Amid stock market volatility and a devaluing currency, can Chinas yuan really become the next global reserve currency?
China experts at cushy downtown Washington think tanks shake their head no, arguing that the U.S. dollar will always reign as the worlds reserve currency. Its a matter of principle, they say. In the postWorld War II financial order, Bretton Woods set the rules.
However, the new Chinese leadership under President Xi Jinping has made different calculations. In fact, the future of our global financial architecture as perceived in Washington differs so much from that envisioned by Beijing that it is possible neither will see eye to eye, at least on the question of the next global reserve currency.
The International Monetary Funds recent decision to include the yuan as the fifth sovereign currency in the Special Drawing Right (SDR) is a long-dreamt political victory. For Xi it hails international prestige and recognition of Chinas economic might and right to global influence. It represents a key move on the Chinese chessboard as Xi shifts the direction and structure of his nations economy from factory of the world to central bank.
So will Kung Fu Panda wield the new weapon of a reserve currency in conquest or salvation?
One thing is certain. China needs more practice. Stock market volatility and circuit breakers are evidence of newfound tools that when brandished with leverage make the countrys leaders look just clumsy.
Talking heads condemn Chinas intermittent closure of its melting bear market and its falling growth rates. But in doing so, maybe the experts are not looking beyond the silken curtain into the inner thinking of Kung Fu Panda. Critics fail to observe that Chinas capital market is a mere splinter of a fraction of the nations capital might. They do not talk about its leaderships internal decision to change the very structure of growth from quantitative to qualitative, and the government-guided shift from outward exports to outward investments. The very foundation of Chinas economy is undergoing a dramatic restructuring in the hopes of making it more enduring.
Rightly or wrongly, Chinas leaders have several convictions that are affecting the economic changes under way and the new targets they are setting for themselves.
First, they believe the nation has had sufficient foreign investment and technology transfer. In short, China feels that it has learned all that it can from foreign multinationals and it no longer needs them. Domestic enterprises will be prioritized in all situations and encouraged to invest outward, increasing Chinas influence over markets in the developing world.
Second, China realizes that the high growth rates underlying the economic miracle have created an ecological disaster. Growth alone will not guarantee political and social stability. Cleaning up the environment especially, assuring food and water security will do more in the long run. Growth is being tapered in a calculated way, one percentage point at a time. It is by no means an accident.
Third, a widening of the yuans acceptability as a clearing currency for transactions across the developing world will strengthen Chinas sway without shocking its economy with full convertibility. The yuan is expanding its influence while skirting the risk of such a shock as China lays a new Silk Road of infrastructure interconnectivity from Russia through Central-South Asia to Korea and along the Swahili Coast of Africa.
In this context Chinas stock market remains a tightly controlled experiment. The government is quick to guard against speculation, knowing the social and political ramifications of a crash. So they intervene in, control and close markets, if necessary. They will play the opening of their capital market moves very close to their chest.
China is the largest trading partner of more than 120 nations. Each currencys weight in the SDR basket reflects its share of global trade and reserves. While the yuan will account for 10.9 percent of the SDR basket when it joins in October, many feel that the currency could easily be as much as 14 percent given that China represents 13 percent of the world economy and 15 percent of global trade.
Still, China will be in the club, which carries all the prestige and aura of importance associated but has limited real influence and risk at this time. So the yuans entry is a delicate, carefully calculated and important move on the chessboard of Chinas ascent and assertion of global influence.
Moreover, it is a major step toward realizing Chinas vision in establishing a new financial architecture that will integrate the economies and geopolitics of China, India, Russia and the nations of South-Central Asia and Africa into a close trading network, linked by a matrix of China-invested infrastructure. In an abstract political sense, President Xi is achieving Mao Zedongs vision of a nonaligned bloc using the tools of integrated and coordinated finance and investment rather than political ideology.
The U.S.s leadership looks out across the boulevards and monuments that define Washington as the beacon of a global world order that has dominated since World War II with the dollar at its core. In its mind it is a zero-sum game; only one team can win.
Chinas leadership reflects upon a time in history when the complex network of the Silk Roads intersecting trade routes found their way to one end point China. That is the world it intends to remake. And that is why having the yuan as a global reserve currency is so important to the nation.