Yuan

choi

Sebastian Mallaby and Olin Wethington, The Future of the Yuan; China's Struggle to international its currency. Foreign Affairs, Jan/Feb 2012, at 135.
http://www.foreignaffairs.com/ar ... -future-of-the-yuan
or
http://www.gatewayhouse.in/publi ... affairs/future-yuan

(a) Excerpt in the window of print:

(i) The emerging narrative about the yuan’s ascendance is mostly wrong.

(ii) The interbnationalization of the yuan has allowed people who disagree to unite--at least in the short term.

(iii) The upshot of China's currency policy has been a classic demonstration of the law of unintended consequences.  

(iv) Even if China’s policy of gradualism with regard to its currency succeeds, the yuan is not going to displace the dollar anytime soon.

(b) Quote:

(i) "According to this view, just as the dollar dethroned the British pound in the interwar years, so the yuan will soon displace the dollar, striking a blow to US interests." page 135

(ii) "Beijing’s steps toward currency internationalization reflect not a fully formed, coherent long-term strategy but rather an evolving process shaped by splits among China’s policymakers over the scope and speed of financial reform." p 136

(iii) pp 137-138

"THE RELUCTANT RISE OF INTERNATIONAL CURRENCIES

"One might assume that as a country approaches great-power status, it will naturally attempt to internationalize its currency. In fact, rising powers have often done just the opposite. As the economist Jeffrey Frankel has shown, that is what the United States did in the interwar period and what Germany and Japan did in the 1970s, even though the currencies of all three countries later became international. In each of these cases, both the public and policymakers were initially skeptical of the benefits of allowing their currency to be used widely abroad.

"Rising powers have had two reasons to fear the internationalization of their currencies. The first concerns competitiveness. When foreigners buy and hold a currency, they increase its value. This appreciation persists as long as the buyers hang on to the currency as a store of wealth. A stronger currency hurts a nation’s exports by making its goods more expensive abroad and creates more competition for domestic companies by making imports cheaper for consumers.

"The second reason to fear currency internationalization concerns control of the financial system. Like China today, Germany, Japan, and the United States all emerged as trading powerhouses at a time when their financial systems were tightly regulated. Governments capped interest rates on bank deposits and restricted the investment opportunities of pension and insurance funds so that capital remained cheap. But this “financial repression” stuck savers with low returns, and the demand for artificially cheap capital often exceeded the supply, leaving some borrowers frustrated. Currency internationalization threatened the cheap-capital development model by freeing savers and borrowers to find one another abroad, beyond the reach of regulators.

"These reservations about currency internationalization have contributed to long lags between a nation’s emergence as a first-rank power and the widespread use of its money by foreigners. The United States became a larger economy than the United Kingdom in 1872, but the dollar did not begin to displace the pound as the reigning international currency until World War I, and the process was not completed until after World War II. Even then, the United States frequently appeared indifferent to its currency’s newfound status. In the 1970s, President Richard Nixon abandoned the gold standard, sacrificing the international prestige of the dollar on the altar of domestic stimulus. Likewise, Japan resisted currency internationalization until the 1980s, when it became impossible to resist American pressure to allow U.S. financial firms to enter the Japanese market. The deutsche mark became a reserve currency because foreigners wanted to hold it, not because German authorities actively sought that outcome.

(iv) pp 138-139

"CHINA’S DOLLAR TRAP

"If other rising powers have resisted the internationalization of their currencies, why is China’s policy so different? The answer is that the recent global financial crisis confronted China with the dangers inherent in dollar hegemony. China’s economic model had relied on boosting exports by keeping its exchange rate undervalued. This required China’s central bank to purchase large quantities of dollars, reinforcing the dollar’s status as the global reserve currency. But the crisis revealed that the benefits of this model were smaller than they appeared and that the costs could be significantly higher.

"The crisis showed that by basing its growth on exports, China had laid itself open to a sharp reversal if foreign markets seized up. In the first quarter of 2009, collapsing demand in Europe and the United States caused China’s annual growth rate to fall to 6.2 percent, after hitting ten percent or more in each of the previous ten quarters. The crisis also highlighted the potential costs to China of accumulating dollar reserves. To keep the yuan undervalued, China had bought $1.5 trillion worth of U.S. financial assets, including about seven percent of all the bonds issued by government-linked lenders, such as the disastrously overleveraged Fannie Mae and Freddie Mac. The crisis convinced Beijing that it could one day take a serious loss on those investments.

(v) "Anyone who has watched China’s extraordinary economic performance, achieved while it ignored many of the West’s textbook development prescriptions, should be modest in predicting that China will inevitably trip up this time. But even if China’s policy of gradualism with regard to its currency succeeds, the yuan is not going to displace the dollar anytime soon. The dollar enjoys an advantage that its predecessor, the pound, never had: formidably deep capital markets both inside and outside the United States, which operate mainly in dollars." p 145

(c) My comment:
(i) The magazine allows a free peek at the first two paragraphs.
(ii) The section in Quote (iii) is contrary to what I thought, that past powers WANTED its currency to be dominant--even pre-eminent. This section is followed by a section whose heading is "China's Dollar Trap."