The country of China and other high-growth economies are taking steps in order to lower the importance of the dollar in international financial transactions, moving towards a shift in a multi-currency reserve and trading system.
by David Marsh
Monday, April 18, 2011
Commentary: Beijing won't push the renminbi too fast
China and four other leading high-growth economies have taken landmark steps toward lowering the importance of the dollar in international financial transactions — part of a seminal shift in the move towards a multicurrency reserve and trading system.
Mind you, you wouldn't get an idea of anything dramatic from reading the official Chinese press on the conclusion of a summit meeting of the so-called BRICS economies (Brazil, Russia, India, China and South Africa) in the southern resort twin of Sanya in southern China last week.
"Leaders call for peace and prosperity" was the front-page headline in the China Daily. Stirring stiff. Even more striking was the prominent story the previous day that China's President Hu Jintao and visiting Brazilian President Dilma Rousseff had agreed to quicken trade procedures for "gelatin, corn, tobacco leaf, bovine embryos and semen." At least we know there's no holding back the Chinese rhetorical flourishes on these issues.
Leave aside the whimsical acronyms. Addition of South Africa to the former BRICS format seems to have galvanized the grouping. The five countries agreed to expand use of their own currencies in trade with each other — an important step toward putting the dollar into a new downsized place. One key influence is the annual expansion of China's trade volume with other core countries by 40% in 2010 — and the buoyancy looks set to continue. The BRICS' state development banks, including the China Development Bank, agreed to use their own currencies instead of the dollar in issuing credit or grants to each other — and they will also phase out the dollar in overall settlements and lending among each other.
Chinese officials at the annual Boao Forum at the end of last week voiced cautious optimism about the possibilities for far-reaching international monetary reform proposals taking a step forward when the G-20 meet in Cannes in November at the behest of French President Nicolas Sarkozy. Chief among these is for enhancing the special drawing right of the International Monetary Fund through the inclusion of emerging market currencies.
Speaking in Boao, Zhou Xiaochuan, governor of the People's Bank of China, refused to get carried away by any of this. He gave a cautious welcome to bringing the renminbi in to the SDR but admitted it had to be part of a planned move to full convertibility of the Chinese currency as well a shift to a flexible exchange rate.
Fresh signs of a disturbing lack of equilibrium in the Chinese economy, above all the latest annual rise in the consumer price index in March to 5.4% — have heightened speculation that China will speed up a rise in the renminbi to lower import prices. Governor Zhou, while not yet wishing to confirm any details, delivered a strong hint that he was prepared for such a course.
If the renminbi were to become a fully fledged reserve currency, of course, it would have to go down as well as up — marking enormous risks along the journey for the renminbi to assume a greater international role. For all of these reasons, Beijing will proceed with utmost caution in relaxing its restrictions for the currency to circulate freely overseas.
The last few days, make no mistake about it, mark an important step along this path — but there is a long way to go still.
David Marsh is co-chairman of the Official Monetary and Financial Institutions Forum.
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