In the run up to the G20 summit, the creation of a supranational global reserve currency has been a hotly debated issue. Some commentators have even speculated that the summit may take steps towards replacing the dollar with a new reserve currency. The United States is the world's largest debtor and China, the country with the most foreign exchange reserves, is worried about falling into a US dollar trap. George Soros says the G20 summit may be the "last chance to avoid a global depression". But there is little hope that the summit will bring about major change as no single power will be able to impose its will, according to a commentary of the 21st Century Business Herald.
Before the summit Germany and France pinned the blame for the financial crisis firmly on the US and expressed their indignation at the US bailout policy and in particular what they saw as moves towards trade protectionism. They also proposed setting up an international regulatory body that would have authority over US financial institutions.
Developing countries believe having the US dollar as the world reserve currency is the root cause of economic instability and they are keen to establish a super-sovereign currency to replace the dollar. On the face of it there is little chance that the summit will reach a meaningful consensus on a rescue plan for the world economy, particularly as the US is determined not to give up the dollar's dominant status. And developing countries will be unwilling to provide additional funds to the IMF unless they are given a greater say in world financial institutions.
History is repeating itself. The G20 summit may mark the start of the collapse of the world economic order dominated by the US dollar. At a world economic summit held in June 1933 in London, the United Kingdom attempted to recover its dominance of the world economic order, while being challenged by the US. The meeting failed to reach agreement on any substantive issues. Eventually the Second World War settled the issue and allowed the US to completely destroy European hegemony. In 1944 the Bretton Woods system, based on the US dollar, was established at a United Nations Monetary and Financial Conference.
Looking at the history of how the dollar replaced the pound is instructive, says the commentary. The dollar beat the pound because the Great Depression destroyed the international economic order and Roosevelt's New Deal revived the US economy. The enforcement of the Reciprocal Trade Agreement Act helped to establish an international trading system dominated by the US.
In addition, the US also put in place a number of other favorable pre-conditions. It strengthened its navy which in turn guaranteed the security of its resources and markets. And it joined, and later came to dominate, all major international organizations.
The current situation resembles that of 76 years ago. The position of the US dollar has been shaken by the ongoing crisis but the dollar has not been destroyed. And no currency, as yet, has the potential or capacity to replace the dollar. The rise of a currency to a dominant position must be backed by powerful military power and control of a large volume of international trade, so as to guarantee its credibility and circulation throughout the world.
The rise of China's economy depends on access to markets and the expansion of its exports. Fighting protectionism is of supreme importance for China and it will continue the process of signing free trade agreements with countries and regions around the world. China has recently concluded more than 600 billion yuan of currency swap deals. They will help stabilize the value of the currencies involved, boost Chinese exports and speed up the internalization of the Chinese RMB.
China should use its foreign exchange reserves to gain more clout in international organizations, for example by purchasing the IMF bonds and increasing its voting strength at the IMF, according to the commentary. It should also enhance its influence in regional financial organizations such as the Inter-American Development Bank (IDB) and Asia Development Bank (ADB).
But China has two major weak points: one is its non-convertible currency and the other is its economy's heavy dependence on exports, says the commentary. The former prevents its currency from exerting international influence and the latter means that China still depends heavily on overseas markets. China needs to speed up the internationalization of the RMB and move towards full convertibility. In the meantime it also needs to take structural initiatives to boost the role of domestic demand in its economy.
(China.org.cn by Zhang Ming'ai, April 1, 2009)
