One recent item of much discussion has been whether the Chinese government wants to see the dollar decline as a reserve currency. The main reason we have given that China would not wish to see a precipitous decline in the dollar is that the government would be shooting itself in the foot: destroying the value of its trillion-dollar reserve stash. This certainly matters.
But another simple way to look at why China might not want this is to consider how its policy has long been centered around an undervalued yuan. To be sure, China is looking at moving towards a greater emphasis on domestic consumption of domestic production in the future (as part of the global "rebalancing" Bernanke and many other economists wish to see), but in recent years we have seen general agreement that the yuan is undervalued -- the question has been "how much".
Now consider what China would be doing if it initiated the much-feared "run on the dollar" apart from hurting the value of its reserves: it would be smashing the very logic of its export-oriented growth strategy by makings its products dramatically pricier to Americans. Again, there are caveats here (China sells a large amount to Europe as well and may be interested in a strong euro as a competitor to the dollar as a global reserve currency, and moreover past policy is unlikely to be reflected in future policy), but it would seem very unlikely to have an export-oriented economy seek to undermine the purchasing power of its biggest customer.
In other words, to address some concerns in class, China may wish to see a long-term waning of the dollar's dominance in favor of a more stable "basket" of currencies (perhaps including its own yuan in the long run), but it surely does not wish to see a collapse of the dollar for the sake of bragging rights.
In short, sometimes a simple argument can suffice: if China really wanted to hurt the dollar, why wouldn't they have simply revalued the yuan long ago? And why would they have accumulated so many of them in reserves in the first place?
1 comment:
China might want a devaluing dollar, but not now. Perhaps once they converge sufficiently with the developed world, they will want to establish a global economic superiority - and that is when all those cash reserves will come in handy... Although, realistically, that could not happen anytime soon.
As for "collapse of the dollar for the sake of bragging rights", it is certainly a poor economic strategy. But is it a poor political strategy? The US trade deficit makes the two countries mutually dependent, but China is in a somewhat more convenient position of a lender, and a holder of USD reserves. While a "run on the dollar" may well be suicidal, it could be used as a powerful political tool, if not for Chinese dominance, then at least for the sake of global economic stability.
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