For the past few years China has been advocating inclusion of the Yuan (RMB), in the IMF’s Special Drawing Rights (SDR). A faint glimmer of progress was discernible on March 31, 2011, at the G20 Monetary Reform Seminar held in Nanjing, though the proposal will undoubtedly be finally vetoed by the US, which needs to sell bonds worth at least a trillion dollars each year for many years to keep its economy afloat. In the interregnum Beijing, which has emerged as the world’s largest exporter, is expanding acceptability of the Yuan among its major trading partners through currency swap agreements.
A quick analysis of official Chinese media reports indicates that China’s leadership is determined, at least since the international economic crisis highlighted China’s economic superiority, to strengthen China’s currency and maximise Beijing’s international influence. Investing in countries of its interest and ensuring use of its currency for international trade are intended to help China achieve this.
Chinese Vice Foreign Minister Cui Tiankai’s comments, reported by the Beijing-owned Hong Kong-based ‘Ta Kung Pao’ on March 5, underscored China’s ambition to weaken the US grip on the global economy. He said that Chinese President Hu Jintao in the course of his European tour last November had visited Portugal and France when they were in economic difficulty and signed a $20 billion industrial purchase deal. This gesture, Cui Tiankai claimed, had given a setback to US’ strategic objective of ‘besieging China in the Asia-Pacific region’. The newspaper commented that both European countries would like to use the G20 forum to gradually break the monopoly of the US, ‘which benefits itself at the expense of others’. Earlier, China's Vice Premier Li Keqiang disclosed that China was diversifying its foreign currency holdings and was buying Euros.
Prior to the G20 seminar in Nanjing, Xu Hongcai, Deputy Department Director at the ‘China Centre’, a major Chinese government think-tank, candidly stated that ‘nations around the world have no way of restricting dollar issuance by the Federal Reserve’ and that the current international monetary system is unfair. Xu asserted that the world had fallen in to a ‘dollar trap’ making it prudent for countries to reduce dollar holdings in official currency reserves.
Hinting that Beijing’s efforts may have found some resonance, though they will be staunchly opposed by the US, the G20 seminar agreed to study whether to include the Chinese Yuan within the basket of currencies comprising the IMF's Special Drawing Rights (SDR). French President Nicolas Sarkozy suggested at the seminar that given the importance of emerging economies such as China to global growth, their currencies should be added to the SDR basket. The US Treasury Secretary and French Finance Minister were more circumspect and insisted that China needed to comply with certain pre-conditions. Former Chinese central bank adviser, Yu Yongding, who also spoke at the conference, said that applying such conditions was a contentious issue.
Challenging what Beijing describes as the ‘global financial hegemony’ of the US dollar, has been the subject of recent articles in authoritative official Chinese publications. ‘Zhongguo Qingnian Bao’, the official newspaper of China’s Central Communist Youth League (CYL), which counts numerous former members among China’s current top leadership echelons, on March 8, published a lengthy article by Qiao Liang. This claimed to detail how the US succeeded in dominating the global financial arena, but at the same time cautioned Chinese financial strategists against unnecessarily provoking the US. Reiterating that the US had to maintain the ‘hegemony’ of the dollar, Qiao Liang concluded: ‘it now seems that the United States has no efficacious tools to achieve this other than military methods’. A Major General in the People’s Liberation Army Air Force (PLAAF) and Professor at the Air Force Command College, Qiao Liang acquired prominence by authoring the book, ‘Unrestricted Warfare’, which examined the advantages of waging asymmetric warfare against a stronger adversary.
The other important article was published on December 10, 2010 in the authoritative Chinese Communist Party (CCP) theoretical magazine ‘Qiu Shi’ (Seeking Truth). This recommended counter-measures, in the economic and strategic spheres, to neutralise US efforts intended to dominate China and prevent it from realising its aspirations.
This article discussed, inter alia, the manner in which China should safeguard the value of its US Treasury Bill holdings — currently estimated at $ 2.8 trillion — and how it should undermine the US position as a ‘financial super power’. Asserting that China’s ‘most powerful weapon today’ is its economic power and especially the foreign exchange reserves, it observed ‘if we use it well, it is a weapon; otherwise it may become a burden’. The US government’s action of increasing the number of dollars in circulation thereby diluting the value of the dollar, was criticised as harmful to countries possessing US dollars. It added that the only way to restrain the US from printing more currency is by not purchasing US dollars. To achieve this a consensus would be necessary, or one country would have to take the lead and not purchase US dollars. Since a consensus was not feasible, it recommended that China should muster the courage to take the lead in either selling its US dollar holdings, or not purchasing dollars for a period of time. Alternately, China should use its foreign exchange reserves to buy other currencies, which will ‘help promote good relations and economic and trade relations with these countries’ while enhancing China’s economic influence with them. It said that if China has the ‘necessary courage and determination’ to withstand US pressure, such a move will show just how much the US needs China and the ‘US will start to fear us’.
Meanwhile, the quantum of Chinese-held US dollars, estimated by the US Treasury in its annual report in December 2010, at $ 1.16 trillion, has become a topic of public concern. The Guangzhou Ribao (March 7) observed: “…Unfortunately we still have not seen any information released by the relevant Chinese authorities on changes in China’s holdings of US Treasury Bonds. State foreign exchange reserves are the common wealth of the masses, and the masses have a right to know”.
Beijing has simultaneously concluded sizeable currency swap agreements with a number of major trading partners, allowing them to pay for Chinese exports in Yuan. During the recently concluded National People’s Congress (NPC) session too, Chinese Premier Wen Jiabao spoke of expanding the use of RMB in cross-border trade and investment and of making the RMB convertible under the capital account
Jayadeva Ranade is a former additional secretary in the Cabinet Secretariat, Government of India
