By Ranjan X. Roy
Yesterday, as Americans paid their taxes and partied like it was 1773, China took yet another action little noticed in the American media, but with major long term implications. China finalized a deal with Argentina, arranging a $10.2bn currency swap of their respective currencies (70bn CNY/38bn ARS). While Michele Bachmann and the like were up in arms after Zhou Xiaochuan, Governor of the People’s Bank of China (PBoC), suggested that SDRs could potentially function as a new global reserve currency, this particular story appears to have garnered little attention from those paranoid of a “one world currency“. However, this development is of crucial strategic importance and should be recognized by US policymakers as a development that must be addressed, rather than proposing legislation that doesn’t even begin to make any sense.
The move will allow Argentineans to directly access Chinese Yuan for trade, rather than having to settle in US Dollars. Previously, as the USD has been the primary reserve currency for international trade, an importer would have to cross two “spreads”, first converting ARS to USD, and then the USD to CNY (just imagine having to go to the airport currency exchange twice just to buy a souvenir). The Argentine Central Bank is explaining the move as a “contingency plan to bolster liquidity amid the global financial crisis,” but this vague statement is better explained by Passport at Foreign Policy:
As Xinhua reports, the Argentines can essentially use the RMB as extra cash to pay for imports. But one might note that, since the Yuan is not a convertible currency, the money can only be used to purchase goods from — you guessed it — China, potentially giving a boost the Dragon’s ailing export sector.
China’s economy has suffered along with the rest of the world since they have long been reliant on export-led growth, and in this market, major trading partners just aren’t importing any more. And so this currency swap is shrewd move for China, in that it has the dual effect of both promoting Chinese exports to Argentina, while also allowing this trade to be settled in Yuan rather than Dollars. Michele Bachmann’s paranoia meter should have been turned up a notch, since with this move, China has slowly begun initiating a shift away from the USD while simultaneously increasing its economic presence in an unfamiliar region. It marks yet another step towards full convertibility of the Yuan. While the swap shouldn’t incite outright panic, US policymakers need to recognize these coordinated actions in the broader context. This isn’t just about the US Dollar: it’s about our leadership role in these regions.
This swap is the sixth of its kind since this past December, with South Korea, Malaysia, Indonesia, Hong Kong and Belarus all coming to similar arrangements with the PBoC, totaling 650bn CNY ($95bn USD). Note that last fall, as the Federal Reserve “stepped it up” and arranged currency swaps with many central banks, including swaps worth $30bn USD with both Brazil and Mexico, economies like Argentina were left out. Romero and Barrionuevo at the NYT have documented a number of additional coordinated initiatives China is taking in nations generally ignored by the US, including direct loans to Ecuador and Venezuela.
Both the rise of China’s presence globally, along with the eventual shift away from the USD as the sole reserve currency, are generally accepted as longer-term eventualities. In the meantime, the United States must recognize that it is in our interest to get our own house in order while not ignoring nations that have looked to us for leadership in the past, rather than turning inward and resorting to protectionism.
5 responses to “The Real Implications Of China’s Currency Policy”
ranjan, good piece. it would be interesting to see how much reserves the central bank of argentina has and what was the mix of those reserves. i will send you some data on global central banks and the reserves they hold. nice post.
The crucial question on the matter, which almost nobody dare to ask, is what do Chinese plan to do with ARS in the future. ARS is not a type of currency you want to hold in a basket, especially in times of deleverage.
It is almost certain that Chinese are primarily interested in natural resources of AR.Assuming that the swap agreements will be prolonged and/or extended in value, reserves of, lets say $50bn in ARS, would give Chinese opprotunity for strong political pressure on Argentinian Gov. As all the rest of argentinian economy, both sovereign and private obligations, export/import still will be dependent on USD/ARS exchange rate, real threat of devaluation of their currency would make argentinian economy most vulnerable. Such a threat of devaluation could be thrilling, giving Chinese unconditional righs to mining, drilling, explorations etc. Ultimately these are the things Chinese are interested the most, not ARS currency, not an argentinian demand uphold , nor export stimulus on chinese economy(very weak in terms of value of swaps). So in the long run it is not the best way to deal with a crisis.
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China’s currency move shows that it is prepared to sideline the US dollar and cause a US dollar flood on the global currency markets. Already many Chinese firms have positioned themselves in developing countries especially in mining and agriculture and if they all switch to demand the Renminbi instead of the US dollar then the US dollar is in trouble. However China cannot risks devaluing the purchasing power of its US dollar reserves because of its actions. The only way out for the US dollar is to abandon the fixed cross rate system and accept free floating cross-rates. Thus as seen in 1948 November Americans found it cheaper to buy goods from the UK via Italy as it cost them US$2.6 per Sterling pound than the direct rate of US$4 per Sterling pound.
Thus for Argentina and the developing world if China created a free currency trade system and exchange arbitrage equalized quotations between markets then the cost of a currency would depend on which market it was bought in, hence a currency would be in both at all times in a devalued and appreciating state so to say until exchange arbitrage equalized the rate. It is this fact that creates China’s cheapness factor through the labour card, because if the US went on a free currency policy, accepting all currencies and letting exchange arbitrage take over, the cost of it importing raw materials would drop bringing back viability and jobs to the US. With such a policy the US has to demand that exports of all nations be paid for in their national currency, the quest is to find the national currency at a price that is profitable to keep imports flowing. If not then China is most likely to follow this path but if they stick to fixed cross rates then its currency will be doomed, and this will raise tension between the US and China, as China blames a weak dollar.
Its time to switch to free floating cross rates as the world did in the 1960s from fixed exchange rates to floating rates, now the world needs is free floating cross rates and let convertibility be determined by the price of a currency not traditional command economies.
I think, establishing a global presence is one of China’s ways to thrive in the present economic climate. Strengthening its monetary value while ensuring profits is really a good idea. The only threat it poses to the US is if Yuan will be recognized as the primary reserve currency for international trade and overthrow US as the global leader. But, this is a minor challenge compared to the internal challenges that faces the US government. Obama certainly knew about China’s move, however, I bet he thinks that strengthening the USD within is the best move against China’s domination and before China can level with US, Obama will certainly have raised US a notch higher.