The PBoC has thrown down a gauntlet. Or has it?
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With the Fed having decided to pile into US government debt, and on the eve of G-20 summit in London, the People’s Bank of China (PBoC) Governor Zhou Xiaochuan, along with the chief of the State Administration of Foreign Exchange, has sent a deliberate message that China may seek an alternative to the US dollar as its forex reserve currency by cooperating with International Monetary Fund.
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That same day, when PBoC Deputy Governor Madame Hu Xiaolian's remarks were generally supportive of the dollar and Treasuries, Zhou Xiaochuan released a report on a candidate for a new reserve currency, the Special Drawing Rights, the so-called paper gold issued by IMF. Western observers are finding this seeming contradiction of remarks perplexing, since for them it has not seemed a likely G-20 position for China.
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The Fed debt-buying announcement has Chinese media and a lot of analysts in and outside the government deeply concerned, or angry, about the monetization of US government debts.
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Although, short-term, the Fed action pushes Treasury bond prices up, the Chinese government is worried about its long-term dollar-denominated assets, accounting for a lion’s share of its forex reserve. China has repeatedly expressed its worries. Premier Wen Jiabao stated recently he was concerned about the security of Chinese investments in the US.
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This time the Chinese media and analysts have gone a bit overboard in accusing the US government of crossing the boundary between being a responsible reserve money printer and planting a time bomb for the future collapse of dollar, collapse in terms of both exchange rates and inflation.
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The Chinese government does not have a lot of room to maneuver here, but what are the terms of maneuver in this case?
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The Chinese government has come to the realization that its economy has been so deeply pegged to the US that it has no other choice but to pray for a stable dollar and a quick recovery of the US economy. Other possible moves include internationalization of RMB, grabbing oil/resources overseas, boosting domestic demand, etc., none a solution for the time being and all carrying a load of uncertainties. So, continuing to support the current system is inescapable, at least for the foreseeable future.
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Longer term, a non-sovereign, super-national currency may well be an attractive alternative for China. China can transfer its USD holdings to super-national currency-denominated assets, such as SDR, gaining security for its reserve assets and acquiring influence in the international monetary system. A multinational institute would better serve China’s interest than a G-2 regime, a China-US axis of international economic-financial-monetary order. At the moment, the SDR is the only feasible choice that is not opposed by the cacophony of voices in Beijing.
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Zhou’s statement is being offered as a trial balloon. This is the typical gradualism of China’s domestic reform style applied to the international front. China needs a change, but not a challenge, and this is in line with China's respect for multinational association. This is the message.
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But water-tester or threat, it seemed to catch the US off guard. Nobody is quite sure what to make of it. It came across very different from Hu Xiaolian’s message the same day. She was much closer to the point of view of a China deeply intertwined with the United States
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Zhou's report was also is a response to criticism of this latter situation from the homeland. It was published simultaneously in Chinese and English, suggesting there was a domestic as well as an international audience for this and that it had been prepared in advance.
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To its international audience, China wants to show that it is responding to appeals from some western countries, such as UK, that it should support IMF and use its $2 trillion forex reserve to address the current economic crisis. And for the home crowd, it offers a vision of the greater influence China will be able to exert operating through a major multinational organization, not to mention the not quite subtle warning it throws up to US financial authorities to be damned careful with the vast sums it has been borrowing.
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The view of the IMF in Zhou's piece definitely seems more conciliatory toward the institution than has been expected in recent years. The government wants to show its domestic audience that it does have a solution, though few people in China have any idea what an SDR is. But if China throws its weight behind the IMF, the international community is going to have to take both IMF and the new Chinese prominence very seriously.
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