Author: Peter Drysdale

The global financial crisis has brought with it big changes in the international economic system. The response to the crisis has seen the emergence of the G20 as the main locus of international economic governance and a cession of authority from America and the old industrial powers (the G7 economies) to the emerging powers in Asia and elsewhere. The role of the US dollar as the world’s primary international currency is also under question, as the growth of US deficits that are necessary to sustain that role has begun to corrode confidence in the value of the dollar.

As the big new kid on the block, China plays into everyone’s thinking about what to do next. An immediate focus is on China’s massive holdings of dollar assets in the form of currency reserves. China’s anxiety about the value of these assets in the face of weakness in the dollar could accelerate retreat from the dollar-based international currency system. There is also pressure for appreciation of the Chinese currency, the RMB, with the aim of reducing Chinese current account surpluses (part of the flip-side of US deficits). But the meta question is, if a global monetary system based on the US dollar is no longer sustainable – even though the process of unwinding dependence on the dollar is likely to take a very long time – what are the alternative scenarios and what role would China play in the international currency system?

This week, Yiping Huang reflects upon this question against the background of thinking in China, including PBOC Governor, Zhuo Xiaochan’s essay last year on transforming Special Drawing Rights (SDRs) at the IMF into an international currency. The continuing advantages of the US dollar as a reserve currency do not recommend any precipitate change. Certainly for the RMB to play the role of a reserve currency in the future, it will need to do so either as part of a multiple currency system or via the creation of an international currency system. For this to work, the Chinese financial market will need to be opened and Chinese transactions on the capital account will have to be liberalised, and that process is only at its very beginnings.

Whichever way the system evolves, Asia and its currencies will have to play a bigger role, one commensurate with its importance in global output and trade. One idea that has been put forward (especially from Japan) is for the creation of an Asian dollar. Huang suggests that the yen’s time has passed. Another idea, that Huang floats, is that the RMB could emerge as Asia’s dominant currency. Whatever the case, the time has come to begin work with regional partners on what system might serve us ten years or so down the track.