For your reference (currency)…
October 26, 2012
As U.S. presidential candidates are arguing over how vociferously to blame China for “currency manipulations,” the Chinese renminbi is replacing the dollar as the reference currency, the monetary standard, in much of Asia (which is to say, exchange rates with those emerging markets move most closely with the renminbi).
Recent research by Arvind Subramanian and Martin Kessler, which they summarize in the Financial Times, suggests that
…since June 2010 when the renminbi resumed floating, the number of currencies tracking it has increased compared with the earlier period of flexibility between July 2005 and 2008. Over the same period, the number tracking the euro and the dollar declined… East Asia is now a renminbi bloc because the currencies of seven out of 10 countries in the region – including South Korea, Indonesia, Taiwan, Malaysia, Singapore and Thailand – track the renminbi more closely than the US dollar. For example, since the middle of 2010, the Korean won and the renminbi have appreciated by similar amounts against the dollar. Only three economies in the group – Hong Kong, Vietnam and Mongolia – still have currencies following the dollar more closely than the renminbi.This shift stems from China’s rise as a trader; its share of east Asian countries’ manufacturing trade has risen from 2 per cent in 1991 to about 22 per cent today. Countries that sell to the growing Chinese market or are locked in supply chains centred on China see the advantages of maintaining a stable exchange rate against the renminbi…
The impact is being felt elsewhere as well:
Trade is also propelling the rise of the renminbi outside east Asia. For example, the currencies of India, Chile, Israel, South Africa and Turkey all now follow the renminbi closely; in some cases, more so than the dollar. If China were to liberalise its financial and currency markets, the lure of the renminbi would broaden and quicken.
This is noteworthy– and surely worthy of serious discussion in the presidential election context– as an indicator both of the continuing global influence of China’s economy (arguably, in PPP terms, already the world’s largest), and of the erosion of the global reference currency advantage that, for the last several decades that U.S. has enjoyed. America’s status as “reserve currency of choice” seems, at least for now, intact; but as Subramanian and Kessler note, being “the reference” matters too: “The symbolism and its historic significance cannot be understated because east Asia, despite physical distance, has always been part of the dollar backyard.”
At the same time, the shift underlines the complexity of the political situation in Asia. Even as China’s military posturing and imperial grabs for territory are driving its neighbors under the umbrella of U.S. “protection,” growing trade is enmeshing them ever more deeply with China. In the short term, this makes for a confused (and probably unbalanced) situation; but as Subramanian and Kessler observe, “politics trumps in the short run but economics wins in the long run.”
So perhaps instead of righteously demanding that China increase the value of its currency (the impacts of which in the U.S. would be many and complex– but on balance, simply inflationary), our prospective leaders should be focusing on how to rehabilitate and reenergize the sort of innovation that can make the U.S. a more competitive trading partner for developing economies– and indeed, the world at large.
ADDENDUM: I should note, though it’s probably obvious, that the waxing Chinese currency dominion could wane, if China’s economy and trade are severely troubled– as, for example, the insightful Michael Pettis suggests they are… And, as Mohamed El-Erian and Michael Spence argue, let’s not forget India.
