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The 21st century was widely perceived as the century of US dominance on the political and economic stages. But within 10 years, this view was significantly impacted by the turmoil in the world economy. The 2008 global financial crisis heavily affected the US banking and financial community. This crisis spilled over to Europe, threatening the political and economic stability of the West. But some Eastern nations like China and India were only slightly affected. Against the backdrop of the four-year old crisis, we observe the rise of China in all spheres, including in the financial space.
Three years ago, the book “The European Union: experience of the integration model” which I wrote presented the scheme of the world currency triad (see attachment). It reflects the limits and the directions of the global monetary system’s development in the foreseeable future.
If two vertices of the triangle are represented by the USD and the euro, the third one is Asian, represented by the Chinese yuan/renminbi and the Japanese yen. The value of the monetary triad is that it expresses the real balance of economic powers represented by national or supranational (euro) currencies. It shows evolution since the top vertex can periodically change. The ambiguousness of this triad is that one of its vertices is represented by the Asian camp, where the Chinese currency – the yuan/renminbi - is dominant today.
As far back as 2009, it did not have any characteristics of an international currency: it was inconvertible and was not part of the SDR (special drawing rights) – the International Monetary Fund’s basket of currencies, as the Chinese monetary data was deemed not transparent enough and the yuan/renminbi was not considered by the international community. The Chinese economy was not granted market economy status then, and the policy of China’s central bank was questioned by the West. Such resistance from countries with the world’s leading currencies caused a situation of strain, leading to what is dubbed the “international currency war”, at the beginning of 2011.
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However, the downgrade of the US credit rating and the continued Eurozone sovereign debt crisis marked a fast integration of the yuan/renminbi and affected the world currency system evolution. Many bilateral regional commercial contracts are becoming yuan/renminbi-denominated; international loans are denominated in the Chinese currency as well. The inclusion of the yuan/renminbi into the SDR basket is being discussed in the IMF. The progressive internationalization of the renminbi seems inevitable.
This process is backed by the Chinese government’s financial support to the euro at the end of October 2011. But to be fair, this support is also positive for China. Indeed, Europe is China’s major importer and trade partner and in addition, an important part of the record high Chinese currency reserves are in euros.
Let’s get back to the triad structure, in which the yuan/renminbi presence can hardly be contested. In the current situation, when the world economic crisis began in the US and continues to impact the world, the USD’s status as the international reserve currency is being challenged. The financial destiny of the US needs global support, including from China.
The USD still enjoys a top position in world trade and finance while the second place belongs to the euro, by default. Created as a collective currency, it gained confidence and recognition from numerous countries, therefore the possibility that the euro will be perceived as a world reserve currency worth taking the top position in the triad remains high. The European GDP exceeds USD17 trillion – much more than that of the United States (USD14 trillion) and three times more than the Chinese and the Japanese GDPs. However, Europe is facing a long-term recession, and the debt crisis still represents a serious risk for the status of its currency. Such a situation, if it continues, could likely lead to the rise of the Chinese yuan/renminbi at the top of the currency chain.
The main argument in favour of the Chinese currency is that the pace of China’s economic growth is above that of other economies. Within the next 10 years, the Chinese GDP will surpass the US, and China will inevitably become the world’s leading economic power. Even today, China holds currency reserves of over USD3.2 trillion, which allows the country to pursue an expansionist policy on a global basis. There is no country in the world that could equal China in investment volume, approaching USD400 billion from USD371 billion in 2010. We could very well be approaching “the century of China.”
Berlin Irishev is a managing partner at Paris-based Parlink Consulting
