Some Realities Behind China’s Call for a “De-Americanized World”

How serious is China about “the introduction of a new reserve currency to replace the dominant U.S. dollar,” one of its proposed steps for creating the “de-Americanized world” that the official Xinhua news agency called for in the run-up to the denouement-cum-deferral of the U.S. fiscal crisis?

American commentators’ responses have ranged from the dismissive to the apocalyptic. Those in the former camp have characterized the call as nothing more than bluster and the latest example of Beijing seizing any opportunity to take a poke at the U.S. Adherents of the doomsday view see this as yet another sign that the dollar’s days as the world’s premier currency are numbered (as a rule of thumb, the more dire these predictions, the more advertisements for gold appear on the host blog or website).

Squarely betwixt those extremes, Michael G. Kulma, PhD, offers a nuanced view that examines Beijing’s recent pronouncements – and actions – in the context of the Chinese leadership’s cautious nature and careful, occasionally conflicted, pursuit of superpower status.

“At the end of the day, stability and growth – more than geopolitics, per se – are the primary concerns for China,” says Kulma, Senior Fellow at the Asia Society’s Center on U.S.-China Relations and Executive Director of the Society’s Global Leadership Initiatives. While some observers look at Chinese moves on the monetary front and see them as one component of a broader challenge to U.S. supremacy, Kulma notes that whatever China’s ultimate aspirations, the country’s near-term concerns about the dollar arise from the facts that it is the United States’ largest foreign creditor, holds more than $1.2 trillion in Treasury securities in its foreign-exchange reserves, and remains heavily dependent on exports (and thus exchange rates) to fuel its growth.

“You need to start from the realization that China is a massively risk-averse country,” Kulma noted in a September interview with this blog. Ironically, he adds, that cautious posture both provides an impetus for China to seek a diminished role for the dollar in global finance and stamps its pursuit of that goal with a certain tentativeness or restraint.

“The global financial crisis of 2007-2009 absolutely changed the timeline for the Chinese,” accelerating their concerns about a U.S. dollar-dominated world, says Kulma. He notes that in March 2009, Zhou Xiaochuan, governor of the People’s Bank of China, released a paper calling for eventual establishment of a new international reserve currency – potentially the IMF’s Special Drawing Rights, or SDR – to replace the dollar as the primary medium of exchange in international commerce and finance. Such bold policy pronouncements have been accompanied by relatively modest or incremental actions, he notes. Those steps include:

• Negotiating an agreement with the United Kingdom, announced on Oct. 15, that will see the state-controlled Industrial and Commercial Bank of China issue a yuan-denominated bond offering in London, facilitating greater use of the yuan on London exchanges.
• Entering into roughly 20 bilateral currency swaps with trading partners over the past five years, most notably a 2012 arrangement with Australia worth $31 billion and one with the United Kingdom earlier this year with a value of up to 200 billion yuan. While the aim of such swaps is to make trade between the partner countries more efficient, this is accomplished by making “dollar-less” transactions possible.
• Taking the lead in the BRICS’ formation of a $100 billion Contingency Reserve Arrangement (CRA) that the member nations can draw upon in the event of a financial crisis. China is expected to contribute $41 billion to the fund, with Brazil, Russia, and India each contributing $18 billion and South Africa $5 billion. Discussed in detail at the Fifth BRICS Summit in Durban, South Africa this spring, finalization of the plans was announced at the G-20 Summit in St. Petersburg last month.

Because it is designed to provide an alternative to recourse to the IMF, some observers see the CRA as part of a full-fledged assault on the Bretton Woods Institutions that the U.S. and U.K. launched at the end of World War II. (An Indian-led effort to create a BRICS-funded development bank that would compete with the World Bank stalled at the Durban summit over questions about how much each nation would contribute.) However, Kulma notes that the size of the CRA is modest relative to the approximately $5 trillion the BRICS hold in international reserves, and that discussions about its operation are marked by a vagueness that also characterized an earlier supposed challenge to the IMF, the Chiang Mai Initiative. “We just don’t know a lot about this mechanism yet. For instance, will the arrangement be a stand-alone program, or will there be some tie to Chiang Mai?” Kulma asks.

The Chiang Mai Initiative (named for the Thai town that hosted the 2000 meeting where it was first discussed) arose from the 1997-1998 Asian Financial Crisis, when Indonesia, Thailand and other Asian countries bristled at the austerity measures the IMF sought to impose on them in return for monetary assistance. The initiative began as a series of bilateral currency swap arrangements between the ten members of the Association of Southeast Asian Nations (ASEAN), China, Japan, and South Korea. The arrangements were designed to enable member countries experiencing capital outflows to avert liquidity and currency-valuation problems and so perhaps avoid, and at least defer, the need to turn to the IMF. But when the global financial crisis reached its peak in September 2008 and capital began leaving member countries, the weakness of the often-small bilateral arrangements became apparent, and many members had to engage in swaps with the U.S. or Australia rather than with one another. In recognition of those limitations, the members converted the Initiative into a multilateral arrangement in 2010. To further strengthen the Initiative, the member countries last year doubled its scope to encompass $240 billion in agreements and raised the threshold at which a member would seek IMF assistance.

Kulma notes that while the Chiang Mai Initiative has fostered regional cooperation, it has not yet distributed any money or demonstrated that it can be a stabilizing force in times of crisis. (The initiative has far harsher critics, such as Hill and Menon, who argue that it lacks the rapid-response protocols needed for it to play a meaningful role in a financial emergency, that it is bereft of surveillance and conditionality procedures, and that, in the end, it is not actually a fund but rather a collection of promises to provide funding.)

While the ASEAN nations and Japan took the lead in organizing the Chiang Mai Initiative, Kulma says that China was a driver of the BRICS’ Contingency Reserve Arrangement.

“The CRA accomplishes several things beyond its primary financial purpose,” he notes. “First, it’s a mechanism for building up cooperation between countries that have some things in common but that also are located in different parts of the world and have some important differences in their situations and agendas. Second, it provides an opportunity for China to dip its toes in the water in another area of global governance. Contributing $41 billion to this fund is a pretty safe way to enter the financial governance arena when you have more than $3 trillion in foreign-exchange reserves.”

“The Chinese are realists,” Kulma says, adding, “as much as they may want to diversify their holdings, they don’t have a convertible currency now, and won’t for some time to come.” He adds that Chinese incrementalism on the world stage also can be attributed to Beijing having been stung in recent years by international criticism of its commercial activities in Africa and its claims to islands in the South China Sea. “They’re finding that ‘with great power comes great responsibility,’ and they see that if you want to play a leadership role, you have to deal with a lot of baggage and some occasional backlash.”

The pace and force of China’s efforts to diminish the role of the dollar and otherwise reshape the global financial system, Kulma maintains, ultimately will be determined not by some grand strategy to supplant the U.S. on the world stage but rather by ongoing calculations of what best promotes domestic stability and economic growth.