Mov­ing to­ward a mul­ti­po­lar cur­rency sys­tem

Grow­ing in­ter­na­tion­al­iza­tion of the Chi­nese cur­rency part of a ‘de-dol­lar­iza­tion’ trend that seems to be gath­er­ing pace

China Daily European Weekly - - Comment - By ZHANG MONAN Zhang Monan is a se­nior fel­low and pro­fes­sor at the China Cen­ter for In­ter­na­tional Eco­nomic Ex­changes.

Even a decade af­ter the global fi­nan­cial cri­sis, the world econ­omy has not fully re­cov­ered be­cause the struc­tural prob­lems that pre­cip­i­tated the cri­sis have not been elim­i­nated. Com­pli­cat­ing the mat­ter is a series of poli­cies the United States has adopted to shift trade and fi­nan­cial risks.

The US dol­lar has dom­i­nated the global fi­nan­cial sys­tem for his­tor­i­cal rea­sons. The ex­change rate sys­tem that pegged other cur­ren­cies to the dol­lar served as the cor­ner­stone of the Bret­ton Woods sys­tem. How­ever, the Bret­ton Woods sys­tem it­self col­lapsed af­ter the US ter­mi­nated con­vert­ibil­ity of the dol­lar to gold in 1971, ush­er­ing in an era of freefloat­ing cur­ren­cies and mak­ing the dol­lar a re­serve cur­rency.

But the Trump ad­min­is­tra­tion’s pro­tec­tion­ist and uni­lat­eral poli­cies, to­gether with mas­sive US debts, have ex­posed economies to the risks of the free-float­ing dol­lar, prompt­ing many coun­tries to break away from the US dol­lar regime and shift to­ward a mul­ti­po­lar cur­rency sys­tem.

The US has im­posed steep tar­iffs on im­ports from a num­ber of economies, in­clud­ing China, Rus­sia, Brazil and In­dia, as well as from tra­di­tional al­lies such as the Euro­pean Union, Ja­pan and the Re­pub­lic of Korea. The re­sult of this move on the global in­dus­trial chain could ne­ces­si­tate the re­con­struc­tion of the world trade or­der. There is also wide­spread con­cern that the United States might use the re­serve cur­rency sta­tus of the dol­lar to im­pose new sanc­tions on some coun­tries.

The prospects of US fi­nan­cial resur­gence, on the other hand, have dimmed be­cause of the tax cuts the Trump ad­min­is­tra­tion has im­ple­mented. Ac­cord­ing to the US Congress Joint Com­mit­tee on Tax­a­tion, the tax cuts will in­crease the coun­try’s fis­cal deficit by $1.45 tril­lion in the next 10 years. And although fis­cal eas­ing to boost the econ­omy, com­bined with tight­en­ing mone­tary pol­icy, will accelerate the growth rate of US trea­sury bond yields, the pol­icy will be un­sus­tain­able in the long run.

Also, along with the shrink­ing trade sur­plus in emerg­ing mar­kets, thanks to the Trump ad­min­is­tra­tion’s tar­iff wars, de­mand for US bonds might be sup­pressed. The growth of the US bond yield rate would fur­ther raise fi­nanc­ing costs and cre­ate more sys­temic risks. In fact, coun­tries such as the Nether­lands, Ger­many and Switzer­land have re­cently taken back or an­nounced they will take back gold re­served in the US.

Thus, de­vel­oped coun­tries, emerg­ing mar­ket economies and oil-pro­duc­ing states are all un­happy with the fluc­tu­at­ing dol­lar.

The “de-dol­lar­iza­tion” trend seems to be gath­er­ing speed. First, the use of other cur­ren­cies in the oil trade is be­com­ing in­creas­ingly pop­u­lar. In Novem­ber 2016, Rus­sia in­tro­duced Urals crude oil fu­tures de­nom­i­nated in rou­bles at the Saint-Petersburg In­ter­na­tional Mer­can­tile Ex­change. The Ira­nian Oil Bourse has been us­ing the euro, the Ira­nian rial and a bas­ket of other cur­ren­cies to set­tle oil deals since July 2011. And Chi­nese crude oil fu­tures de­nom­i­nated in yuan be­came trad­able at the Shang­hai In­ter­na­tional En­ergy Ex­change in March this year.

Sec­ond, the cred­i­tor coun­tries of the US have sharply re­duced their dol­lar as­sets. Apart from the big­gest US cred­i­tors — China and Ja­pan — a dozen other coun­tries in­clud­ing Rus­sia and Tur­key have re­duced their dol­lar as­sets. This has caused the US gov­ern­ment bond to drop to its low­est level since Oc­to­ber 2011. Sur­pris­ingly, even the United King­dom, Ire­land, Switzer­land, Lux­em­bourg, Canada and Mex­ico have ei­ther sold or have de­cided to sell the US bonds in their pos­ses­sion.

More­over, the share of the dol­lar in global cur­rency re­serves has de­clined. In­ter­na­tional Mone­tary Fund data re­leased in July showed the ra­tio of the dol­lar re­serves fell for the fifth con­sec­u­tive quar­ter in the first quar­ter of this year — from 62.72 per­cent of the al­lo­cated re­serves in the fourth quar­ter of 2017 to 62.48 per­cent — while non-dol­lar re­serves in­creased. For in­stance, re­serves held in yuan grew in the third quar­ter to 1.4 per­cent of the al­lo­cated re­serves from the orig­i­nal 1.2 per­cent, while the shares of the pound ster­ling and euro jumped to 4.68 per­cent and 20.39 per­cent, re­spec­tively.

From a set­tle­ment cur­rency, to money of ac­count, to a re­serve cur­rency, the in­ter­na­tion­al­iza­tion of yuan, has en­tered a new phase. By Jan­uary this year, more than 1,900 fi­nan­cial in­sti­tu­tions had listed the yuan as a pay­ment cur­rency. Euro­pean coun­tries, in­clud­ing Ger­many, France, Spain and Bel­gium, have in suc­ces­sion an­nounced they would add the yuan to their for­eign ex­change re­serve pool and ac­cord­ingly re­duce their dol­lar re­serves.

Fur­ther­more, along with the in­ter­na­tion­al­iza­tion of the Chi­nese cur­rency, global in­vestors have in­creased their hold­ings of bonds de­nom­i­nated in yuan. Ac­cord­ing to China Cen­tral De­pos­i­tory and Clear­ing Co, as of the end of Au­gust over­seas in­vestors held 1.41 tril­lion yuan ($205.54 bil­lion) worth of such bonds — Chi­nese na­tional debt of 1.03 tril­lion yuan — thanks to an in­crease of 53.95 bil­lion yuan in a sin­gle month in its 18th month of growth.

The share of for­eign in­vestors in China’s gov­ern­ment debt mar­ket has jumped from 0.88 per­cent last year to 5.85 per­cent now — which shows that the sta­tus of the yuan in the global mar­ket has in­creased and yuan­de­nom­i­nated bonds have be­come a safe bet for in­vestors.

A mul­ti­po­lar cur­rency sys­tem is emerg­ing, and the trend of coun­tries re­duc­ing their US debt hold­ings and sign­ing bi­lat­eral cur­rency swap agree­ments is gain­ing pace, but ex­pect­ing a mas­sive sell­off of US dol­lars would be un­re­al­is­tic.

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