Can China Topple The Dollar?
Reprinted from NewsweekBy Daniel Drezner
June 8, 2009
To hear some tell it, China is campaigning to topple the dollar as the world’s reserve currency, and just might get the job done soon. In March, China’s central-bank governor, Zhou Xiaochuan, proposed the creation of “a super-sovereign reserve currency,” and while he did not mention the dollar explicitly, the target was unmistakable. The dollar’s role since the 1940s as the unit of account for most international trade and financial transactions has privileged American finances and American power. Losing that position would take America down a peg and open up the door to China, which followed up on its super-sovereign idea by initiating deals designed mainly to swap the yuan for the dollar in its trade with nations from Belarus to Brazil. And in a separate move that the Financial Times claimed was an effort to diversify away from the dollar, China has doubled its gold holdings over the past five years.
This flurry of activity has made some China watchers jittery: Nicholas Lardy, an expert on China’s economy at the Peterson Institute for International Economics, soberly concluded that the United States has “no leverage.” And economist Nouriel Roubini is warning that the Asian century, “dominated by a rising China and its currency,” could begin in less than a decade if America doesn’t get its “financial house in order.”
But the dollar’s reign is not about to end any time soon. Its role as a reserve currency rests on both the power of inertia and the powerful attraction of the American market. U.S. GDP is still more than twice China’s, and its trade flows are 50 percent higher. No one knows exactly when (or if) China will catch up; some analysts say five years, some say 30. Regardless, its recent moves challenging the dollar are -actually quite modest. Its series of bilateral currency swap deals with countries like Belarus, Argentina and Malaysia have attracted a lot of attention—the purpose of the swaps is to finance bilateral trade without -dollars—but they amount to only about $95 billion in a globalized economy that saw $19.5 trillion in goods and services traded across borders last year. As for the doubling of China’s gold reserves, it doesn’t actually demonstrate diversification away from the dollar: while the total value of China’s foreign-exchange reserves has increased tenfold during the same time period, the percentage of its total reserves in gold has fallen to 2 percent. Beijing has actually been diversifying away from gold.
Chinese officials acknowledge that the dollar will remain the reserve currency for some time (the head of the State Administration of Foreign Exchange recently talked about the yuan becoming convertible in 2020). For China, of course, the desire to change the status quo is mixed with the urge to preserve it. Keeping the dollar strong is the best way to protect its politically powerful export sector thriving.
•Daniel Drezner is a professor of International Politics at The Fletcher School of Law and Diplomacy at Tufts University.