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Kimberly Amadeo

China Calls for New Global Currency

By June 30, 2009

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Wen Jiabao

China insists on using its growing economic clout to replace the dollar a new global currency. China is right to be alarmed at the dollar's drop in value, down 11% since March. China is the largest foreign holder of U.S. Treasuries, and it just saw its investment deteriorate.

What It Means to You

China is sending a warning message to the U.S. to cut back on the U.S. debt, which is at $11.4 trillion and rising. China is also negotiating currency swaps with other G-20 trading partners, such as Hong Kong and Argentina, reducing its reliance on the dollar for international trade. As China's need for the dollar declines, so will its appetite for Treasuries. This could cause interest rates to rise, hampering the revival of the U.S. housing industry.

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Photo: Chinese Premier Wen Jiabao (Credit: Liu Jin/Getty Images)

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Comments

July 3, 2009 at 9:13 am
(1) Asif Farooq says:

if chyna buys more debts what is advantage to chyna and why US wants other countries buy its more debts.

Why Chyna do so & Why US wants so ?????

July 3, 2009 at 2:39 pm
(2) Kimberly says:

Hi Asif,

China has been steadily buying more debt, despite its threats. That’s because the U.S. dollar is still relatively safe and buying the dollar helps keep the yuan’s value lower. This helps China export goods more cheaply.

The U.S. wants China and other countries to buy its debt to pay for the Economic Stimulus bill.

Kimberly

July 4, 2009 at 11:01 am
(3) Madwesh says:

China is in the midst of a vicious circle. If the Dollar declines, the asset side of the Chinese central bank’s balance sheet will decline dramatically. Thus you see China diversifying with significant gold purchases.

In the next 3-4 years, the dollar denominated assets will be low enough on their balance sheets that their threat will become real. You might notice that China is buying shorter term Treasuries (5 and 7 year) versus 30 years.

In answer to Asif’s question, they don’t have to. The US has for over a few decades supported the world economy including the Chinese manufacturing build up. The US trade deficit is over -700 billion dollars (exports minus imports) per year (2008 data), majority of it is with China. In many ways China is stuck to the process of buying Treasuries with the excess dollars that earn every year from the US. This is true of the middle east with Oil revenues as well. Each get a 4% return on it – which is why they are buying it otherwise the dollars will sit in a locker earning nothing and deflating because of out-of-control Obama & Congress spending.

July 6, 2009 at 3:40 pm
(4) Kimberly says:

Hi Madwesh,

I agree completely. I think part of what China is doing is signaling to the U.S. that it does not want to play banker much longer if that means it will lose money on the investment.

China is increasing trade with South America and other Asian countries to decrease its reliance on trade with the U.S. It is also diversifying (slowly) into other currencies to decrease its dependence on the value of the dollar. It can’t do anything too quickly because that, in itself, could cause further dollar decline.

Kimberly

July 7, 2009 at 3:30 pm
(5) Morrison Bonpasse says:

There is a need for only one “new” global currency, which will be the currency around which a consensus will develop for that currency to become THE Single Global Currency.
Such a currency cannot managed by only one nation, so it will not be the U.S. dollar unless/until the U.S. joins in a monetary union and is willing to share management of its currency with others.
The euro is the mostly likely candidate, as the European Central Bank has already mastered the operations of running a large multi-country currency.
The Single Global Currency will emerge through the creation, expansion and merger of monetary unions to form a “tipping point” Global Monetary Union. The question is not whether the euro or the U.S. dollar or the renminbi will ever join the Global Monetary Union, but when, and at what level of leadership.
China will do itself and the world a service by joining a monetary union and urging that monetary union to become part, or the core, of the future Global Monetary Union. Settling for the shortsighted goal of making the renminbi another global, but national, currency in a risky multicurrency monetary system will not help China nor the world.

July 9, 2009 at 1:31 pm
(6) useconomy says:

The G-8 may be discussing this at their meeting this weekend. Even though Chinese President Hu Jintao is absent (due to riots in China), Russia and France are calling for a global currency.

Kimberly

July 12, 2009 at 5:27 pm
(7) Madwesh says:

Morrison,

One last try – EURO is no different from the US dollar with respect to your ideal scenario for a “new world global currency”.

“European Central Bank has already mastered the operations of running a large multi-country currency” – mastered what? The Fed has been operating a the US economy through the regional banks for over a 100 years.

- Mastered the process? Ask Angela Merkel, ECB is out of control.
- Mastered the equivalence across member countries? Ask Spain.
- Mastered Stability? Stop asking the US Fed to bail it out of its weakness.
- Attractiveness: Get Swiss and UK to sign up first.

Norway, Denmark etc are smaller than a mid-sized city in the US. They are smaller than a tier III city in India and China. Surely, you are not counting on those countries as an example of “multi-country”.

EURO and ECB are a nice experiment. With the European aging population and the core EU countries in decline they are dependent heavily on other economies for growth. The last thing anyone wants is to have the central bank for the world sit in Europe.

China’s threat is not to kill the goose that lays the golden egg, but ensure that it not out of control. The assets on their balance sheet are either dollars or primarily dollar denominated (> 80%). Its own consumer portion of the economy is about a $1.5 trillion. It needs a good decade of exports (which is to the US) still before that local economy can sustain itself.

Also, please defend your position instead of cutting and pasting the same message again-and-again.

July 12, 2009 at 8:42 pm
(8) Morrison Bonpasse says:

Madwesh,

Respectfully, establishing a common currency among countries who have been combatants in two world wars is a major accomplishment. I agree that the U.S. Fed presides over regional banks, and the Fed is also a good model from which to draw lessons for the future Global Central Bank, but the ECB is a central bank for a common currency of 16 independent countries.

You correctly note that the economies of the 16 member countries are suffering, some more than others. However, one problem none of them has is an unstable or crisis-prone currency. To the extent possible, all 16 can work with a stable, relatively low interest currency. Other EU countries are seeking to join the EMU, and that’s a powerful endorsement. I believe the EMU Masstrict criteria are interpreted too strictly, and that other EU countries should be welcomed and admitted more rapidly. In any case, the EMU is growing and no one is leaving.
Each of the 16 countries has fiscal government tools to wield to promote their own economies.
Yes, I am counting Denmark, Norway, Sweden and all other EU countries as important future EMU members. Every national currency which is dropped is the right step in the movement to a Single Global Currency.
You are right that resistance in Switzerland and the U.K. is strong, but there are people and organizations in both countries which are pushing for joining the eurozone, and it’s only a matter of time.
What the people of the world want is stable money and they don’t want to have to pay a fee every time they trade with another country. Around the world, interest is growing in regional monetary unions, in some substantial part because their private and public leaders have been to Europe and they can see that monetary union works.
China has operated successflly within the current multicurrency system, but it understands that, in the words of Paul Volcker, “a global economy requires a global currency,” and not one dominated or managed by only one country, with its own self-interest. Interestingly, for all the talk about Chinese manipulation, all the country did was to peg the value of its currency to the U.S. dollar. You obviously know a lot about the Chinese economy, but I submit to you what what it wants for a currency is a stable currency. Even with a Single Global Currency, China will be a low-cost manufacturing country for a long time.
If you don’t want to see more currency crises and currency fluctuations, and don’t want to see global imbalances among currencies, and don’t want to see hundreds of billions of dollars/euros wasted annually on FX transactions, and don’t want to see enormouse accumulations of wasteful FX reserves, what is your solution?

Regards,

Morrison

July 13, 2009 at 8:58 pm
(9) Madwesh says:

Morrison,

This is good conversation, I am learning as well. In a different blog sequence, I am suggesting that the problems (besides the uncontrolled power to manipulate with the monetary policy and fiscal policy) is related to the lack of asset mobility across currencies.

A simple example is Crude oil. If there was a free market that allowed the trade of crude in any currency (1 dollar or 1.55 pound or 1.38 EURO or 95 Yen would all be equivalent), the buying and selling of that asset would go to the strongest of the currencies. Which, I would guess, would put a stop to the uncollateralized check writing by the administration (started by the previous administration).

I also postulate that multiple currencies will be necessary to keep arbitrage alive and to offer fall back positions. For example, if the US dollar was the single global currency, the Fed/Treasury would be running amuck printing dollars. This could drive people to move back to gold or a barter system to offset the percieved deflation (what they earn remains the same but what they have to pay to buy goods gets costlier every day).

One of the many things that stops that runaway behavior is a fear of significant weakening of the dollar with respect to other currencies. However, this government is testing the limits of how much it major trading partners and lenders can take.

July 14, 2009 at 7:36 am
(10) Morrison Bonpasse says:

Madwesh,
The logic of pricing crude oil primarily in one currency is similar to the logic of the need for a Single Global Currency, i.e. the need for consistent standards of value. Around the world, we know the price of crude oil and we know how that compares to last week and last year.
The future Single Global Currency will be managed by a Global Central Bank which is managed by a representative management team with several governing boards or committees, like the European Central Bank. The primary goal of the GCB should be, and likely will be, “monetary stability” and such a bank will be unlikely to recklessly “print money” or otherwise cause runaway inflation. Its operations should be transparent in this internet age, and the world will be watching.
As several significant countries, e.g. China, Russia, Brazil, have recently noted, it is unsatisfactory for the world’s monetary system to rely so heavily as it does now on a currency of a single nation, i.e. the U.S. Dollar.
The solution is not to move to another national currency, (e.g. the renminbi), which would pose the same problem, and not to a regional currency (e.g. the euro), but to a Single Global Currency.
What the people of the world want is stable money. One likely side effect of the adoption of a Single Global Currency will be the reduction in interest in gold as a substitute for money, because the long-sought-after stability which gold offered, will be available with the Single Global Currency.

Morrison

July 14, 2009 at 7:08 pm
(11) Madwesh says:

I don’t have any conceptual problems with what a Single Global Currency is. However, it is not as straight forward as replacing all Dollars, Yen, Euro, Pounds, Yuan, Rupee etc with an equivalent. The value of that currency will be extremely inflationary or deflationary to most developing and under developed economies – only the developed economies will have the ability to stomach it.

As long as the Single Global Currency is not tied to any fundamentally unvarying valuable object (example: gold or a basket of commodities), it will just be printed paper. Such money will fluctuate in real value proportional to people’s or country’s percieved value for that currency. No different from what is happening today with the BRIC countries striking deals amongst themselves and avoiding transacting in dollars.

Based on the above evidence, I disagree with the view that people will not go back to gold as a safe haven. The resulting collapse in the value of that printed paper will be pretty dramatic leading to even more countries creating their own trade mechanisms.

The minute there is a change in political arrangement in Russia or China, they will change their view on the single global currency.

Also, EURO was not stable by any stretch of the imagination through this present crisis (went from $1.28/EURO to $1.58/EURO back to $1.28/EURO presently hovering around $1.38/EURO). This pretty much forced Germany, an export economy, into a recession.

July 14, 2009 at 7:17 pm
(12) Kimberly says:

If we’ve learned one thing from this global economic crisis, its that the value of anything – money, houses, oil – is tied to what people think it is worth. There is no such thing as something with intrinsic value any longer – including gold.

I also think the trend towards BRIC countries and other groups of countries establishing their own form of transfer outside of dollars is something to watch. We may be witnessing the countries of the world forming their own global currency – not tied to the dollar, or gold, but tied to something far more ephemeral yet tangible – their relationship with each other.

Kimberly

July 15, 2009 at 10:27 am
(13) Jimmy T says:

I think it is interesting that China must rely on its peg to the dollar in order to ever break its dependence. Here is an interesting article about why the Yuan would have trouble becoming the world currency: http://www.mindreign.com/en/mindshare/Global-Economics/Yuan-Currency-3f/sl35291137bp313cpp10pn1.html

July 15, 2009 at 6:29 pm
(14) Kimberly says:

You raise a good point. Should the new global currency be based on a basket of currencies? Or would it be simpler to combine the dollar and euro and then let all other countries add on as they see fit?

Since China’s currency is pegged to the dollar, would it convert to the dollar at its current value? Or would the U.S. and China need to negotiate a value?

Kimberly

July 16, 2009 at 7:48 pm
(15) Morrrison Bonpasse says:

Madwesh,
I don’t see how you conclude that adopting a common currency by an underdeveloped country would be inflationary. Ecuador and El Salvador adopted the U.S. dollar in 2000, 2001 without such effect, at least attributable to dollarization as a cause. The U.S. dollar is used by the Marshall Islands and other underdeveloped countries. What the people of the world want is stable money, whether they live in developed or underdeveloped countries.
The value of money, whether backed by a metal or fiat, is essentially a matter of trust as Kimberly agrees. The people trust that the issuing authority will issue enough money to keep prices stable. In countries with national currencies, that trust is tightly linked to the national goverment, and its stability. In a monetary union, the trust is derived from trust in the issuing central bank, and people trust central banks, with their goals of monetary stability, more than they trust national governments to provide stable money.
Most money is now digital, rather than paper. If it is managed properly by the Global Central Bank, and properly visible to the world via the Internet; there is no expectation of a crash.
Yes, the value of the euro has fluctuated, but I submit that there has been far more currency stability among the 16 EMU members with one global reserve currency than there would have been with 16 separate currencies. The fluctuation of value of the euro parallels that of the U.S. dollar. The ONLY way to stop such currency fluctuations is to move to a Single Global Currency. If there are even two currencies at the end of this inexorable process, those two currencies will fluctuate against each other, at great expense and risk – for no gain whatsoever.

Kimberly
I agree that the BRIC proposals are interesting and important. Soon, those countries will see that moving to another regional or national currency will be no better than the current reliance upon the U.S. dollar; and the transition to such a currency could be risky. Instead, those countries and the world will benefit by moving to a Single Global Currency.

Jimmy T
Yes, it’s ironic that China is perceived as a manipulator of its currency when what it has done is to peg the value of the yuan or renminbi to the U.S. dollar. The problem is that in our market-based foreign exchange trading system, the yuan would, by now, have risen in value, if not pegged to a set ratio to the dollar.

Kimberly
When the euro was created, the value of the euro was fixed as of a certain date to the values of currencies of each of the 12 EMU members, and that “fixing” was trustworthy enough that there was no serious attempt to speculate to different valuues.
As regional monetary unions are being planned, created, expanded and merged, the same process of setting the value of the new common currency, as a function of the values of the legacy currencies will occur. One critical decision was made by the EMU before 1999, which was that the legacy currencies would be abandoned. Previously, there had been consideration given to keeping them, but the problem would have been that there still would have been a market for them and room for all the craziness of the current multicurrency system. It was with great foresight that the legacy currencies were abandoned.
Some respected economists have recommended a supranational currency, like the SDR’s, which would co-exist with the existing currencies, but that would not solve the basic problems of the multicurrency world: costs, crises, currency fluctuations, and imbalances.
It will be best to move to a Single Global Currency, to be used by everyone, for domestic AND international transactions, and abandon the legacy currencies.

Morrison

July 12, 2010 at 11:52 am
(16) Josh says:

Recently China changed its currency to “floating” type. What does it mean, and what implications do they have? Next, why does China’s currency hold so much of an advantage over the countries? Thanks

November 19, 2012 at 11:59 pm
(17) d shatin says:

There never will be one world currency. Nor will the Eu survive.
One World Government with one world currency is but pipe dream that if forced upon the citizens of their respective nations of the world will elicit guerilla warfare the likes of which would make all previous guerilla wars throughout contemporary history, pale in comparison.

The consolidation of power and authority vis a vis one world currency with one body of global elites running the show is the antithesis of democracy. While those enamored by power and global financial control press for this with certainty and self righteousness, democracy will uproot all such efforts.

Finally, time for the USA to withdraw its membership and its financial support for the World Bank and related ‘financial institutions’ as it is no better than the US training Afghanis how to fight only to be murdered by the weapon provided.

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