Real Money

Remember when the comment "give me that in real money" was clearly understood around the world to mean "give it to me in dollars"?

Well, the Economic Strategy Institute is hosting a seminar at the Cosmos Club in Washington D.C. on Monday morning, July 1, (open to the public) in which the notion that "real money" might soon mean Chinese RMB will be discussed. Indeed, the full notion is that Shenzhen, the Chinese city that has grown up in the shadow of Hong Kong over the past twenty years, will be able to exploit this rise of the RMB to become a major global financial center in its own right.

A delegation of experts sponsored by the China Development Institute are going to explain how Shenzhen has been designated as a special development center in several specified areas including finance and RMB liberalization.

If you think this is all star gazing, keep in mind that when the dollar meant real money, the Japanese yen was at Y360/$ and the Swiss Franc and German Mark were at four per dollar. That the dollar remains the dominant global reserve currency despite its devaluation over the years is mainly because there is as yet no credible alternative. For a while it looked as if the Euro might challenge, and indeed, even in the wake of the ongoing crisis of the EU, the Euro is by far the second most important reserve currency, way ahead of the pound sterling and the Japanese yen.

But China is slowly but surely undertaking to mount a challenge. It is interesting that China would do so because countries like Japan have resisted reserve currency status because they fear losing too much control of domestic interest rates and overall economic policy. But China clearly chafes at the dominance of the dollar. It has increasingly been making agreements with trading partners like Australia to settle bilateral trade in RMB and the local currencies rather than in U.S. dollars which has long been the custom. It has also been arranging for overseas banks in places like Singapore to do certain trading and transactions in RMB. Thus, the establishment of Shenzhen as a kind of experimental center is not unprecedented and not unconnected to overall and continuing policy.

Whether China can succeed in displacing the dollar is completely unclear at this point. But recent developments demonstrate how unrelated issues can have unexpected and potentially very significant consequences. For instance, the Financial Times reported on Thursday, June 27, that Iran, Russian, and China are propping up the Syrian economy. I had been wondering how the Syrian government was paying its bills and buying the oil and other essential commodities it needs. Well, simple. The Syrians are doing all their business in Russian roubles, Iranian rials, and Chinese RMB.

Of course, this arises because the U.S. has imposed sanctions on Iran and Syria and because the Russians and Chinese have decided they have an interest in supporting regimes that have been challenged by uprisings and sanctioned by Washington.  But it is an interesting step along the way to alternatives to the dollar.

"So what?" you say. "Why do we care if the dollar maintains its status as the global currency?" Well, I personally don’t. In fact, I wish the dollar would lose that status because losing it would compel America to get serious about its over-consumption and under-investment and about getting competitive. But U.S. policy makers don’t want it to happen because loss or impingement of reserve currency status would make it much more difficult for America to borrow. It would be less able to borrow in its own currency and thus would face real market discipline that could in turn force withdrawal abroad and retrenchment at home. For the last ten years, for example, the United States has been waging wars in Iraq and Afghanistan on borrowed money and much of the financing was, in effect, done by China. So in a real sense, China paid for the American wars.

China would like to stop doing that sort of thing and is organizing not to.