How many times have we heard this?

[Gob]

China keeps playing with the dollar

LOS ANGELES (MarketWatch) -- A top Chinese central bank official suggested switching away from the U.S. dollar as a benchmark for the yuan's foreign-exchange rate, switching instead to a basket of currencies, according to remarks published

In comments posted to the People's Bank of China Web site, the central bank's Deputy Gov. Hu Xiaolian said using a basket of currencies from the nation's top trading partners would allow the Chinese yuan to better reflect trading fundamentals.

"Compared with pegging to a single currency, the exchange-rate regime with reference to a basket of currencies will help adjust exports and imports, current account, and balance of payment in a more effective manner," she said.

China's central bank currently sets a "central parity rate" against the U.S. dollar each day, with that day's trading range confined to 0.5% above or below that level.

But Hu said focusing on the dollar-yuan rate ignored China's bigger trade picture.

"A floating exchange rate has impact on total imports and exports of an economy," she said. "Therefore, the floating cannot be aimed to adjust [only the] bilateral trade balance, and it is not advisable to just look at the [dollar-yuan] exchange rate.

[Sue U]

It actually sounds like a very sensible idea for a country gearing up its global trade. I don't pretend to be any kind of economic expert, but what is wrong with this? Why wouldn't you want to diversify your currency base to reflect values among all your major trading partners? Don't you buy an index fund or a mutual fund for overall stability and better reflection of the market as a whole? Why not do the same with currency?

[Gob]

Sue I think that China would be mad not to do it, however it could have major implications for the USA.

The head of the People’s Bank of China drafted a white paper in March 2009 suggesting a shift away from the dollar as the world’s reserve currency. Such a switch would have serious implications. Control over the reserve currency is a significant perquisite of monetary power in the global political economy. The McKinsey Global Institute recently estimated the reduction of the U.S. borrowing rate to be at least 50 basis points. They further calculated the net economic benefits of reserve currency status to range between $40 and $70 billion a year – a not insignificant sum.

The dollar is a “negotiated” currency at this point. This means, to paraphrase Tennessee Williams, that the dollar depends the kindness of strangers. Given the overhang of dollars held by central banks, sovereign wealth funds, and other government investment vehicles, there is some economic incentive to switch to a new reserve currency. If the rest of the world – and the Asia-Pacific region in particular – were to decide to coordinate around a different reserve currency, a switch would be possible. In September 2009, World Bank President Robert Zoellick warned, “The United States would be mistaken to take for granted the dollar’s place as the world’s predominant reserve currency. Looking forward, there will increasingly be other options to the dollar.”

http://www.uscc.gov/hearings/2010hearin ... tement.php

[Sue U]

"Reserve currency" and "exchange rate" are two different things, serving different purposes, are they not?

[Lord Jim]

Fortunately for us at the moment, Europe is in even worse shape than we are (because of some of the EU's very weak players) so dumping dollars in favor of Euros, (which in terms of large scale hard currency is really the only other game in town) isn't a real attractive option.

[Sue U]

Thanks for the linked article, Gob. It seems practical realities have China in something of a box right now. From the link:

While a switch away from the dollar is always a latent possibility, the probability of it happening remains exceedingly remote. Even when an economic superpower is on the decline, reserve currencies are remarkably persistent entities. The network externalities of having a single unit of account and medium of exchange are massive. Every major historical and theoretical analysis of currencies stresses the rewards from creating a single focal point currency. A single reserve currency reduces the transactions costs of international exchange by ensuring a single unit of account. A common medium of exchange also reduces the political uncertainty that might exist with multiple reserve currencies.

China’s adjustment costs in switching away from the dollar would be considerable. As the size of China’s external portfolio increases, so have the Chinese leadership’s domestic headaches. There is a fierce bureaucratic rivalry between finance ministry, central bank, and development bank officials – all of whom want to manage China’s foreign exchange portfolio. Domestic discontent has been brewing about China’s foreign investment strategy. Both officials and citizens debate whether holding so many dollars serves Chinese national interests. The political leadership has had to cope with the incongruity of investing trillions of government dollars in the developed world while tolerating significant pockets of domestic poverty. When these investments performed poorly, they faced fierce internal criticism. Officials at the China Investment Corporation received considerable domestic flak for their May 2007 investment in Blackstone, after that firm’s stock value plummeted by 40 percent.

A decision by China to switch away from the dollar would lead to a dramatic fall in the value of its sizeable portfolio of external reserves. Officially, China declared $2.4 trillion in hard currency reserves at the end of 2009, but that does not count holdings beyond the People’s Bank of China. In all, Chinese state investors are estimated to possess roughly $3 trillion in U.S. assets in September 2008, with approximately two-thirds invested in dollar-denominated debt. That figure has only increased in 2009. Any switch away from the dollar would cause that currency to fall in value – which would trigger concomitant losses to roughly two-thirds of China’s holdings. Crudely put, a 10 percent appreciation of the renminbi would translate into a book loss of 3 percent of China’s GDP in its foreign exchange reserves. Any financial losses from a switch away from the dollar – even if it was coordinated – would dramatically outweigh the losses from Blackstone.

The domestic political fallout would be equally great. While the initial decision might receive nationalist support, the economic costs would be significant. In addition to anger at dollar losses, the Chinese leadership would have to cope with the effects of a dollar depreciation. Any appreciation of the renminbi would hurt the Chinese export sector. The only way for China to make up for that lost demand would be to boost domestic consumption. China has been well aware of this need in recent years, but has been unable to increase personal consumption. Current projections have China’s consumption remaining below 40% of GDP for the next fifteen years; even if extraordinary policy measures are implemented, anticipated consumption levels are projected to remain below 50%. China needs global export markets to thrive, which means it would bear massive adjustment costs from letting the dollar depreciate.

Perhaps the hardest constraint on a concerted change in currency regimes is finding an alternative to replace the dollar. In order to engage in coordinated action, the key actors would need to construct or discover a new focal point around which to develop a reserve currency. This leads to an awkward observation – the euro, the only truly viable substitute for the dollar, is not located in the Asia/Pacific region. It would be unlikely for the ASEAN +3 countries to agree to switch from the dollar to a new currency over which regional actors have no influence. This problem is compounded by the euro’s weaknesses as a possible reserve currency. The European Union has no consolidated sovereign debt market. This places a severe liquidity constraint on euro markets. More importantly, the European Central Bank doesn’t want the euro to become the new reserve currency. They have placed high barriers on any country joining the eurozone. In November 2009, ECB president Jean-Claude Trichet flatly stated, “The euro was not created to compete with the U.S. dollar or to replace the dollar as the international reserve currency…. The ECB does not campaign for the international use of the euro.”

Other alternatives are even less attractive. Candidate currencies beyond the euro – the yen, pound, Swiss franc, Australian dollar – are based in markets too small to sustain the inflows that would come from reserve currency status. The yuan remains inconvertible for now, and China’s leaders will be reluctant to give up their control over the country’s financial sector in the future. A return to the gold standard in this day and age would be infeasible – the liquidity constraints and vagaries of supply would be too powerful. The People’s Bank of China suggested using the Special Drawing Right as a template for a super-sovereign currency, but this is an implausible solution. As it currently stands, the SDR is not a currency so much as a unit of account. Even after the recent IMF authorization, there are less than $400 billion SDR-denominated assets in the world, which is far too small for a proper reserve currency. As one Chinese economist put it, the SDR is the Esperanto of currency options.

***

On the currency question in particular, Beijing’s post-2008 strategy of pegging the renminbi to the dollar has created tensions between China and other Asian exporters. The renminbi is strictly pegged to the dollar while other Pacific Rim currencies are pegged to a basket of currencies. Any fall in the dollar’s value increases China’s competitiveness at the expense of other exporters in the region. This forces other countries to either permit the appreciation in their own currencies (Japan), purchase more dollars to keep their currency from appreciating (ASEAN), or impose capital controls to forestall speculation about future appreciations (Taiwan). The situation likely triggers resentment against U.S. macroeconomic policy – but the greater object of ire is China’s reluctance to allow the renminbi to appreciate against the dollar. This is not fertile ground upon which to build a geopolitical coalition against the United States

[Long Run]

This is where the Fed meets the Congress.

No inflation versus "make our job easier by reducing the value of dollar" legislative action. The Fed will win; that's my bet.

[Gob]

The shift is starting?

Banks back switch to renminbi for trade

By Robert Cookson in Hong Kong

Published: August 26 2010 17:55 | Last updated: August 26 2010 17:55

A number of the world’s biggest banks have launched international roadshows promoting the use of the renminbi to corporate customers instead of the dollar for trade deals with China.

HSBC, which recently moved its chief executive from London to Hong Kong, and Standard Chartered, are offering discounted transaction fees and other financial incentives to companies that choose to settle trade in the Chinese currency.

“We’re now capable of doing renminbi settlement in many parts of the world,” said Chris Lewis, HSBC’s head of trade for greater China. “All the other major international banks are frantically trying to do the same thing.”

HSBC and StanChart are among a slew of global banks – including Citigroup and JPMorgan – holding roadshows across Asia, Europe and the US to promote the renminbi to companies.

The move aligns the banks favourably with Beijing’s policy priorities and positions them to profit from what is expected to be a rapidly growing line of business in the future.

The phenomenon will accelerate Beijing’s drive to transform the renminbi from a domestic currency into a global medium of exchange like the dollar and euro.

Chinese central bank officials accompanied StanChart bankers on a roadshow to Korea and Japan in June. The bank held similar events in London, Frankfurt and Paris.

Lisa Robins, JPMorgan’s head of treasury and securities services for China, said there had been a “spike in interest” from international clients.


http://www.ft.com/cms/s/0/182a2b70-b130 ... abdc0.html

[rubato]

About time.

The over-dependence on the US$ has caused too many countries to artificially inflate the value of the $ in order to support long-term trade agreements denominated in dollars.* This artificial inflation has had one positive effect for us; we can borrow money at unreasonably low rates of interest, and good for us. But it has had negative effects as well; by not allowing the dollar to devalue, which it should based on the size of the deficit, the debt, and the balance of payments, it has kept the price of US goods artificially high so they are not competitive in international markets. It has also kept the price of imported oil too low which has removed the incentive to conserve and by this perpetuated our dependence on foreign oil and thus has perpetuated the deficit (one half of the trade deficit is due to oil alone).

yrs,
rubato

* As when Airbus went apeshit after the dollar dropped 2 years ago and they faced accepting payment in US$ for planes whose costs were denominated in Euros.