the trust of foreign investors and traders that China would not misbehave, especially in hard times, by expropriating or (God forbid!) defaulting on its obligations to foreigners. This was Simon Johnson’s critique in his review of my book.

Two years and several bruising political battles on, how does my prediction look in light of these criticisms? Pretty good.
The first critique was based on a misinterpretation of the sterling-dollar transition (see pages 106 to 114 of my book). Nothing has changed on that score. But it is worth noting that that transition was effectively only 10 to 15 years even without the United Kingdom inflicting demonstrably self-destructive costs as the United States is today. Moreover, in the last three years, the renminbi has displaced the dollar as thedominant reference currency in Asia.
On the second point, China today looks more likely to fulfill the requirements for running a reserve currency. The creation of Shanghai as a free trade zone with full renminbi convertibility and the designation of London as an offshore renminbi center attest to China’s intentions to gradually open the capital account. While the financial system is still neither liberalized nor developed, policies to move in that direction may well be announced at the Third Plenary Session of the Communist Party later this year.
There are two key points to remember here. First, China needs to make the necessary changes not immediately but over the next five years or so to create the conditions for a reserve currency. That is doable. Second, a reserve currency does not need an American-style, turbo-charged and sophisticated financial sector. It needs a reasonably open, reasonably transparent, reasonably liquid, and reasonably well-regulated financial system. China can also achieve that over the next decade.
It is on the third point that things have changed dramatically and in the most unexpected way. My prediction was based on an unstated assumption about the United States being normal. But now, the Johnson critique that the United States has unusual trust among investors has been turned on its head. Can investors now trust the United States not to default on its obligations (and thereby on the very instrument that provides the financial plumbing for the depth and liquidity important for a reserve currency)? Will this new distrust persist beyond the bad times, even in normal times?
Making matters worse, the US problem leading to investor uncertainty and mistrust is not a one-off breakdown but a structural problem of ongoing dysfunctional politics. Even though the United States has averted (just about) a debt default this time around, the Great Menacing Farce that we have just witnessed will be replayed a few months down the road and perhaps many times thereafter.
As Michael Clasey, arguing for a downgrade of the US credit rating, put it: “Triple-A credits do not behave like this.” Only a change in the underlying politics can restore the attribute that China does not currently have but that the United States is squandering away.
The bottom line is that, for two years now, China has burnished its credentials and the United States  has undermined them from a reserve-currency perspective. And if the dollar’s loss is the renminbi’s gain, my prediction is looking more not less likely to be realized.
When Gary Shteyngart was asked what he always carries with him, his response was: “Renminbi in 100¥ denominations. You never know anymore.”

Comments (1)

A irresistivel ascensao do yuan? - The Economist

The rise of the yuan

Turning from green to red

The yuan is displacing the dollar as a key currency

The Economist, Oct 20th 2012 | HONG KONG

IN TOKYO last week the bigwigs of international finance paid close attention to a speech by Ben Bernanke, chairman of America’s Federal Reserve. His speech urged them, in effect, to pay less attention. Many policymakers in emerging markets complain that Fed easing destabilises their economies, contributing to higher inflation and asset prices. Mr Bernanke pointed out that emerging economies can insulate themselves from his decisions by simply decoupling their currencies from the dollar. It is their habit of shadowing America’s currency, however loosely, that obliges emerging economies to ease monetary policy whenever he does.
Policymakers may heed Mr Bernanke’s words—freeing them to ignore his decisions—sooner than he thinks. In a (more thinly attended) speech on the same day, a deputy governor of China’s central bank pointed out that China no longer hoovers up dollar reserves with its past abandon. And according to a new study by Arvind Subramanian and Martin Kessler of the Peterson Institute for International Economics in Washington, DC, the dollar’s influence is waning in the emerging world. Currencies that used to shadow the greenback are no longer following it so closely. Some are floating more freely. But in other cases they are steadily falling under the spell of a different currency: the yuan.
Some inflation-prone emerging economies, such as Ecuador, have adopted the dollar as their official currency. Others, such as Jordan, peg their exchange rate to it. These official policies are one measure of the dollar’s international role. Messrs Subramanian and Kessler use a different measure, based on the way exchange rates behave in the market. They identify currencies that tend to move in sympathy with the dollar in its daily fluctuations against a third currency, such as the Swiss franc. This “co-movement” could reflect market forces, not official policies. It need not be a perfect correlation. It need only be close enough to rule out coincidence.
Based on this measure, the dollar still exerts a significant pull over 31 of the 52 emerging-market currencies in their study. But a number of countries, including India, Malaysia, the Philippines and Russia, appear to have slipped anchor since the financial crisis. Comparing the past two years with the pre-crisis years (from July 2005 to July 2008), they show that the dollar’s influence has declined in 38 cases.

The greenback has in the past played a dominant role in East Asia. But if anything, the region is now on a yuan standard. Seven currencies in the region now follow the yuan, or redback, more closely than the green (see chart). When the dollar moves by 1%, East Asia’s currencies move in the same direction by 0.38% on average. When the yuan moves, they shift by 0.53%.
Of course, the yuan does not yet float freely itself. Since June 2010 it has climbed by about 9% against the dollar, fluctuating within narrow daily bands. Its close relationship with the greenback poses a statistical conundrum for Messrs Subramanian and Kessler. How can they tell if a currency is following in the dollar’s footsteps or the yuan’s, if those two currencies are moving in close step with each other? In previous studies, wherever this ambiguity arose, currencies were assumed to be following the dollar. The authors relax this assumption, arguing that the yuan now moves independently enough to allow them to distinguish its influence. But some of the yuan’s apparent prominence may still be the dollar’s reflected glory.
Outside East Asia, the redback’s influence is still limited. When the dollar moves by 1%, emerging-market currencies move by 0.45% on average. In response to the yuan, they move by only 0.19%. But China’s currency will continue to grow in stature as its economy and trading activity grow in size. Based on these two forces alone, China’s currency should surpass the dollar as a key currency some time around 2035, Mr Subramanian guesses. By that point, the Fed chairman will be the one pulling in the smaller audiences.

Internacionalizacao do yuan: gradual, mas segura (Le Monde)

Du Japon au Soudan, la Chine développe l'utilisation du yuan dans le commerce

 | 29.12.11 | 14h47   •  Mis à jour le 29.12.11 | 17h44

SHANGHAÏ (CHINE) CORRESPONDANCE - La Chine accélère l'internationalisation du yuan. Pékin a reçu, mercredi 28 décembre, une demande du Soudan, dont elle est le premier partenaire commercial, afin d'utiliser leurs monnaies respectives dans leurs échanges. Si les Chinois l'acceptent, "nous pourrions abandonner le dollar", a déclaré le gouverneur de la banque centrale soudanaise, selon l'AFP.

Depuis 2009, la Chine a déjà signé des accords de "swap", c'est-à-dire de compensation directe sur des montants plafonnés, avec de multiples banques centrales, surtout en Asie mais aussi avec l'Argentine ou la Nouvelle-Zélande. En décembre, de tels accords ont été conclus avec le Pakistan et la Thaïlande, permettant à leurs commerçants d'obtenir des yuans pour leurs transactions avec le premier exportateur mondial.

Une nouvelle étape a été franchie le 25 décembre, lorsque la Chine a signé avec le Japon un pacte prévoyant l'utilisation directe du yuan et du yen entre les deuxième et troisième économies mondiales, afin de "réduire le risque de change et les coûts de transaction", selon Pékin. Aucun calendrier n'est établi et les détails restent àdéfinir, mais cette étape est la dernière d'une "série progressive de signes montrant que Pékin est déterminé à développer un jour le yuan en tant que monnaie de réserve alternative viable", note Donna Kwok, économiste de la HSBC.

Le Japon s'est engagé au même moment à investir jusqu'à 10 milliards de dollars (7,7 milliards d'euros) de ses réserves dans le yuan. Malgré le montant limité au regard des colossales réserves de change des deux économies, c'est un coup de pouce au statut du yuan comme monnaie de réserve, le Japon étant le premier Etat du G8 à effectuer un placement dans des bons en yuans. "La Chine va poursuivrele processus d'internationalisation du yuan en 2012 malgré les incertitudes à l'international", prédit M^me Kwok.

MONNAIE DE RÉSERVE ALTERNATIVE

Pour Pékin, il est important de contribuer à l'émergence d'une monnaie de réserve alternative pour briser l'exposition aux politiques monétaires américaines. Mais une telle devise de stature internationale doit par nature être librement convertible, ce qui n'est pas le cas du yuan. Soucieuse de conserver un contrôle déterminant pour ses exportations, la Chine n'a pas suivi la méthode orthodoxe consistant àlibéraliser d'abord les taux de change : la Banque populaire de Chine ne tolère qu'un flottement de 0,5 % par rapport au taux-pivot qu'elle établit chaque jour pour le yuan. Elle n'a pas non plus levé les barrières aux flux de capitaux. "La Chine pourrait être le seul exemple d'un pays poussant sciemment l'internationalisation de sa monnaie tout en maintenant les contrôles de capitaux", relevait en novembreStephen Green, chef économiste de Standard Chartered en Chine.

D'où la vive curiosité sur cette internationalisation hybride. Au coeur de ces évolutions : Hongkong, où Pékin a laissé pousser au cours des dix-sept derniers mois un marché en yuan hors de ses frontières monétaires. La contrepartie est que les yuans positionnés à l'extérieur de la forteresse n'échappent pas au vent de marchés changeants. Ainsi, à la fin septembre, les yuans offshore furent-ils vendus massivement, aux côtés des autres devises asiatiques. Si les deux taux ne se séparèrent jamais de plus de 3 %, s'envola la présomption selon laquelle le yuan de Hongkong suit naturellement celui de Chine continentale.

Or le contexte actuel tendu pousse plutôt Pékin à se méfier d'un afflux de capitaux étrangers en quête de sécurité ou de spéculation en cas d'ouverture. "La Chine entend profiter des bénéfices attenants à une devise internationale mais la dernière chose qu'elle souhaite est une fusion du réacteur causée par une libéralisation mal évaluée des marchés financiers, dit Ren Xianfang, analyste d'IHS Global Insight.L'internationalisation restera donc largement limitée au compte commercial avec uniquement des tests limités sur le compte financier."

La prochaine étape dans l'ouverture sera de savoir comment recycler les yuans de Hongkong en Chine. "Tout dépend de la vitesse à laquelle s'ouvrira le compte de capital, résume Kelvin Lau, économiste de Standard Chartered. Mais avec le temps, et la levée des barrières, il va y avoir une convergence graduelle. Nous parlons là de nombreuses années."

Harold Thibault

O yuan chines como moeda de reserva internacional - Debates Economist

A Economist fez a seguinte afirmação, no quadro de sua seção de Debates: 


"This house believes the yuan will be the world's main reserve currency within ten years."

Defending the motion

Arvind Subramanian  

Senior fellow, Peterson Institute for International Economics and Center for Global Development

As trade within Asia becomes increasingly centred on China, it will start to make sense to denominate that trade in yuan. And since the yuan is already a good store of value, it will soon also become a medium of exchange. Once these conditions are in place, it will make sense to use the yuan as a reserve currency.

Against the motion

Stephen Jen  

Managing partner, SLJ Macro Partners

Why China would want to have a world-dominating currency is unclear, and such an objective is inconsistent with its huge and still growing foreign-reserve holdings. The angst about the dollar losing its hegemony is partly due to Asia's foreign reserves being too large in the first place.

The moderator's rebuttal remarks

Sep 23rd 2011 | John O'Sullivan  

Both Arvind Subramanian and Stephen Jen know what it takes to be the issuer of a reserve currency. It needs economic muscle, big and liquid financial markets and the trust of international investors. Or as our guest contributor, Barry Eichengreen, puts it, a reserve currency needs scale, liquidity, stability and security. Where our debaters disagree is on how quickly, if at all, China can meet these criteria.

In his rebuttal, Mr Subramanian takes on four of Mr Jen's objections to the yuan becoming a reserve currency quickly. The first is that size of GDP is not much of a guide to reserve-currency success. True, says Mr Subramanian. But his measure of economic heft is broader and includes having a big share of world trade and being a large international creditor. It was not until the 1920s that America overtook Britain on all three counts (it had been the world's largest economy since the 1870s). China will soon top America on these three gauges, says Mr Subramanian. It should also soon become top dog in foreign exchange, too.

He agrees with Mr Jen's second challenge, that a reserve currency issuer requires "soft infrastructure"—liquid markets, a sound economic engine, political stability, and so on. China is working on that, says Mr Subramanian. He also agrees that the dollar has the huge advantage of incumbency in terms of the pricing of traded goods and commodities. But he thinks China's exporting might means it can quickly make inroads to the dollar's territory, especially with its customers in Asia. And once a tipping point is reached, the dollar might fall quickly.

Mr Jen's fourth opening point is where the meat of the debate is to be found (it is certainly the issue that has raised the feistiest comments from the floor). For the yuan to displace the dollar, China has to manage things perfectly and America has to screw up badly. Of course, says Mr Subramanian, there is always a risk of a major upheaval in China. Yet China's policy touch has been quite assured—in contrast to America, which is on a seemingly inexorable path to fiscal ruin.

Mr Jen homes in on two strands of argument in his rebuttal: that China's economic muscle is on its own enough to determine the yuan's victory over the dollar; and that the prestige that goes with issuing the world's reserve currency is a big enough prize to mean China will make the changes needed to ensure it happens. China is a big economy largely by dint of its population. It is not yet rich in terms of per-person income. It also faces a demographic turning point in 10-15 years' time. When Japan started to get old (at a point when it was a lot richer than China), the yen's challenge to the dollar started to fade too, says Mr Jen.

China may be big but it is not nimble, he argues. It is hard to imagine a country where the prices of credit, energy and foreign exchange are fixed becoming a storehouse for the world's savings in a matter of years. Mr Jen also points to the Triffin dilemma: an issuer of a reserve currency is required to be a supplier of global liquidity. But how can foreigners easily accumulate yuan to hoard as foreign-exchange reserves unless China starts to run trade deficits?

Mr Jen seems least convinced about the idea that the yuan's international prestige will be a sufficient spur to action for China to fast-track reforms of its financial system. It would be a risky strategy—out of character for China's cautious technocrats. There is also a danger of repeating the mistakes of European monetary union, of promoting a currency when the conditions are not yet ripe. "Overreaching for the sake of national pride does not sound like a strategy China should pursue," writes Mr Jen.

So far, the voting is roughly three-to-one against the motion. Many agree with the thrust of one commentator that trust and transparency weigh in the dollar's favour (a special mention to the sceptical wag who notes there is more chance of the drachma becoming a reserve currency in ten years). The issue raised by Cohiba9 is one that has not been discussed so far but is pertinent: with so many dollars stuffed in central-bank vaults, how quickly could any currency reasonably expect to displace it?

The proposer's rebuttal remarks

Sep 23rd 2011 | Arvind Subramanian  

Stephen Jen makes four important points:

1. Size of GDP is not all in determining a reserve currency.

2. It also requires "soft infrastructure", including liquid capital markets, a relatively stable economic regime, a sustainable political regime and a mighty military force.

3. There are strong incumbency advantages reflected in the "half-century lag" between the rise of the American economy and the ascendancy of the dollar to reserve-currency status.

4. The dollar's decline and the yuan's rise depend on America doing everything wrong and China doing everything right.

He is right that the size of GDP is not all. In fact, an economy needs to be more broadly dominant in terms of trade and external financial strength. On these counts, China, with its rapidly growing trade and the fact that it is the world's premier and unsurpassed creditor, looks very dominant; America looks weak for the foreseeable future, given its fiscal, external and growth problems.

Note too that the error that most analysts make is to focus on size and then claim that there was a half-century lag between the rise of the US economy and that of the dollar. This is historically inaccurate. In a broader sense, Britain retained its dominance through the first world war and beyond because its trade remained larger and external finances stronger than those of America into the 1920s. And indeed the dollar overtook sterling, as Barry Eichengreen and Mark Flandereau's 2008 discussion paper has shown, in the mid-1920s. Sterling's international role persisted thereafter in large part for political reasons because Britain promoted trade and exchange agreements with its colonies that induced the latter to hold sterling rather than switch to dollars. Correcting for these factors, the real lag in the rise of the dollar was only ten years.

Mr Jen has a point about the soft infrastructure. But the case of Japan is illuminating here. When Japan was a rising power and dominant in Asia, the yen began to be used as a reserve currency, even though Japan had less-developed capital markets and no army to speak of. Then, when the country's dominance faded, so did its reserve-currency status. Now China is the dominant power in Asia; it is the main trading partner of most of the key Asian countries. This example suggests that China's currency will gain in stature, notwithstanding that it lacks some of the factors that Mr Jen alleges are preconditions.

Moreover, the Chinese situation is changing rapidly. Just as they have done with the hard infrastructure of roads and railways, the Chinese authorities are currently building an advanced soft infrastructure. Not a day seems to pass without China announcing some new initiative to internationalise the yuan, and the political incentives are in place to continue the process.

Yes, the dollar has an incumbency advantage. But as trade within Asia becomes increasingly centred on China, it will start to make sense to denominate that trade in yuan (ie, use the yuan as a unit of account). And since the yuan is already a good store of value, it will soon also become a medium of exchange. Once these conditions are in place, it will make sense to use the yuan as a reserve currency, starting in Asia and then spreading to the rest of the world. And the flip side of incumbency must also be remembered: once a tipping point is reached, the transition to the next equilibrium is very swift.

Because the economic fundamentals are moving strongly in China's favour, I would argue that as long as there is no major political or social upheaval (which cannot be ruled out, of course), and as long as China posts a reasonable rate of growth and continues its policy reforms, the default is in favour of the yuan's rise.

And on the other side, Mr Jen seriously underestimates America's predicament: because of its over-indebtedness and because persistent short-term problems (unemployment, idle capital) can morph into long-run ones, its medium-term growth prospects look bleak. Meanwhile, the entitlement explosion and political polarisation suggest that the long-term fiscal position is fragile. And above all, America has now a long-entrenched "middle class problem", comprising a number of related pathologies: stagnating median income, rising inequality, declining social and economic mobility, problems in education, and competition from China and India even at the upper end of the skill spectrum. It is not at all obvious that we should be more bearish about China's economic fundamentals than those of America.

To use Mr Jen's metaphor, China has an overbuilt upper body with the legs of a 12 year-old. Doesn't it make sense to think that eventually the legs will develop, rather than the upper body wither? In that case, its reserve-currency status will eventually fall into line with its underlying economic "fundamentals".

And, if you really want to look back, as Mr Jen does, one conclusion leaps out from history, as Ian Morris points out in his recent book, "Why the West Rules for Now?": China was the dominant power for nearly 1,000 years until the 1500s. So, never underestimate the Chinese.

The opposition's rebuttal remarks

Sep 23rd 2011 | Stephen Jen  

In his opening statement, Arvind Subramanian presented a long list of challenges China faces, from the complex technicalities of financial-market liberalisation to daunting political and economic challenges. I could not agree more with these concerns. Indeed, Mr Subramanian seems to have more concerns than reasons supporting his conclusion. To me, neither of the main arguments he makes—the economic bulk of China being a necessary and sufficient condition, and China's presumed pursuit of national prestige at the expense of its industries—is that persuasive.

I will take a step back and propose that the discussion may need to be broadened: rather than debating "when" the yuan might rival the dollar, I suggest that we also think about the "why" and the "how", before coming back to the question of "when".

WhyWhy does China want to nurture the yuan to be the dominant reserve currency in the world? As an ethnic Chinese, I sincerely hope this is not because of "national prestige", as Mr Subramanian suggests. The euro zone is a compelling example of what can go wrong when political hubris is placed before economic rationality and practicality. Making the yuan the dominant reserve currency in the world is not like going for a gold medal in the Olympics; there are important economic and financial consequences. Overreaching, for the sake of national pride, does not sound like a strategy China would or should pursue.

Further, it should be stressed that the world may have too much "official foreign reserves". Our calculations show that, out of the $7 trillion in official reserves held by the euro zone, close to $4.5 trillion may be considered excessive, ie, in excess of what a country would traditionally want to hold in foreign reserves. Part of the excess reserves was accumulated for self-insurance purposes following the Asian currency crisis of 1997, and part has been the result of Asia's currency policy of quasi-pegs vis-á-vis the dollar. As the dollar has depreciated in the past decade, Asian central banks have had to buy massive amounts of dollars to maintain this de facto dollar peg. One reason euro-zone central banks have begun to diversify out of the dollar is precisely because their reserves are too high. Fixating on the dollar losing its hegemony misses the point that the cause of the diversification is problematic.

Moreover, these foreign reserves are not particularly good financial investments. After the great recession, as Germany is mired in disinflation and the euro-zone in inflation, for the first time in recent history, Asian central banks are running a negative carry on their reserve holdings. We calculate it is costing China about $110 billion a year in negative carry to hold their reserves. In general, we see merit in the notion that the savings surplus countries have distorted incentives in the rest of the world through their abnormal accumulation of foreign assets. Just because a country can make money does not mean that it knows how to invest the wealth.

In short, why China would want to have a world-dominating currency is unclear, and such an objective is inconsistent with its huge and still growing foreign-reserve holdings. The angst about the dollar losing its hegemony is partly due to Asia's foreign reserves being too large in the first place.

HowMr Subramanian also touches on the challenge of China's moving away from mercantilism. I agree this is a key challenge facing the country in the coming decade. Related to this is the "Triffin dilemma": that the world's reserve currency needs to be issued by a country that runs large, protracted current-account deficits, in order to provide sufficient international currency for the world to use. Mr Subramanian may want to comment on when he thinks China will run persistent large savings deficits.

Another key challenge is demographics. China's economic size may have just surpassed that of Japan, but China's per-person income is only one-tenth of Japan's. In 10-15 years, China is expected to hit a demographic turning point that is no less sharp than what Japan has experienced. This puts China at risk of getting old before getting rich. Extrapolating from the experiences of the past decade while not accounting for the powerful demographic headwind China will face seems odd.

I would also add that China faces yet another challenge: policy "ideological" transition. Capitalism rests on trust in prices doing the work to equilibrate supply and demand, whereas communism distrusts prices and trusts quantity controls. While on the surface China may seem like a capitalist society, there are prevalent macroeconomic price controls. First, the price of money is controlled: China does not yet have a meaningful yield curve. Interest rates are the prices of money and liquidity, and they are still mostly pre-set. Second, the prices of energy input are subsidised. Third, the price of the currency is distorted. In other words, three of the most important macroeconomic prices in China are controlled. For China to be able to develop a liquid and viable financial sector, it will have to have more trust in prices than in quantity.

WhenMy guess is that China will only consider granting full capital-account convertibility to the yuan when it has reached its equilibrium level. Doing so prematurely would lead to a spike, and possibly an overshoot, in the value of the yuan. But if the yuan is made convertible only when it has reached its equilibrium level, it may no longer appreciate with certainty. Investors may be mesmerised by the yuan partly because it seems only to appreciate and never to depreciate. But, ironically, if foreign investors are allowed to buy and hold yuan, that will be precisely the moment when the future direction of the yuan becomes unclear.

The debate on "when" has more meaning if the "why" and the "how" are also discussed. My reading of China's policies in the past two decades is that none has been implemented so that the country could "show off": there are economic reasons for every macro and development policy in China. Having a robust economy and broad-based prosperity and eradicating poverty are how China shows off. For the coming decade, China could show off by engineering a successful transition from mercantilism, developing a robust financial sector and dealing with the demographic headwinds. Creating a trophy currency at the expense of other objectives would be putting the cart before the horse.

Comments From the Floor?

1-20 of 21 comments

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J. Kemp wrote:

Dear Sir,

The ideal currency is one which has greatly diversified economy underlying it -- one with a deep and growing root system, and one stabilized by an extensive network of trading relationships. High and growing productivity helps too, as does sovereign wealth.

Sounds more like present and future China, and less like present and future America. Unless of course America cleans up its act very quickly.

posted on 24/09/2011 02:49:01 amRecommended (0)Report abuse

54RJmu5VfV wrote:

Dear Sir,
Sorry, it is even simpler than that; would you put your money in a currency where a small number of people with views different from most people who believe in free markets make most economic decisions? America's recent adhoc regulatory changes don't make a much better case, but I think most people would agree America's economy is still more predictable and market driven than China's. So far.

posted on 24/09/2011 01:49:50 amRecommended (0)Report abuse

54RJmu5VfV wrote:

Dear Sir,
How can one even ponder that a closed, communist gov't provide a reserve currency? Unless China's markets are completely open, this is a ridiculous consideration. Will that happen within 10 years?

posted on 24/09/2011 01:41:21 amRecommended (0)Report abuse

Huggie Bear wrote:

Dear Sir,
The Americans have soiled their patch & no longer have the confidence of the rest of the World.
Years of profriglate waste in defence, in pork-barrel politics, in self-indulgence USA no longer deserves to be the World's Reserve Currency

For all its flaws, now is the time of a universal currency, independent of political & economic interference (hopefully) the SDR

posted on 24/09/2011 01:41:05 amRecommended (0)Report abuse

Sneadious wrote:

Dear Sir,
I'd bet 3:1 on the IMF's SDR, and inside of 3 years from November.

Ric Snead

posted on 24/09/2011 00:44:07 amRecommended (0)Report abuse

rohitsharma2602 wrote:

Dear Sir,

posted on 23/09/2011 22:33:45 pmRecommended (0)Report abuse

Anoutsider wrote:

Dear Sir,
Noteworthy is the acceptance of the criteria for adopting the proposition - the basic set of conditions for a currency reserve. However, even the Defender concedes that not all the conditions are yet being met, but remains optimistic they will all be fulfilled rather soon.
If there were only ever two contenders for the reserve role, the debate would be simpler. But there are at least two other possibilities: one is the euro, the other is gold.
Every time gold is brought up, it brings howls of ridicule from official economists, but if you wanted specie not subject to public meddling or legal dilution, freely traded and internationally recognised as a store of value, gold meets the criteria. As to 'trust'- investors are voting with their wallets. Frankly, this blogger thinks we have run out of arguments against gold. Except one; most central banks have disposed of their gold holdings, and would have to re-build them from low levels. I leave it to others to ponder the euro option.

posted on 23/09/2011 21:54:06 pmRecommended (0)Report abuse

MSmitka wrote:

Dear Sir,
I supervised an (undergrad) thesis last year examining the shift in currency regimes more broadly. The last shift was from the pound sterling to the dollar; she looked at the Ottoman Empire to provide what turned out to be a couple additional data points. [I also happen to have followed and taught about the Chinese economy for 25 years, albeit not as a primary specialty.]

One lesson I took from that is that momentum is very important. At present commodity markets are denominated in dollars, trade, foreign exchange markets (little direct trading between most "minor" currency pairs) and of course short-term asset markets.

The other points are picked up by others. Still, let me extend this a bit. Bilateral trade could be increasing denominated in the RMB. But that alone would not matter a lot. Such trade would remain but one slice of global trade, and even much bilateral trade would be under shorter-term contracts or have rules for periodic readjustment. Using RMB might be convenient, but not terribly central.

So that alone wouldn't be enough, and as all have noted, China would need to be able to offer the underlying liquidity and stability, neither at present in place.

More important, momentum means that the US has to screw up enough to force the issue.

Ten years seems to me a little bit near term for China to meet the liquidity and store of value functions, particularly if one views the current government structure as non-viable. (I'm no longer so certain that the CCP won't last out the decade.)
A screw up on the US end is at the moment not so hard for me to envisage. But I worry about a long-running low level of deflation and poor growth la Japan. That would be unfortunate for my family and I since I live in the US, but I don't think that would be the sort of thing to force the rest of the world to look elsewhere for a reserve currency.

Finally, I think it helps to become a reserve currency if there's a lot of it available. In the immediate post-WWII era global markets were really, really small. More recently .... well, chronic US trade deficits have the flip side that the rest of the world ends up holding a lot of dollars. Of course one can tell a story of capital deepening, of China holding even more foreign assets, and the rest of the world building up yuan assets. Much easier to tell that story, I think, once China begins running chronic current account deficits, which will require that domestic savings falls even faster than investment (as investment will surely slow). Domestic Chinese demographics means that will, I believe, eventually happen. But not by 2015, probably not significant in 2020.

So I disagree, but because of a weighting of probabilities of the forces of Chinese "progress", US "retrogression" and the buildup of global holdings of RMB. And by 2030 I think -- rather, I hope for their sake! -- you have to throw India into the mix. In a world with several very large economies, telling a story that makes China dominant is harder. More likely the dollar will muddle through, absent hyperinflation, with a wide array of locally denominated bilateral markets economizing on the stock of "international" dollars.

posted on 23/09/2011 21:25:36 pmRecommended (0)Report abuse

Super Dave wrote:

Dear Sir,
I can't believe this is even being discussed on the Economist. China is nowhere near a stable country. The fundamental problems they have brewing create risks that are much greater than the problems the US has. How can the Yuan become a currency reserve when it isn't even market traded? It's like skipping a whole stage of development. The odds of one of the major problems in China (particularly in real estate) slowing growth, and eventually tearing the country apart over the next 5 years is quite high. Right now they are putting on a good face and saying everything is running smoothly so they can keep their consumer confidence high and make the transition from a manufacturing to more service based industries and "decouple" from dependance on demand from the West. I don't see the decoupling happening fast enough. That is why China continues to artificially devalue the Yuan and quell the increasing protests (now in the thousands per day).

posted on 23/09/2011 19:33:46 pmRecommended (0)Report abuse

Travis B. wrote:

Dear Sir,

Why is this even being considered until China freely floats their currency? You can be an alternative to something that you are pegged to.

posted on 23/09/2011 18:51:14 pmRecommended (0)Report abuse

never late wrote:

Dear Sir, look back 20 years, where was China and where is She now??????

posted on 23/09/2011 18:32:45 pmRecommended (0)Report abuse

never late wrote:

Dear Sir,I belive yes, but not in 10 years, could be 20 or more, never late

posted on 23/09/2011 18:19:02 pmRecommended (0)Report abuse

Philafifer wrote:

Dear Sir,

Does anyone know what the juan is worth today? How about yesterday? How about in different areas of China? Asia? There is no fixed value in terms of anything.

posted on 23/09/2011 16:26:31 pmRecommended (0)Report abuse

xeWGAjqhJy wrote:

Dear Sir,
I think it will become a reserve currency not the main reserve currency. As China becomes the world's biggest economy, its currency will become important and it will surely be worth holding reserves of it, but upheaval in China is just as likely as it is anywhere else, and it would be foolish to put too many eggs in that basket. I think the world is headed for a much more multipolar future in lots of ways, and I'd be keeping reserves of every big economy's currency.

posted on 23/09/2011 12:40:25 pmRecommended (0)Report abuse

NRYHZvftiG wrote:

Dear Sir,
We all know the privilege of having one's currency as the world's main currency comes with an opportunity and a price. The opportunity often manifest in the country's ability to manipulate the value of its currency to its advantage, such as devaluation. The price comes in the form of such a country bearing the burden of ensuring global financial stability. Does China has the ability and willingness to carry such a burden? In other words, for the yuan to become world's main reserve currency, China's economic growth alone is not enough; the Chinese government's political will to take that burden, and the ability to do so, will have to be there as well. So this debate is exciting but sterile because we do not know whether the Chinese leaders are prepared to accept that onerous responsibility. Witnessing that the United States is taking much of the flak and pain for the economic woes around the world now as never before, China might be happy leaving that burden to others, while making noise against the dollar when it is beneficial.
Murari Sharma

posted on 23/09/2011 07:57:39 amRecommended (0)Report abuse

Jason Chan wrote:

Dear Sir,

Please let me stress that we would miss the point if we keep surveying the political will of Chinese government without regard obvious trend of trade between developing countries.

China's foreign trade has been denominated in USD even for trade partners other than US. When USD is on a long term depreciation trend, trading firms in both China and other developing countries would switch to trade in Yuan to avoid lossing value on the greenback they are bound to pile up for trading settlements.

Jason

posted on 23/09/2011 04:05:35 amRecommended (0)Report abuse

Charles Bonham Davy wrote:

Dear Sir

If the present financial crisis teaches us anything, it is simply that our world monetary system does not work. Every ten years we have another crisis of some sort. The idea of a reserve currency was feasible in a world that has now gone: first Spanish gold, then British pounds, Swiss Francs, and finally the US dollar. In essence, it was an appeal to some super stable monetary institutions, which were, as the British would say in the 19th century, as 'solid as the Bank of England'. None of us any longer believes such fiction.

To invent a new reserve currency based on a politically unstable economy that has blossomed in the last two decades is equally absurd. So, what can we do? The story of the poor euro is a lesson for all would-be inter-nation currency creators. Of course we could go back to some rare mineral like gold that we can dig up from the ground and in times of troubles, that is exactly what we all do. But if we were to discover huge fields of gold beneath the Antarctica ice that would lower the price of gold instantly; so even rare metals are not a stable currency (plus it's basically unfair that some countries have more of it).

It seems that currency works well as a concept within individual communities or nations. The problems arise in inter-nation trading. Stability is then introduced by the mechanism of the 'exchange rate'. If nation A floods the market with Adollars then nation B alters the Adollar to Bdollar exchange rate. So for example Greece would have a currency devalued against other European currencies. The scraping of the intra-Europe exchange rates was the flaw in the birth of the euro.

The problem is that a financial system based on bi-currency exchange rates is apparently very complicated. If we have 100 currencies, there are in principal 10,000 exchange rates and so if they are not consistent (every second of the day) the traders can make money going from Xdollars to Cdollars to Hdollars and back to Xdollars.

In the past, this has been avoided by a reference currency such as the US dollar. So, there are no bi-currency exchange rates but instead we have only mono-currency exchanges rates such as Xdollars to US dollars and Ydollars to US dollars. For 100 currencies there are 100 exchange rates. So, to go from Xdollars to Ydollars. we compare their exchange rates against the reference currency (US dollars). The problem with this system is that traders can physically change the exchange rate for one currency very easily by simply buying and selling currency. Then we have a 'crisis'. Chief culprits are of course the banks themselves (using their depositors money).

It has been suggested the reference currency should no longer be the currency of a particular nation (no more talk of 'reserve currencies' but instead THE 'reference currency') based on a world basket of all currencies. Our world computer knows the formula and so all mono-currency exchange rates are based on the 'World Dollar'. In techno-talk the World Dollar is a normalized currency that represents the value of all world trade.

Computer simulations based on the World Dollar show a monetary system, which is stable against currency-traders and naturally adjusts to national economies going through boom and bust phases.

posted on 23/09/2011 03:56:32 amRecommended (0)Report abuse

BFichthorn wrote:

Dear Sir,

When China's currency is freely floating, I might consider your this. When China's rule of law is in stone and predictable I might consider this.

Until that time, no one in his right mind would consider this.

posted on 23/09/2011 03:42:53 amRecommended (0)Report abuse

vongvong wrote:

Dear Sir,

China is willing to have a world-dominating currency.Because EU & US economy decession and currency inflation are expected. that means the reservation in usd or eud would be deappriciating.

posted on 23/09/2011 03:04:21 amRecommended (0)Report abuse

Jason Chan wrote:

Dear Sir,

A review on Chinese economic policy over the past 3 decades would reveal the Central Government has just been facilitating the natural outcome at different stages of its development.

China is set to be a dominant exporter of heavy industrial products. Other rapidly growing countries will be importing more from China to build up their infrasturcture. As more international customers are buying high-valued products from China with long payment terms, trading parterns of China, especially developing countries will have incentive to keep more Yuan as reserve. The dominance of Yuan will be a natural by-product of China's further dominance in the world's economy, rather than out of the will of the "autocrats". Just like Hong Kong people is saving more Yuan when its economy is getting more integrated to Mainland China's, trading sectors in other countries will follow. Indeed, the "autocrats" had in essence lossen exchange control by entering bilateral treaties on Yuan settlement with various economies as they realized they are not able to act against such market force.

I had to add a quotation mark to the word "autocrats". Negative news about Chinese government is flooding both local and international media (please note that Chinese local media especially the internet might even be more critical to the Chinese officials then their international counterparts nowadays). Yes, much has to be fixed in Chinese legal and political system and corruption is rampant. But let's not forget China scores better than most developing countries in the Corruption Perceptions Index. Still, Chinese government is fully aware they can no longer add in its old ways. Mr. Subramanian does have good reasons not to be too pessimistic about China's soft development.

Overall, I agree with the motion of this house. Allow me to add that the pace of development of the third world will be an important contributing factor.

Jason

posted on 23/09/2011 01:39:47 amRecommended (0)Report abuse