China’s leadership will soon usher in bold reforms to support a domestic consumption-driven economic model, and globalizing the renminbi as an alternative store of wealth to the US dollar is at the center of the strategy.
The scathing commentary published by China’s state-owned Xinhua news agency calling for a ‘de-Americanized world’ was undoubtedly music to the ears of many in the developing world. The article – published during the recent fiscal deadlock – accused Washington of abusing its superpower status by engaging in unwarranted military conflicts, engineering regime changes with impunity, and mishandling its status as the issuer of the world reserve currency by exporting risk abroad. Xinhua’s commentary also called for drastic reforms of the IMF and World Bank to reflect the growing muscle of the developing world, and most significantly, “the introduction of a new international reserve currency that is to be created to replace the dominant US dollar.”
The planned reforms led by the Xi Jinping administration in Beijing should be viewed through the lenses of the position taken by this article, with the end goal being the full convertibility and internationalization of the renminbi.
China’s renminbi as a ‘third leg’
Beijing interprets the global economy resting on highly unsound foundations – the US dollar and the Euro – and it would like to engineer a smooth transition toward a multipolar economic system where the renminbi can act as a third leg to support this structure.
China is already the world’s largest trading nation, exporter, and creditor, and it is soon expected to overtake the US as the largest oil importer and the world’s largest economy, but further institutional and regulatory reform is needed to mitigate risk and increase efficiency before the renminbi can contend as a top trading currency.
Beijing has specifically cited the goal of full renminbi convertibility in its most recent five-year plan in 2011, which would allow foreign currencies to be exchanged for renminbi without any state-intervention or restriction on the amount. The long-term strategy to globalize the renminbi is based on a three-pronged approach – emboldening it as a global trade settlement currency, then as a global investment currency or a store of wealth, and ultimately as a global reserve currency that can replace or serve as an alternative to the US dollar.
China is already making significant progress in establishing the renminbi as a global trade settlement currency, nearly 12 percent of Chinese exports and imports are settled in renminbi, a six-fold increase in three years, while renminbi denominated corporate bonds have become freely available to international companies. China also has currency swap agreements with around 20 countries, including Russia and Japan, allowing trade to be settled directly in renminbi instead of US dollars.
Convertibility restrictions remain in place over concerns that excessive hot-money inflows and outflows could threaten the economy, but Beijing is allowing the recently-opened Shanghai free-trade zone to serve as a testing ground for the wider convertibility of the renminbi and market-oriented policies, a precursor to the currency’s integration into the global economy.
Goodbye greenback, Hello redback
Although the exact amount of China’s gold reserves isn’t known, it is expected to have a few thousand tonnes of the precious metal. Demand for gold in China has skyrocketed by almost 350 percent since 2008, and according a 2011 cable made available by WikiLeaks, Beijing believes that the US is actively suppressing the price of gold to maintain the US dollar’s role as the international reserve currency, and that increasing its gold reserves will promote the internationalization of the renminbi.
Given the increasing demand for gold, its prices are declining when they should otherwise be soaring, suggesting that Wall Street banks are acting on Washington’s behest to manipulate the gold price through the unregulated trading of paper gold derivatives. These measures signify the US dollar’s state of ill health, and the extent of manipulation implies that a panic dumping of dollar assets and US Treasury bonds would ensue if the gold price soared to its genuine market value, spelling the end of US dollar domination. It is little wonder why China has put so much emphasis on hasty currency reforms.
The brinksmanship behind the US government shutdown, the perpetual raising of the debt ceiling, the perpetual borrowing and endless money printing have all caused an erosion of trust in the US dollar.
Full article: Renminbi rising: China’s ‘de-Americanized world’ taking shape? (Russia Today)