社科网首页|客户端|官方微博|报刊投稿|邮箱 中国社会科学网
Hot Topics
Currency competition
2022-01-13 09:18:00

China Daily Global 2022-01-11

Currency competition

ZHANG Yuyan

There are two factors that are important for a country's currency popularity or the size of its currency circulation area besides its national strength. The first is the quality of its judicial system, specifically the fairness and transparency of the implementation of the law. Second, the country's financial assets must be large enough for it to be a global provider of fundamental collateral that can continuously produce a variety of multi-tier assets.

The fact that currency hegemony can bring great benefits leads to fierce competition to internationalize currencies.

This competition is mainly for currency circulation domains. That is making the issued currency used by as many countries or populations as possible. The process in which countries use the currencies of other countries, as a reserve currency, is the one in which the latter levies seigniorage in a broad sense from the former by exporting currency. Reducing transaction costs, avoiding exchange rate risks, and promoting economic integration within the currency area are also important benefits of currency competition. This is also the root cause of the appearance of pound area, franc area, ruble area, dollar area and even eurozone in different periods.

The rise of a country's overall strength does not mean that its currency will immediately become the world's key currency. There can be a lag of decades. It was half a century or so after the United States' GDP surpassed that of the United Kingdom, around the end of World War II, that the dollar really overtook the pound as the world's dominant currency. Even so, the pound today still acts as an international currency. That explains why the Chinese renminbi is not a key currency despite the rapid rise in China's overall strength.

The mankind enters the global economy in the 15th century. In the past 500 years, two of the most attractive stories of key international currencies have been presented in two different versions. In his book Civilization and Capitalism, 15th-18th Century, the French historian Fernand Braudel fully affirms the fundamental role of the pound after the UK became the world's hegemony, and points out that during the 200 years of its rise as a global overlord, the UK did not have a consistent "sterling policy "or top-level design, and did not expand circulation of sterling and reap the benefits of seigniorage by consciously maintaining its currency stability. The pound became one of the pillars of the British Empire because the UK monetary authorities took the almost best approach to deal with each currency and financial crisis so that it eventually became the key international currency.

The dollar took a different route. In 1944, at the Bretton Woods Conference, the dollar was given the status of the equivalent of gold in a planned, organized and coordinated way. In his biography of John Maynard Keynes, Robert Skidelsky devoted more than 80,000 words to the detailed negotiation process that produced the post-war international monetary system.

The lessons to be learned from the pound and dollar is that for China to internationalize the Chinese renminbi, there needs to be a top-level design and the country must seize every opportunity and deal with every challenge that comes its way.

Although the Bretton Woods system collapsed in the early 1970s, trade and investment persisted, and all the alternative currencies were much weaker than the dollar, so the world monetary system remained dollar-based. With no or weak competitors, monopolists are often tempted to abuse their power, causing problems for themselves and the world. The 2008 financial crisis originated from the subprime mortgage crisis in the United States, which spread rapidly, and ultimately had a huge negative impact on the world as the dollar was the standard currency. One of the main reasons why China and others strongly called for greater diversification of the international monetary system at the first G20 summit in late 2008 was to impose some sort of constraint on the issuer of the single key currency.

Professor Kenneth Rogoff of Harvard University, former chief economist at the International Monetary Fund, points out that while the US dollar is still the global currency and there are no real competing currencies, two trends are hurting its position: the US' share of the global GDP is declining and US government debt as a share of GDP is on the rise. The euro, the most promising competitor to the dollar, has suffered for years from a lack of fiscal integration within the eurozone. In 2020, the European Union made a historic decision to issue bonds in the name of the EU to finance the 750 billion euro ($849 billion) European Recovery Plan.

Eurobonds are arguably another fundamental collateral in addition to US Treasuries in the current global financial markets, allowing for the diversification of the international monetary system.

Another potential player or competitor in the international monetary and financial arena is China, which has been promoting the internationalization of the renminbi for years. The most likely future global monetary system is probably a ternary system: the dollar, the euro and the renminbi. Of course, this will not be realized instantly. There are still many conditions to be met for the renminbi to become one of the international currencies, and there could be setbacks too. However, the general trend is that the international monetary system will develop in the direction of these three pillar currencies.

The continuous improvement of its domestic financial system and mechanism, the in-depth opening of its financial market, especially the use of China's national debt as global fundamental collateral, are necessary to promote the internationalization of the renminbi in the future.