China must take steps to internationalize the yuan
Also increase returns from foreign exchange reserves
China Daily 2010-05-19; By Zhang Monan
As the largest holder of Washington's debt, China should strive to drive a hard bargain with the United States, especially in the context of the latter's insistence on the appreciation of the yuan.|
China's status as a major international creditor nation has grown faster than its ascendance as an economic power.
China's US treasury debt holdings rose to $895.2 billion by the end of March, in the process becoming Washington's No 1 creditor.
China, however, has faced a dilemma due to this status, which has imposed asymmetrical rights and obligations with regard to Washington.
Since China's huge foreign investment is in the form of reserve assets or government lending, it may be labeled an "official creditor", as opposed to a "private creditor", which is based on a country's foreign direct and private investments.
By the end of last year, China's foreign reserves had touched $2.3992 trillion, or 69.3 percent of the $3.4601 trillion that the country held in foreign financial assets.
As a fledging creditor nation, China has chosen to convert its enormous trade surplus into official foreign reserves, which have partly found its way into the US capital markets due to Beijing's large-scale purchases of US government bonds.
China is expected to get a return ratio of only 3 to 4 percent by investing in the national debt of the US.
On the other hand, the US, despite its huge debt and yawning trade deficit, accepts more dollar inflow, and then invests these commodity dollars, chiefly into Asian emerging markets.
As a result, Washington gets a return ratio of 10-15 percent compared to China's much lower investment return ratio.
The bi-directional capital investment, in essence, reflects imbalances in international capital flow, and highlights the basic fact that economic globalization has led to developing countries being looted economically by the world's major financial powers.
Since China cannot use its own currency to issue debt, the country's swollen trade surplus has intensified the risk of a devaluation in its reserve assets.
On the contrary, even its ballooning national debt has failed to restrain Washington from becoming the world's largest debtor nation.
Instead, the US is utilizing its debtor status as an unchecked instrument to maintain and extend its decades-long hegemony in the global financial domain.
The long-standing Dollar Standard has not only helped the US to globally circulate its national debt, but has also helped increase its national wealth through monetization of US government debt or depreciation of the dollar.
Statistics show that 48 percent of international trade is settled in dollars, 61.3 percent of the foreign reserves held by other nations are in dollars, and the dollar is used 83.6 percent of the time in international financial transactions.
Due to its dominance in the international financial market, the Dollar Standard has essentially evolved into the US Debt Standard.
As the distributor of the world's leading currency, the US can hike dollar issuances to boost its ability to pay off its inflated national debt.
The dollar's devaluation has been used as a major means to reduce US government debt. From 2002 to 2006, as much as $3.58 trillion of US national debt evaporated due to Washington's increased dollar issuance or dollar devaluation.
Large-scale foreign direct investment (FDI) has also brought the US enormous economic returns.
Due to its adherence to the FDI strategy, Washington achieved a profit ratio of as high as 20 percent in its foreign assets investment from 2000 to 2006.
In a sound and well-developed international financial market, the liability-credit relations should be used as an important chip in political games and interactions among different countries.
What China should do now is ponder how to use its clout as the largest US debt holder and transform its enormous financial power into writing policies to its advantage, and improve its financial capability to fend off pressures from the outside world.
The country should make great efforts to push for the internationalization of its currency, the yuan. To this end, the country should strive to increase the renminbi's proportion in international trade settlements, develop the yuan into one of the leading investment currencies in the international financial market and then forge it into a leading reserve currency.
In the short term, the country should make active efforts to set up effective channels for yuan's foreign investment.
In the push for Capital Account Convertibility for the yuan, and keeping financial risks under control, the domestic currency market should be gradually opened up in order to help foreign players gain access to the Chinese currency and its use.
Effective measures should be taken to repatriate outbound yuan through the Qualified Foreign Institutional Investors (QFII) channels and push for more yuan settlements in services trade as well. Expanding the circulation of the yuan in the international financial market will help raise China's status as a major international creditor nation.
Great efforts should be made to set up a well-developed homegrown financial market in China. The country's status as a premature creditor nation is closely related with its underdeveloped financial market.
Given the existence of some defects in its financial structure, and the distribution of its financial assets and resources as well as their organization and management, China should set up a full-fledged homegrown financial market as soon as possible. That will help transform it from an investment-oriented to a savings-oriented economy.
Besides, the country should try to reduce its debt investments and, instead, increase equity investments which would help China enter new economic growth areas.
Effective steps should also be taken to adjust China's foreign assets structure in a bid to transform its capital advantages into institutional, resources and investment advantages through restructuring the country's global capital strategy.
The author is an economics researcher with the State Information Center.