Much twittering is going around that China is fed up with the dollar hegemony. According to Reuter’s:
“The grim reality has led people, amidst the panic, to realise that the United States has used the U.S. dollar’s hegemony to plunder the world’s wealth,” said the commentator, Shi Jianxun, a professor at Shanghai’s Tongji University.
The above quotation apparently appeared in the overseas edition of the People’s Daily, not in the main edition. Naked Capitalism argues that this reflects the official China position.
While this is clearly not an official statement, the fact that the commentary was given such prominent placement suggests that is a sanctioned view.
I am not persuaded. I would turn Shi’s presumed comment back on China itself, to wit, “China has used currency manipulation to plunder the world’s wealth.”
In tying the yuan closely to the dollar, China has been a shadow world currency. Recently, China tightened that connection to protect sensitive industries. (Note the slight downward tick in the yuan-dollar graph.)
There is no question that many are now hoarding dollars in an attempt to cover loses; hence, the strong dollar. But take a look at this year’s exchange rates tracking the yuan against the Euro, the yuan against the Pound, and the yuan against the dollar.
But to argue that China is innocent in the debacle we see around us is a real stretch. As I have pointed out repeatedly, trade is at the heart of China’s rise; trade has conferred upon it the wealth it now enjoys. For a long time, China pegged the yuan to the dollar, a major cause of for its success in trade. (It relaxed that peg for a while; now it is tightening it up again to protect some of its industries.)
That peg gave exporters in China a real edge. Produce cheap; sell high. And, as Chinese officials have said time and time again, foreign companies inside China are primarily responsible for its export machine. Those companies did not want the peg abandoned. (Hence, our rather lukewarm push for China to abandon its peg. Corporate America was doing fine in China.)
Other important factors in China’s rise are, of course, its taxation schemes and its cheap labor.
In the long run, the dollar hegemony will go. It may disappear sooner than later. Who wants to use a currency whose owner is deeply in hock, and going deeper in hock with each passing minute?
I am not at all sure what will replace the dollar; maybe some kind of world currency. The coordinated effort of central banks to lower interest rates may be only the beginning of the path the nations of the world are about to follow.
From this writer’s point of view, the enormous trade imbalance, favoring China and other emerging nations, is the mirror image of the enormous American debt.
Ignoring its deteriorating trade position, America has relied on credit in every conceivable form. Finally, the excesses of our unregulated, financial system broke world’s piggy bank.
[Note: I did not include the yen. The yen has improved dramatically over the yuan.]