HONOLULU - There is continued concern in Washington that China's
economic rise, and its relatively weak currency, could threaten the dominance of
the US dollar over the next 5 to 10 years. That will not happen, according to
Paul Bowles.The University of Northern British Columbia professor, and a
recent visiting lecturer at the East-West Center, says "China's reemergence as
an economic power is unlikely to point to an end of the dominance of the
dollar." He notes that even if some predictions that China may overtake the US
as the world's largest economy by mid-century prove true, the dollar "would
likely to continue for decades after that as the world's leading currency."
He points out historical experience is on his side of the argument. "The
pound sterling continued to play a significant role in the international
monetary system long after Britain's economic pre-eminence was lost."
Bowles says there is little chance China's currency, the renminbi, will
become a significant international currency any time soon, "given that many of
the factors required for an international currency are not present."
for talk of an "Asia dollar" with the Chinese currency at its core, he is also
pessimistic. "An Asian currency is also a long run possibility at best and, even
then, only if long standing regional rivalries between Japan and China can be
But, that does not mean the dollar is home free, he cautions. "The threat to
US dollar dominance does not come from China's reemergence or from a possible
Asian Currency Unit, but rather from the current imbalances (in foreign exchange
rate regime, trade surpluses, and official reserve holdings) and the policy
history which lie behind them."
Bowles says the current situation is "one marked by China having a large
bilateral trade surplus with the US, a rapid build up of official reserves to
over $1 trillion and a very slowly appreciating renminbi against the US dollar."
What to do about those factors lie at the heart of the policy matters that must
be dealt with in both Beijing and Washington. But, he adds "the scope for
mismanagement is considerable."
The US continues to pressure China into
letting the renminbi appreciate, as Bowles puts it, "in an effort to reduce the
bilateral trade deficit."
Meanwhile, he points out, "China's
policymakers have continued with their public declarations that they are moving
to a more flexible exchange rate system but have provided no details of when or
to what degree."
To be fair, he adds, China has switched from a fixed
rate against the dollar to a tightly managed float against a basket of
currencies, and the renminbi has appreciated a percentage point or two against
Bowles says Chinese leaders have analyzed the 1985 Plaza Accord and its
impact on Japan. They did not particularly like what they saw. And, he says
China "will not be pressured into entering a similar type of agreement with the
US," Bowles adds, "Such an agreement would be seen as serving US rather than
China's interests and the types of numbers being bandied around in Washington as
the desirable appreciation of the renminbi are non-starters in Beijing."
On the trade front, Bowles sees the possibility of China gradually shifting
over the next 5 to 10 years to a more domestic-oriented economy from today's
export-led industrialization strategy. And, the shift has nothing to do with
pressure from Washington.
"From a policy perspective (the export-led economy) is seen within China as
being responsible to a considerable degree for the widening regional income
inequalities, inequalities which the new leadership view as threatening social
stability." That shift, if and when it comes about, could lower the trade
surplus to a certain degree.
China's hoard of foreign reserves are another issue.
Approximately 80 percent of Beijing's reserves are held in US-dollar
denominated assets, and not all are due to the trade surplus. Of the
approximately $220 billion increase in reserves in the period from June 2005 to
June 2006, roughly $132 billion (61 percent) was the result of trade surplus and
$85 billion (39 percent) was the result of foreign direct investment and/or "hot
Bowles says there is a growing argument within China that the current level
of reserves is harmful because a build up of reserves "is associated with the
loss of real output, higher risks as a result of a potential US dollar
depreciation, higher political risks associated with more conflict with the US,
increased difficulty of domestic monetary management as a result of the need to
sterilize the inflows, and a reduced ability to borrow from the World Bank."
In response to these arguments, he says "it is not surprising to find Chinese
leaders indicating that they do not wish to see a further build up of
Bowles says both the US and China have an "overarching common
interest in preservation of a stable international economic and monetary order."
But, within that larger common interest are home-grown ones. And therein lays
the real threat to the US dollar. "US unilateralism, hectoring and demands
coupled with Chinese nationalism and exclusion from a major role from the
international financial institutions leave plenty of room for over-reactions,
political miscalculations and policy errors."
"The future of the dollar rests in no small measure on the ability of the two
powers to successfully navigate the rocky road head," Bowles