China’s take on currency shifts

This is my Perspective column from this week’s Fund Strategy magazine.

Given the importance of China in the global economy it is becoming vital to understand mainland Chinese perspectives on key topics.

This is not to contend that the Chinese are right on every matter. On the contrary, no doubt their comments are often one-sided. But that is also true of American, British and other viewpoints.

It was with this spirit of understanding that a recent paper on the international monetary framework by a senior Chinese central bank official was particularly interesting*. Dr Jin Zongxia, the head of the Research Institute of the People’s Bank of China, gave a much more guarded view than that often attributed to China by westerners.

Jin predicted that for the foreseeable future the dollar would remain the world’s dominant currency. It would be supplemented by four other international reserve currencies: the euro, sterling, the yen and the renminbi.

Jin’s perception of the euro as fundamentally weaker than the dollar was particularly interesting. Although his language was guarded the implication was that the eurozone was severely weakened by political divisions.

“The debt crisis in the euro area has demonstrated the structural weakness of this currency”, said Jin. “If we take into consideration that the euro partially relies on the dollar’s payments infrastructure for its cross-border transactions, we can say that the euro is basically a very large regional reserve currency.”

It might come as a pleasant surprise to British readers that Jin was fairly upbeat about the future role of sterling. “The British pound will continue to be an important player with very special vitality and unique importance.” He particularly praised the “financial freedom and openness of London”.

In contrast, he was much more guarded about the future of the Chinese currency. Although he acknowledged its “great potential” to grow he emphasised that so far it has only attained a limited international presence. “The renminbi has lagged beyond the yen in Asia for many years, not to mention the other major currencies”, he said.

Jin concluded by arguing that the increasing cross-border usage of the yen should contribute to the international monetary system’s stability. It would help boost global liquidity and the diversification of currency risk.

The Chinese central banker was billed as writing in a personal capacity rather than officially. But he was no doubt aware of the need to be diplomatic in his language. Even if he felt inclined to make an outright attack on other countries he would no doubt refrain from doing so. He was also likely to be guarded about China’s own monetary ambitions.

However, Jin’s view is broadly in line with that of more moderate western experts and with the real state of the international monetary system.

Barry Eichengreen, a professor of economics at the University of California, Berkeley, also came out in favour of a multi-polar global currency system in a talk to the Asian Development Bank. Like Jin he sees the internationalisation of the renminbi as adding extra liquidity to the global financial system.

Eichengreen also argues that it will have the beneficial effect of adding more discipline to the international financial system. So if America does not follow “sound and stable policies” there will be alternatives to the dollar.

Of course not everyone accepts this benign view. Some see competition between the dollar and the renminbi as potentially destabilising for the global monetary system.

As for its existing international reach the renminbi has grown rapidly since 2009 but perhaps not as much as many assume. According to figures from Swift, a system for international financial transactions, cited by the Economist the renminbi still only ranks 14^th in cross-border currency transactions. That is despite concerted attempts to promote a more international role for the currency.

No doubt the rising role of the renminbi will receive ever more international attention. It is important in economic terms but it also has political ramifications too.

The renminbi will inevitably end up playing a far larger international role than it does at present. However, it is unclear how long the dollar can maintain its preeminent international position.

Those who want to follow the Chinese perspective on the matter have the advantage of more English language versions of mainland Chinese sources than ever before. These include websites such as the China Daily and People’s Daily as well as television channels such as CCTV (China Central Television).

Naturally it would be even more revealing to follow such media in Mandarin Chinese but that is probably best left to the experts or the extremely determined. To become functionally literate in the language evidently requires mastery of several thousand characters.

The Foreign Service Institute, part of the US State Department, estimates it takes about 2,200 class hours of intensive study for native English speakers to master Mandarin. That is equivalent to almost two years of full-time effort, including a year in the country, or more than three times the time it takes to learn most Western European languages.

Few will be willing to go that far. But is has become essential for anyone who wants to discern key economic trends to understand the mainland Chinese view.

* “The future of the international monetary framework”. The OMFIF Commentary. February 7, 2013