Qingyi: Reserve Currency Risk and Chinese Responsibility

While “War” is defined as the dissension and transformation caused by reserve currency in the world, the relationship between reserve currency system and trade balance is justly ignored. In a great degree, another important reason (except a well-known reason) that causes current reserve currency risk is presented long unbalance trade system.

Of courses, America should undertake the responsibility that America is unable to continuously support increasing world trade. If former leaders who resided in White House could face up to the low long-term investment rate that U.S. economy keeps, which are very similar to the poorest, slowest economic growth countries such as south of Sahara, America regards dollars as reserve currency to win oversea floating indebtedness that could be used in domestic fixed asset investment in order to increasingly improve employment market and enhance national income and consumption power. However, it is not feasible to excess expand the same debt-based consumption and to blindly expand relevant derivative financial instruments. Then, the financial crisis could be resolved sufficiently.

In addition, it is an essence that America long oversea investment expansion is still the expansion of America floating debt. Although the profitability of large enterprises is obviously promoted, at the same time, productivity rapidly is lost toward oversea, which leads to faster rise of trade deficit. Further, this promotes the foundation to support dollars credit toward continuous split.

However, it is not a good manner that we always ascertain responsibility of America but not reflect native responsibility simultaneity.

Viewing in a different way, money is used for consumption, and reserve currency (like any money), are the use of media transactions in the final analysis. If reserve currency issued in abroad speed up turnover rather than great hoarding by some countries, current reserve currency risk could not develop so serious.

Total world foreign exchange reserves widely increase to $ 4,300 billions from $ 1,550 billions based on statistical data of IMF in 2000- 2007, the accumulative addition amount is $ 2,750 billions that are 4.4 times of past 10-year accumulative addition amount. The addition amount from China is up to $ 1,400 billions that account for more than 51％ of world foreign exchange reserves. In addition, the addition amounts from five countries (including China, Japan, Russia, India and Brazil) at the same term stupendously reach to $ 2,820 billions that is 1.03 times of world foreign exchange reserves.

Reserve currency hoarding show that world trade system occur severe structural imbalance and mean that those countries hoard reserve currency could not promote faster domestic economy development depending on using the liquidity of foreign exchange reserves .

It is a very serious problem. The history of the world's economic growth shows that any country can not rely on the growth of trade surplus liquidity for long time. Those countries become real rich rapidly transform domestic economy structure depending on liquidity during rapid growth of exports without exception and thus realize economic sustainable growth after increased labor cost. Because labor costs possesses a property of full rigidity, once it becomes the key factor to restrict export competitiveness, the domestic economy growth should be doomed to be broken.

On the other hand, the history of reserve currency prove that one country’s “win” means another country’s “lose”. Some main countries of export growth have hoarded reserve currency, which must lead to the reserve currency shortage in other countries and restrict other countries to improve domestic economy development depending on resource products exports.

The worse matter is that some Chinese scholars toughly believe that foreign exchange reserves are not used for consumption but risk prevention. It is the idea that dominates the Chinese foreign exchange reserves management, which lead the ratio between foreign exchange reserves and import increase to 74％ in 2000 and then to 180％ currently, from 21％ in 1990. Since China has a small quantity of financing oversea debt, it is enough that the ratio between foreign exchange reserves and import keep 30％.

However, on the one hand, excessive foreign exchange reserves become one of part reasons in world reserve currency crisis, on the other hand, the major risk among China total population developing trend is seriously underestimated. Wealth growth is always inversely proportional to dependency, with a sustained birth decline, China population shall decrease to 0.56 billions from the peak population of 1.38 billions in 2100. If China does not use current foreign exchange that is a great favorable time to speed up the domestic economy transformation, then, it is a very difficult matter that China shall continuously become the leader in world economy growth.

There are two words to be considered in face of current world reserve currency risk. One Confucian dictum is that “Gentleman is self examination” , another Taoism is that  “Do not devote a small interests for the benefit of the world ”. They mean that a country should reflect the role and relevant duty during currency risk process. If world trade keeps balance in whole and structure, without excessive export and import, such as “everyone is very stingy”, how appears a reserve currency crisis?

Finally, it is unimportant that what is reserve currency, but it is more important that reserve currency will be "war", all countries should not try to earn additional benefits from reserve currency acted as trade media. Here, those who consider the current international monetary system and reform frequently using the "currency war" look very smart. However, in fact, they are too much smart and beyond the limit.

 (Author: Research Fellow of China Economy and Development Institute)