The Future of International Liquidity and the Role of China

• Autores: Alan M. Taylor
• Localización: Journal of Applied Corporate Finance, ISSN-e 1745-6622, Vol. 25, Nº. 2, 2013, págs. 86-94
• Idioma: inglés
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• Resumen

  • China has prospered from its strategy of reserve accumulation and related export surplus. But the strategy has drawbacks. Open-ended reserve accumulation has left the the economy exposed to an eventual devaluation of the dollar, and reliance on exports has left it exposed to a downturn in rich-world consumption. China thus has an incentive to rethink both halves of its model�to accumulate fewer reserves, on the one hand, and to run a smaller current-account surplus on the other. Recent steps such as faster renminbi appreciation, the new Five-Year Plan, and announced shifts in reserve strategy will move China in this direction� and other emerging economies may well follow.

    This article analyzes the likely consequences of internationalization of the Chinese renminbi for the global monetary system and its possible ascension to reserve currency status. It argues that if the process proves feasible, despite the difficult hurdles along the way, the results of internationalization would be constructive, both for China and the rest of the world. If emerging-market central banks and other reserve managers (such as sovereign wealth funds) continue overwhelmingly to favor the dollar and a small set of other developed-market reserve currencies as a store of value, the world risks a third crisis of the global reserve system. This would be a rerun in a somewhat different guise of the well-known paradox described by economist Robert Triffin, whereby the demand for international liquidity, when loaded onto a small set of national currencies, ends up destabilizing the system as the key reserve suppliers issue more and more assets and hence build up unsustainable debts. (Such forces, Triffin argued, were a main cause of the 1930s crisis of the gold exchange standard; and as he predicted, those forces emerged again in the 1970s to destabilize the dollar-and goldbased Bretton Woods system.) In today's global monetary system, the emergence of the renminbi (along with other developed- and emerging-market currencies) as a potential reserve currency would expand and diversify the supply of reserve assets, enabling central banks to maintain large buffers against financial shocks while allowing the United States to stop issuing a large and growing bulk of the world's safe and liquid claims, and thus bearing the burden of an everexpanding, and ultimately questionable, debt to the rest of the world.