Nouriel Roubini has an interesting op-ed in the NYT today that’s actually got very little to do with the financial crisis or the banks or the prospects for a recovery some time in the next year.
It’s about the process that’s already in place for China’s Renmimbi to supplant the US dollar.
First, the conditions definitely seem in place for the Dollar’s status to erode. We’ve got a stunning level of debt, and it’s clear that the rest of the world is growing uneasy about financing it all. We’ve also got deep political problems, notably a Congress that’s been thoroughly captured by special interests, and thus lacks the political will to take real action on anything.
So how and why does the Renmimbi take its place? Sayeth Roubini:
China is a creditor country with large current account surpluses, a small budget deficit, much lower public debt as a share of G.D.P. than the United States, and solid growth. And it is already taking steps toward challenging the supremacy of the dollar. Beijing has called for a new international reserve currency in the form of the International Monetary Fund’s special drawing rights (a basket of dollars, euros, pounds and yen). China will soon want to see its own currency included in the basket, as well as the renminbi used as a means of payment in bilateral trade.
At the moment, though, the renminbi is far from ready to achieve reserve currency status. China would first have to ease restrictions on money entering and leaving the country, make its currency fully convertible for such transactions, continue its domestic financial reforms and make its bond markets more liquid. It would take a long time for the renminbi to become a reserve currency, but it could happen. China has already flexed its muscle by setting up currency swaps with several countries (including Argentina, Belarus and Indonesia) and by letting institutions in Hong Kong issue bonds denominated in renminbi, a first step toward creating a deep domestic and international market for its currency. Read the whole thing at NYT — >
The path probably won’t be that smooth. In addition to all the stuff mentioned above, for the entire world to really have that much faith in the currency, China would have to become much, much more open and transparent, and then show a commitment to that transparency for some time. For what it’s worth, China is still an authoritarian country with strict investment rules and a fair amount of centralized economic control. The US, for all its faults, remains an open book with a pretty good track record.
Don’t start exchanging your dollars just yet.
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