Will China develop an alternative financial system to the current US dollar regime?
By Jon Fernquest
US
monetary policy may well soon lead to high levels of inflation (Read Meltzer
on history of inflation
and Krugman's
rebuttal).High inflation could eventually lead to a fall in the value of dollar assets (or dollar-denominated assets) .
For the global financial system this could mean that:
1. ....savings are
being diluted to "bail out America’s
failing banks and bankrupt households."
2. ..."central banks are punishing savers to redeem the sins of debtors and speculators."
2. ..."central banks are punishing savers to redeem the sins of debtors and speculators."
Ethnic Chinese account for much of the savings in Asia, not only in China itself, but also in countries such as Singapore and Thailand, so this group could suffer the most.
US monetary policy is pushing China towards developing an alternative financial system, according to the author of today's article economist Andy Xie.
Much of global ethnic Chinese savings might follow.
The current dissolution of global savings may also destroy the dollar's status as the dominant global reserve currency.
The dollar might even collapse.
Using SDRs as a reserve currency is one idea that has been suggested by China's central bank, but this idea may not be as easy at it seems, explains UC Berkeley economist Barry Eichengreen in a recent article (Read article via Economist's View).
Here is an extract from the article Andy Xie contributed to the Financial Times this weekend as featured in Economist Mark Thoma's blog:
If China loses faith the dollar will collapse, by Andy Xie, Commentary, Financial Times: Emerging economies such as China and Russia are calling for alternatives to the dollar as a reserve currency. The trigger is the Federal Reserve’s liberal policy of expanding the money supply to prop up America’s banking system and its over-indebted households. ...[T]he Fed may be forced into printing dollars massively, which would eventually trigger high inflation or even hyper-inflation and cause great damage to countries that hold dollar assets in their foreign exchange reserves.
US dollar regime - the current international financial system that uses the US dollar as the main reserve currency
reserve currency - a stable foreign currency like the dollar commonly used to make international payments and also kept as foreign exchange reserves by governments
foreign exchange reserves, foreign currency reserves - extra supplies of foreign currency that a country uses to protect the value of its own currency (by using the foreign currency to buy its own currency when necessary), also includes "liquid" assets such as gold which can be quickly changed into money
assets - a thing of value that a person or a company owns, for example: stocks, bonds, real estate, loans to others, or money
dollar assets, dollar-denominated assets -assets that are valued in dollars, must buy and sell the asset with dollars (note: dollar assets are possible even outside of the US where the dollar is the official currency)
dilute - cause to lose value (add water to some liquid to make the liquid weak, for example add water to wine)
bail out - save from failure by giving money
redeem the sins of - forgive bad things they did, so they can start over
debtors - people or companies that owe others money
speculators - investors who put their money at risk in hope of making more money when an asset increases in value
ethnic Chinese - a member of the Chinese racial or cultural group
dominant global reserve currency -
dissolution - breaking up
Andy Xie - MIT educated former chief economist for the Asia Pacific region at Morgan Stanley, now based in Shanghai (Read story of his leaving Morgan Stanley with some biography, read of his views)
special drawing rights (SDRs) - IMF money or more technically: "potential claims on the freely usable currencies of International Monetary Fund members" (See Wikipedia and Economist glossary)
alternatives - different choices that can be made
trigger - the thing that caused (China and Russia to call for these changes)
liberal - giving or allowing a lot of something, generous
a liberal policy - a policy that gives a lot or allows a lot
the money supply of an economy - currency held by the public plus money in bank accounts
expanding the money supply - creating more money
prop up - support, prevent from collapsing
over-indebted - have too much debt, have borrowed too much money which they must now pay back
printing dollars - means the same as: expanding the money supply
trigger high inflation - cause high inflation
hyper-inflation - when prices are increasing very quickly (so salaries must increase often and people must rush to the store to buy things when they receive their pay check) (See Wikipedia)
The chatter over alternatives to the dollar mainly reflects the unhappiness with US monetary policy among the emerging economies that have amassed nearly $10,000bn in foreign exchange reserves, mostly in dollar assets. ...[T]he US situation is unique: it borrows in its own currency, and the dollar is the world’s dominant reserve currency. The US can disregard its creditors’ concerns for the time being without worrying about a dollar collapse. ...
The faith of the Chinese in America’s power and responsibility, and the petrodollar holdings of the gulf countries that depend on US military protection, are the twin props for the dollar’s global status. Ethnic Chinese ... may account for half of the foreign holdings of dollar assets. ...
chatter - quick continuous talking without a lot of meaning
amassed - gather and collect together a lot in one place
the world's dominant reserve currency - the world's most important reserve currency
a creditor - a person who you owe money to
disregard its creditors’ concerns - don't really care what the person you owe money thinks
for the time being - temporarily , from now for a short time
petrodollars - profits from oil sales held in the form of dollars (not converted back to an oil producing country's own currency)
gulf countries - oil producing countries of the Middle East such as Saudi Arabia, Kuwait, Oman, Baharein
petrodollar holdings of the gulf countries - oil profits held as dollars by Middle Eastern oil producing countries
twin props for the dollar’s global status - the two things that support the dollar as the most important reserve currency in the world
The US could repair its balance sheet through asset sales and fiscal transfers instead of just printing money. ... The country’s vast and unexplored natural resource holdings could be auctioned off. Americans may view these ideas as unthinkable. It is hard to imagine that a superpower needs to sell the family silver to stay solvent. Hence, printing money seems a less painful way out. ...
Other currencies are not safe havens either. ... Central banks are punishing savers to redeem the sins of debtors and speculators. Unfortunately, ethnic Chinese are the biggest savers.
balance sheet - the financial position of a company with a list of assets on the left and liabilities as well as owner's equity ( the value of the owner's investment in the company) on the right
fiscal transfers - taxing people and giving the money to other people
natural resources - land, forests, minerals under the ground (silver, gold, iron), oil, and other things existing naturally in a place before humans were there, that have value and can be extracted and sold by them
holdings - things that you own
auctioned off - sold in an auction to the person who bids the highest price (the highest bidder)
an auction - when something is sold by people offering prices, the highest price wins and gets to buy the thing
superpower - one of the most powerful countries on earth
sell the family silver - selling the things you love the most, silver forks, spoons, and knives that have been passed down from your grandparents (selling because you are desperate to raise money and have nothing left to sell)
solvent (adjective) - when a company has more assets than liabilities, so that the value of the company for owners (owner's equity) is greater than zero, when the value of the company is greater than its debt
solvency (noun) - the condition or state of a company having more value than its debt
stay solvent - prevent value of company decreasing so it is worth less than its debt
a less painful way out - an less painful solution, an easier solution
safe havens - a safe place to stay, protected from danger
central banks are punishing savers to redeem the sins of debtors and speculators
Diluting Chinese savings to bail out America’s failing banks and bankrupt households, though highly beneficial to the US national interest in the short term, will destroy the dollar’s global status. Ethnic Chinese demand for the dollar has been waning already. ...
America’s policy is pushing China towards developing an alternative financial system. ... Its recent decision to turn Shanghai into a financial centre by 2020 reflects China’s anxiety over relying on the dollar system. The year 2020 seems remote... However, if global stagflation takes hold, as I expect it to, it will force China to accelerate its reforms to float its currency and create a single, independent and market-based financial system. When that happens, the dollar will collapse.
a bailout - help someone out of a difficult situation by giving them money
waning - growing weaker, in decline
stagflation - economic situation in which inflation and economic stagnation occur simultaneously and remain unchecked for a period of time (See Wikipedia)
accelerate its reforms - make improvements more quickly
float its currency - let the value of its currency move up and down with market supply and demand
market-based financial system - a situation with little government control or intervention, in which asset values are determined largely by supply and demand
