The West Better Listen as China Makes its Play for International Finance
China has been progressively laying the foundation of an international financial and monetary system that is centered on the yuan.
Over the past two years progress has gained momentum, but they have been hitting speed bumps along the way, which was shown last year in August. If China is able to regain its economic footing then its ambitions might be realized in the next decade.
This development would then empower Beijing and the dollar’s centrality would diminish in the global economy as with American power.
The demand of the dollar as a reserve currency is so strong that it is able to drive down borrowing costs for the US government by $100 billion a year and this then makes it easier to finance the worlds strongest military.
Beijing has similar aspirations, but Washington has been slow to accommodate China’s rise. The IMF quota reform has been refused by congress for the past five years. The approval would mean that China would have more influence in the financial institution.
Last year, the US Treasury made a hint to the opposition to include the yuan in the elite SDR basket of currencies of the IMF.
Washington has now agreed on both counts last year, but this was not before Beijing had launched its own financial institution, the Asian Infrastructure Investment Bank.
China has also helped in creating two more international financial institutions with the BRICS, which are the New Development Bank and Contingent Reserve Arrangement. They also have two credit ratings agencies that appeared on the global stage since 2008.
However, in the next 10 years there are three ways that things could unfold.
- The US could successfully incorporate China into the existing international financial order. If China is allowed to become a prominent stakeholder in its financial institutions and if it does not try to blunt global use of the yuan then Beijing could see fewer incentives to create new structures. However, Washington will need to listen to Beijing’s economic ideas and allow them to exercise leadership as an unpleasant message is being sent to China with America’s constant refusal to join the Asia Infrastructure Investment Bank.
- If Washington fails at incorporation then China might emerge and build a rival financial and monetary order. There three new international financial institutions would develop into important providers of development and emergency finance. This will then allow developing countries the opportunity to shop between the World Bank and the Asia Infrastructure Investment Bank and see who would give them the best deal. This would then dilute the Washington based international financial institutions ability to promote political and economic policies that reflect American interests. This could then mean that the yuan could be a key global currency and have a larger grip among countries that have a negative view over the prominent America.
- Another possibility is that if Beijing fails to guide its economy through the economic transition then the ambitions of China could fall short. China is trying to shift an export led growth strategy to a consumption based growth model and to move the yuan from a fixed exchange rate to a market driven one. However, China could experience a financial crisis over the next few years.
Any of these possibilities are possible, but one thing is for sure that China, its currency and its role in the international financial and monetary systems will continue to demand the attention of the world and of American leaders.