-
-
-
China Daily E-paper
Op-Ed Contributors
Time for a new Bretton Woods
By Adlai E. Stevenson (China Daily)
Updated: 2010-04-22 07:46
 |
Large Medium Small |
Editor's note: China should organize a new Bretton Woods System based on East Asia to maintain global monetary stability, the author suggests.
In the monetary system organized with US leadership at the end of World War II, currencies were linked to the US dollar, which was linked to gold. The US accounted for over half the world's output of goods and services. By the mid 1950s, all East Asia accounted for only about 4 percent of global output. China's economic reforms began only 30 years ago. By then, the US dollar had begun its decline. Its official convertibility to gold at $35 was suspended in 1971. Today gold is priced in the market at over $1,100, and China's foreign exchange reserves exceed $2.4 trillion.
As the dollar declined over time, US trade deficits increased, challenging economic orthodoxy. Today US debt levels, fiscal deficits and entitlements have climbed to unsustainable levels, leaving the US increasingly dependent on China for credit.
China is under pressure to reduce its trade surplus by revaluing the renminbi - but China is understandably concerned about protecting its investments from a further decline of the dollar. It will appreciate the renminbi in its own good time, as it diversifies its investments and internationalizes its currency. A stronger renminbi would help contain inflation. It would foster domestic consumption and reduce the cost of imports.
But many of China's imports are commodities and components which fuel its exports. A stronger renminbi would facilitate China's foreign direct investments and enhance its economic competitiveness, again challenging western orthodoxy. The US ran trade surpluses with a strong dollar. Floating the renminbi while liberalizing capital controls is no quick fix for the world's monetary instability.
Meanwhile Europe is struggling to contain fallout from Greece's fiscal profligacy, while the US struggles to regulate the bailed-out banking industry which triggered the financial crisis, as debt continues to mount.
The US dollar no longer meets the tests of a reserve currency. It is ubiquitous but not a reliable store of value. In brief, the world has outstretched its capacity for financial governance and monetary stability though the IMF has become more realistic since inflicting its conditions on East Asians during the financial crisis of 1997.
