Is a Chinese reserve currency inEVITAble?
March 31st, 2009By David Goldman
Speaking of Evita, China has in effect lent Argentina $13 billion in its own national currency through a swap with Argentina’s national bank. Rather than lend money to the US to finance Obama’s dubious stimulus package, China is lending part of its reserves to trading partners, for a total of $95 billion since December to Indonesia, South Korea, Malaysia, and Belarus.
China and Argentina in currency swap
By Jude Webber in Santiago
Published: March 31 2009 01:25 | Last updated: March 31 2009 01:25
In addition, Argentina has recently tightened the rules for imports, including the application of non-tariff barriers, in an effort to shore up its national industry.
China, which is pushing to end the dominance of the dollar as a worldwide reserve, has agreed a Rmb70bn ($10.24bn, £7.18bn, €7.76bn) currency swap with Argentina that will allow it to receive renminbi instead of dollars for its exports to the Latin American country.
Xinhua, the official Chinese news agency, said the deal was signed on Sunday by Zhou Xiaochuan, governor of the People’s Bank of China, and Martín Redrado, Argentine central bank president, in Medellín, Colombia, where they are attending a meeting of the Inter-American Development Bank.
Beijing has signed Rmb650bn ($95bn, €72bn, £67bn) of deals since December with Malaysia, South Korea, Hong Kong, Belarus, Indonesia and, now, Argentina in an attempt to unblock trade financing that has been severely curtailed by the crisis.
Gordon Brown, UK prime minister, told a summit in Chile at the weekend that this week’s Group of 20 meeting in London, which both China and Argentina will attend, needed to ensure vast trade credits were unlocked to help get the world economy back on its feet. The World Bank estimates as much as $300bn (€227bn, £210bn) could be needed.
China has suggested replacing the dollar with an enhanced version of the International Monetary Fund’s unit of account, the special drawing right or SDR. The dollar’s future as the world’s reserve currency will be on the G20 agenda.
Economists say the SDR plan is unfeasible for now but see Beijing’s currency swap deals as pieces in a jigsaw designed to promote wider international use of the renminbi, starting with making it more acceptable for trade and aiming at establishing it as a reserve currency in Asia, something that would also enhance China’s political clout.
Mr Redrado voiced support for China’s call for a new currency reserve regime at his meeting with Mr Zhou. “One of the issues was this idea to incorporate other options to the dollar. There was a lot of consensus on this,” the Argentine official told the Financial Times.
Argentina mostly imports industrial components and electrical goods from China, plus a smaller amount of consumer goods including clothing, shoes and toys. However, Ernesto Fernandez Taboada, executive director of the Argentine-Chinese Chamber of Production, Industry and Trade, said Argentine imports from China had fallen about 15 per cent in the past three months because of the slowing of the domestic economy.
Relative to the requirements of a reserve currency, these loans are small, but they do point to the long-term direction, and they indicate that the rest of the world will not allow its capital to be drained into the US budget deficit without a fight.
That raises the question of where the US will find the money to fund the federal deficit.
$1 trillion of reduced consumer spending (a number we hear kicked around often) doesn’t quite translate into $1 trillion of available savings, for less spending means less employment and less income. Nonetheless, a reduction of consumer spending does free up considerable flows for the maw of the Treasury. Add to that a few hundred billion dollars of Fed purchases of Treasuries and a bit over $400 billion of foreign purchases (present annual rate is $360 billion), and Tim Geithner can borrow about $1.8 trillion a year — presuming the US economy stays flat on its back for some time.
April 1st, 2009 at 5:54 am
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April 1st, 2009 at 6:55 am
I know of no economist’s theorem to prove this hypothesis; however, I would suspect that — given the dearth of available investment opportunities — somewhat higher interest rates might translate into materially greater Treasury purchases by the US Consumer. Such purchases, of course, should have the desirable secondary effect of keeping a lid on interest rates, too, as less QE would be required to finance the deficit. The $800 billion black hole in GDP caused by the consumers’ “instantly accelerated” savings rate is truly terrifying. (-3% to + 7 in one year is as breathtaking in its alacrity as the market crash is in its scope, but it still sort of reminds me of the old automobile commercials touting “Zero to 60 mph in 5.3 seconds!”) It would be nice, indeed, if large proportions of such augmented savings went into the purchases of government bonds — as opposed to just personal debt reduction and bank deposits (since banks aren’t lending). Unfortunately, there seems to be little evidence to support the assumption of greater consumer Treasury purchases given the consumers’ heightened level of leverage [and his desire to pay it down]…only anecdotal reports and wishful thinking.
April 1st, 2009 at 7:02 am
These Chinese swap lines cannot be compared to the utterly massive scale of the Fed’s financial aid to EU central banks at the onset of the crisis…hundreds and hundreds of billions of dollars flooded into Europe courtesy of Bernanke.
April 1st, 2009 at 8:56 am
Obviously, it´s inevitable as soon as:
- yuan becomes fully convertible currency
- China overtakes US as the biggest trading nation on planet (but mostly the biggest importer)
So not now, perhaps in 10-20 years. US should better agree with chinese proposal for global currency now, because US would have a lot to say in its managing. When yuan becomes world´s reserve currency, US will have NO say at all in its managing.
April 1st, 2009 at 10:47 am
Kaiten
Please!
>”- China overtakes US as the biggest trading nation on planet (but mostly the biggest importer)”
This assumes, 20 years from now, China is still unified as a single country and economic unit, which is far from certain…
>”US should better agree with chinese…”
Think you should find a country to live in that you enjoy more than the US.
April 1st, 2009 at 11:30 am
” This assumes, 20 years from now, China is still unified as a single country and economic unit, which is far from certain… ”
- Oh, yes, this never-ending american obsession about how all countries are going to disintegrate. Why are you so afraid of competition? Are you sure US will be still unified 50 years from now? Then visit southern California/Texas/Florida…
” Think you should find a country to live in that you enjoy more than the US. ”
- You´re completely correct again. Yes, US is the centre of the universe. Will you grow up, please?
April 1st, 2009 at 11:57 am
..and, kaiten, you undoubtedly would increase your life span if you were also a less angry person.
April 1st, 2009 at 12:07 pm
Thanks, appreciate your care. So you will not, right?
April 1st, 2009 at 12:19 pm
Kaiten,
We get it: you hate the U.S.
Now please let the rest of us read Mr. Goldman’s blog in peace. Thanks.
April 1st, 2009 at 12:20 pm
Kaiten, I am happily retired…very little to worry about except my children…spend most of my leisure time training for Ironman triathlons around the world. As a result, I have very low blood pressure and expect a long life span [unless I am hit by a car while training].
April 1st, 2009 at 12:51 pm
DodgerUSA Says:
I do not hate, I´m buddhist. Do not confuse dislike and hate. Sorry, but i will continue expressing my views despite your dislike(or disagreement), unless Mr.Goldman blocks my account
Chipster:
Ok, thanks for info, I wish you a long, happy and healthy life and good luck in triathlon
April 1st, 2009 at 2:48 pm
Thank you, Kaiten. To you as well…
April 1st, 2009 at 5:39 pm
Thanks. Just to make it clear.
I dislike:
- american foreign policy (very much, yes i hate it)
- some parts of american economic policy
Nothing against ordinary american people. Quite contrary. I consider americans as very cool and kind people.
April 14th, 2009 at 5:35 pm
Two Billion Yuan…
Speaking of Evita China has in effect lent Argentina 13 billion in its own national currency through [...]…