Op-Ed Contributors

US-waged war of currencies

By Zhang Monan (China Daily)
Updated: 2010-10-20 07:56
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The world's largest debtor is using dollar dominance and debts to suck the wealth from emerging economies

In a drummed-up currency war, in which China is viewed as the main target, the United States once again revealed its desire to promote the redistribution of global wealth to its own advantage.

A currency war is in essence a financial war, or a war for more wealth possession, one in which the country that has the dominant say in world's currency issuance will gain an absolutely advantageous position in global wealth distribution.

The US has long skillfully exercised financial policies characterized as "economic egoism". The world's sole superpower has been depending on the inundating issuance of the dollar and its national debts to be the two major engines that sustain its economic growth. As a result, the Dollar Standard System has evolved into a kind of "debt standard system" to the US' advantage.

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A typical example is Washington's attitude toward its bulging fiscal debts. To defuse its astronomical government financial debt, which increased to $12 trillion in 2009, or 82.5 percent of its gross domestic product the same year, the US Federal Reserve adopted a Quantitative Easing Monetary Policy in the hope of expanding the country's balance sheet and monetizing its fiscal deficits, so as to reduce its debt-holding costs. In this sense, inflation is likely to cause no panic among US decision-makers. On the contrary, Washington will no doubt prove to be the largest beneficiary of the fiscal war it has started.

China and other emerging economies, however, will be the victims of this well-designed US "zero-sum" game. Due to their faster economic recovery amid the global economic slowdown, international floating capital has swarmed into emerging economies on a larger scale and at a faster speed than it did before the global financial crisis. It is estimated that from April 2009 to the end of June 2010, the amount of international financial capital that flowed into the world's 20 leading emerging economies reached $575 billion, and more than half of that went to emerging Asian markets. The large-scale inflow of international liquid capital has increased pressure for the recipients to appreciate their currencies and has sown the seeds for inflation.

Statistics indicate that nearly two-thirds of the 20 emerging economies now suffer a negative interest rate and are under huge pressure to raise prices. Merrill Lynch, one of the world's leading financial management and advisory companies, estimates that China will have a 3.2 percent inflation rate in 2010, India 7.9 percent, Russia 6.1 percent and Brazil 5.0 percent. At the same time, the inflow of international capital has further aggravated pressures for currency revaluation in these export-driven or resources-reliant economies.

In its recent unremitting efforts to escalate the pressure on China to appreciate the yuan, Washington hopes to realize multiple intentions. An appreciating yuan is believed to help boost US exports, push forward its much-needed economic restructuring and help its economy recover faster at a time when domestic demand still remains slack. In addition, as China is the largest holder of US national debt, the rapid appreciation of the Chinese currency would cause many of the nation's dollar-denominated US debts to evaporate and promote the redistribution of wealth between the creditor and debtor.

Over the past half a century, the firmly established Dollar Standard System has proven to be an effective tool in helping the US promote international circulation of its huge debt. Washington has also managed to substantially increase its national wealth by monetizing its national debt or devaluing the dollar.

Statistics show that 48 percent of current international trade and 83.6 percent of international financial transactions are now priced by the dollar. About 61.3 percent of the world's foreign reserves are also dollar-denominated. As the issuer of the world's leading currency, the US is able to reduce its national debt by increasing the dollar's issuance through its devaluation. From 2002-2006 alone, around $3.58 trillion-worth of US debts disappeared in this way.

China and other holders of US national debt are now being forced into a financial war, as the US is strongly tempted to depreciate the dollar. To prevent the dollar from devaluing, which will cause the value of their dollar-denominated assets to decline, many US creditors, especially emerging economies, have to continue purchasing the dollar, thus putting their assets at risk of further depreciation.

However, turning a blind eye to the rise of their currencies against the dollar will also cause their exports to suffer heavily and attract more international money, pushing up property prices and fueling economic bubbles and inflation.

China should remain particularly vigilant over Washington's attempts to force the appreciation of the yuan at a time when the country is already facing huge inflation pressures and when its property prices have risen to a dangerous level. China should learn a profound lesson from Japan in the 1980s when the forced appreciation of the yen in its monetary war with the US plunged the then booming economy into a 10-year recession.

As a fast-growing emerging economy whose currency is on the way to internationalization, China should take into consideration long-term and short-term interests in any exchange rate war with the US and should be psychologically poised for a lengthy test.

The author is an economics researcher with the State Information Center.

(China Daily 10/20/2010 page8)