China and Japan Currency Swap: A Nail in The Coffin of The US Dollar Hegemony
By Horace Campbell. On 25 December 2011, the government of Peoples Republic of China and Japan unveiled plans to promote direct exchange of their currencies. This agreement will allow firms to convert the Chinese and Japanese currencies directly into each other, thus negating the need to buy dollars. This deal between China and Japan followed agreements between China and numerous countries to trade outside the sphere of the US dollar. A few weeks earlier, China also announced a 70 billion Yuan ($11 billion) currency swap agreement with Thailand.
After visiting China, the Prime Minister of Japan Yoshihiko Noda went on to India and signed another currency swap agreement with the government of India. These currency agreements in Asia came in a year when the countries of the Association of South East Asian Nations (ASEAN) (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam) were seeking to deepen ways to strengthen their firewall to protect their economies from the continued devaluation of the US dollar. In the year of the ‘Eurozone crisis’ when the future of the EURO as a viable currency was fraught with uncertainty, many states were reconsidering holding their reserves in the US dollar.
Moreover, in the face of the neo-liberal orthodoxy of the Bretton Woods institutions (especially the IMF) swap agreements were proliferating in all parts of the globe. The Latin Americans established the Bank of the South and are slowly laying the groundwork for a new currency, the SUCRE. As in Asia, the Bank of the South will be one of the fundamental institutions of the Union of South American Nations that has been launched in Latin America in order to guarantee the independence of the societies of Latin America.
Not to be left as the only region holding dollars, the leaders of the oil rich states of the Gulf Cooperation Council have been buying gold while announcing as long ago as 2009 the intention to establish a monetary union with a common currency. In Africa there are plans for the strengthening of the financial basis of the African Union but so far there has not been the same kind coordinated regional plans for financial independence. During the period of the debate on the debt crisis in the USA, the Nigerian central bank governor Lamido Sanusi announced that Nigeria plans to invest 5 to 10 percent of its foreign exchange reserves in the Chinese currency – the Yuan also known as the renminbi (RMB).
These accelerated Swap agreements – (agreements between two or several countries (bilateral vs. multilateral) on exchanging currencies in times of crisis) – came a decade after the countries of ASEAN established the Chiang Mai Initiative (CMI). In the aftermath of the Asian economic crash and the currency attack by speculators of the financial services industry, the CMI had been established to promote financial cooperation among the ASEAN countries with regional collaboration on currency issues high on the agenda.
Initially when the CMI was launched, the government of China had been lukewarm to the goals of the CMI but over decade, especially after the 2007-2008 Wall Street crash, the preliminary partnership that was called ASEAN plus three (Viz ASEAN countries plus China, Japan and Korea) matured to the point where the ASEAN Swap Agreements have now been expanded to the Chiang Mai Initiative Multilateralization (CMIM) agreement, and a set of rules with structured mechanisms for financial regionalism to work for the development of Asian bond markets. These three pillars of the new Asian economic cooperation – CMIM, Asian Bond Markets and bilateral swap agreements – mark a new stage in the international political order.
This week we will examine the implications of the Chinese/ Japan currency swap in the context of the internal discussions in China about the consolidation of socialism. In 2011, China overtook Japan as the second largest economy in the world, and every expansion increases internal and external pressures on the socialist goals of the People’s Republic of China. More importantly, it is crucial to recollect the competitive devaluations and currency wars of the last depression so that the decline of the dollar can be managed in a way that avoids the recourse to open confrontation of the last depression. It is worth remembering that one of the goals of the fascists in the last depression was to roll back socialism.
In our contribution this week we will examine the implications of the swap agreement between China and Japan and the pressures on other regions to delink from the dollar. The conclusion will argue that this swap is one more nail in the coffin of the dollar as the international reserve currency.
‘CHINA, JAPAN TO BACK DIRECT TRADE OF CURRENCIES’
This was the headline in the financial press as Bloomberg News and other news sheets of the financial world reported the agreement on settling trade between the two countries in Yen and RMB instead of dollar. With US $340 Billion of transactions in 2010 between the two countries, both being each other’s biggest trading partner, the deal is a clear break away from US financial domination. This Bloomberg Report stated,
‘Japan and China will promote direct trading of the Yen and Yuan without using dollars and will encourage the development of a market for companies involved in the exchanges, the Japanese government said. Japan will also apply to buy Chinese bonds next year, allowing the investment of renminbi that leaves China during the transactions, the Japanese government said in a statement after a meeting between Prime Minister Yoshihiko Noda and Chinese Premier Wen Jiabao in Beijing yesterday.
Encouraging direct Yen- Yuan settlement should reduce currency risks and trading costs, the Japanese and Chinese governments said. China is Japan’s biggest trading partner with 26.5 trillion Yen ($340 billion) in two-way transactions last year, from 9.2 trillion Yen a decade earlier. The pacts between the world’s second- and third-largest economies mirror attempts by fund managers to diversify as the two-year-old European debt crisis keeps global financial markets volatile.
‘Given the huge size of the trade volume between Asia’s two biggest economies, this agreement is much more significant than any other pacts China has signed with other nations.’
Less than two weeks later, in the first week of January 2012, the President of South Korea Lee Myung-bak travelled to China to discuss a ‘bilateral strategic partnership.’ This discussion on bilateral partnership between South Korea and China took place in a context where the Republic of South Korea did not want to be left behind. Ostensibly the visit to China was to discuss the recent passing of Kim Jung IL of North Korea but Chinese media reported that China, Japan and South Korea were hammering out the basic framework for a free trade agreement between the three biggest economies in East Asia.
These agreements will have implications for the dollar as the global reserve currency and there will be increased pressures for the Chinese currency to be internationalized as other societies follow the lead of Japan and seek swap agreements outside of the dollar.
SLOW EROSION OF THE POWER OF THE DOLLAR AND MANAGING THIS NEW MULTIPOLAR CURRENCY ENVIRONMENT
Japan is one of closest allies of the United States. There are thousands of US troops stationed in Japan, but the Japanese, like all peoples of the world, have been losing money as the US dollar was devalued over the past three years. This devaluation has taken the form of what the US authorities called quantitative easing. There has been two such quantitative easings since the 2009 as the United States unloaded more fiat currency on the world.
Whatever the name (devaluations or quantitative easing) all countries in the world were thinking of finding ways to escape being hostages to the US dollar and Central Bank governors from Brazil to India and beyond are working to protect their societies from these devaluations. Asian central banks together hold some $3,3 Trillion in reserves, amounting to an impressive 46 percent of the world’s total national reserves. The government of China has vowed to reduce its holding of US dollars and in 2011. The China Daily newspaper reported that,
‘According to data from the US Treasury Department, China’s holdings of US Treasury bonds stood at $1.1326 trillion by the end of November 2011, $1.5 billion down from the previous month. It was the second successive month that the amount had declined, and the lowest reserve level seen since July 2010. China made six monthly cuts of US debt in 2011, the department’s data showed, trimming its holdings by $27.5 billion from the end of 2010. Yet despite the reductions, China remains the top buyer of US Treasury securities.”
What was left unsaid was the plan of the political leadership of China for a deft management of the reductions so that the international political economy is not drastically affected leading to unforeseen circumstances. Over the past decade numerous officials from the National People’s Congress, the Central Bank and the commercial sectors have been stating that China has to reduce its holdings of US bonds and diversify into other currencies.
When, over five years ago, Parliamentary vice-chairman Cheng Siwei, called for the diversification of Chinese reserves away from US bonds, the implicit assumption was that China would diversify and buy European bonds. This was before the full hollowness of the European project became manifest to the world.
PRESSURES TO INTERNATIONALIZE CHINESE CURRENCY
The Chinese economy has registered an average of over 10 per cent growth in the past thirty years. This has been the most successful transformation of an economy in the recorded history of political economy, but the pundits do not like to point to the socialist foundations of China and the sacrifices made by the Chinese people to transform their society. Mao Zedong called the currency of China, the Renminbi, and the people’s currency. Renminbi is the official name of the currency introduced by the Communist People’s Republic of China at the time of its foundation in 1949. The other name for the currency is the Yuan. Hence the Chinese currency is known by a number of names (including the Kuai).
As a low wage economy, the hard work of the Chinese producers has made the society a force to be reckoned with and the currency attractive to other countries seeking a refuge from the dollar. The political leaders in China have been careful about the pace and nature of the internationalization of the currency. The leaders have slowly allowed Hong Kong to become an offshore renminbi financial centre by allowing authorized institutions in Hong Kong to offer renminbi services such as deposit taking, currency exchange, remittance and trading in RMB denominated bonds. Since 2009 when the Chinese government opened this slight door to the internationalization of its currency, other financial centres such as Macau and Singapore have been hoping to get into the offshore RMB business.
These regional pressures for the internationalization of the RMB came up against the hard reality that for the full internationalization of the currency, for the RMB to become a global currency, the government of China would have to establish capital markets and ensure the full convertibility of capital account. The balance of forces within China would then shift in favour of the one per cent who would then privatise state assets at a faster rate.
In the present international system, opening such capital markets beyond the tightly controlled stock exchanges would open up the Chinese currency to the kind of full scale attack and speculation that was witnessed in the Asian financial crisis in 1997. Thus far the Chinese state has held the line against the expansion of capital markets in ways that would undermine the stability of the society.
The economy of China is a mixed economy with the state-owned enterprises dominating the economy. Of the ten largest companies on the Shanghai Stock Exchange, eight are state owned. With the growth and power of the Chinese economy, the Chinese capitalists have expanded with a large number of billionaires. These billionaires do not control political power and the Chinese state continues to subsidise food, education and transportation services.
There are many limitations to the nature of the Chinese political system, especially the hothouse of growth and accumulation that is creating a fundamental environmental hazard for the majority of the citizens. The growing inequalities and the massive push for the reversal of socialist gains since 1949 are now compounded by an alliance between capitalists in Singapore and the US who are calling for speeding the internationalisation of the RMB.
It is in this context where the December 25 agreement to allow Japan to ‘apply to buy Chinese bonds next year’ becomes significant. It is again worth quoting the press reports of the December 25 agreement. According to the British Broadcasting Corporation,
‘The two leaders also agreed to allow the Japan Bank for International Cooperation to issue Yuan-denominated bonds in China, the first time a foreign government body has been allowed to do so. At the same time Japan said it was also looking to buy Chinese government bonds, a move that analysts believe may prove to be mutually beneficial to both nations. ‘By adopting Chinese bonds as a part of official foreign exchange reserves, Japan is labelling Chinese bonds as an investable asset,’ according to Takuji Okubo of Societe Generale Tokyo.
‘This should encourage Japanese private investment into Chinese bonds, as well as into other Asian emerging currencies. Such a development in turn should help develop offshore currency trading in Japan.’
This new collaboration between China and Japan has been underlined by the Japanese Foreign Minister Koichiro Gemba who on Tuesday said that ‘Japan will seek to take a less inward-looking stance when it comes to diplomacy in the Asia-Pacific region.’ In the words of the China daily newspaper the Foreign Minister said that, ‘Japan will look to enhance diplomatic ties with China based on mutually beneficial goals. With China, this year marks the 40th anniversary of normalizing diplomatic ties, we will aim to deepen the mutually beneficial relationship based on common strategic interests,’ Gemba said in his first foreign policy speech in parliament.
He went on to say that Japan plans to proactively make ‘concrete efforts’ to strengthen its ties with China and establish more ‘open and multilayered networks’ in the best interests of both countries. Ever alert to these shifts in the global currency and financial markets, the British Chancellor of the Exchequer, George Osborne, travelled to Hong Kong in January and offered London as the western base for the coming internationalization of the RMB. Osborne was vociferously making a plea to make London the leading centre for trading the Chinese currency. This conservative Chancellor was exposing the opportunism of the British and demonstrating the short memory of the British hoping that the Chinese have forgotten the Opium Wars.
UNITED STATES SENATE CURRENCY BILL
While the British were declaring their willingness to embrace the RMB, the US Senate has gone about increasing the war of words against China. In the failure to compete in the so-called ‘marketplace,’ sections of the US political leadership have for years been complaining that China should allow open markets for its currency and for its currency to appreciate more rapidly. There are two sections of the US political establishment pushing against the Chinese currency.
The first are those allied to Wall Street and the currency speculators who want to be able to trade in the Chinese currency and to do to China what was done to Malaysia, Taiwan, Thailand and other Asian economies in 1997. The second pressure is coming from those sections of capital who complain that China is flooding US markets. While these two sections do not agree they support the information war against China, this information war carries the refrain that the renminbi is undervalued by 25-30 percent against the dollar, which means Chinese exports to the US become 25-30 percent cheaper, while US goods exported to China are more expensive.
Even though China has allowed its currency to appreciate a little in the last two years, the two sections of capital in the US hostile to China have said that this is not enough. In October 2011 the US Senate passed S.1619, the Currency Exchange Rate Oversight Act of 2011, and a bill to address China’s ongoing currency manipulation, by a vote of 63-35.
One year earlier one commentator for Time Magazine had noted correctly that the real challenge for the United States was to change its consumption patterns.
‘We’ve seen this movie before. From July 2005 to July 2008, under pressure from the US government, Beijing allowed its currency to rise against the dollar by 21 percent. Despite that hefty increase, China’s exports to the US continued to grow mightily. Of course, once the recession hit, China’s exports slowed, but not as much as those of countries that had not let their currencies rise. So even with relatively pricier goods, China did better than other exporting nations.
Look elsewhere in the past and you come to the same conclusion. In 1985 the US browbeat Japan at the Plaza Accord meetings into letting the yen rise. But the subsequent 50 percent increase did little to make American goods more competitive. Yale University’s Stephen Roach points out that since 2002, the US dollar has fallen in value by 23 percent against all our trading partners, and yet American exports are not booming. The US imports more than it exports from 90 countries around the world. Is this because of currency manipulation by those countries, or is it more likely a result of fundamental choices we have made as a country to favor consumption over investment and manufacturing?’
TRANSITIONS: END OF DOLLAR HEGEMONY AND THE NEW INTERNATIONAL FINANCIAL ARCHITECTURE
This commentary on the need for the US to transform its economy and live within its means fell short of outlining a more fundamental problem, that of the military management of the international system and the outmoded imperial impulses that stem from the kind of militarism that now reflect US society.
While the Japanese and the Chinese were deepening economic relations, the US political leaders were intensifying its bellicose rhetoric about Chinese military buildup in the South China Sea and pushing forward the idea of a Trans-Pacific Partnership (TPP) Agreement. Japan was being wooed to become a key anchor of the US dominated TPP.
The China/Japan currency swap was a bold move on the part of these two economic giants in Asia. There are historic difference between the Chinese and Japanese, especially the experiences of the 1930’s Japanese occupation of China and the Rape of Nanking. Notwithstanding these historic differences the US debt of over US $ 14 trillion along with the inability of the US political leaders to effectively tackle the growing debt has awoken many that the US dollar as the international reserve currency is on its last legs.
In May 2009, Nouriel Roubini in a contribution to the New York Times on theAlmighty Renmimbi summed up the decline of the dollar in this way,
‘This decline of the dollar might take more than a decade, but it could happen even sooner if the US did not get its financial house in order. If China and other countries were to diversify their reserve holdings away from the dollar — and they eventually will — the United States would suffer. It would take a long time for the renminbi to become a reserve currency, but it could happen. The resulting downfall of the dollar may be only a matter of time.’
Nouriel Roubini was writing this warning to alert the US rulers to shift gears because of the rise of China. He called for a strategy of investments to recover the US economy declaring, ‘Now that the dollar’s position is no longer so secure, we need to shift our priorities. This will entail investing in our crumbling infrastructure, alternative and renewable resources and productive human capital — rather than in unnecessary housing and toxic financial innovation. This will be the only way to slow down the decline of the dollar, and sustain our influence in global affairs.’
China and Japan have taken a decisive step to diversify their reserve holdings away from the dollar. What is more fundamental is the new rush by other states to join in this new regional currency arrangement. Republic of South Korea is knocking to become central to this swap arrangement while other members of ASEAN are watching these developments carefully. The Eurozone crisis has narrowed the ability of the US to respond negatively to the China/Japan currency swap.
Importantly, the capitalist crisis in Europe has stiffened the spine of those elements of the Chinese society who proclaim that the principal task of China is to bail out its own people and transform the economy to benefit the 1.3 billion citizens. These left forces in China are calling for the consolidation of socialism and for vigilance to halt the power of those who are calling for a speedy internationalization of the RMB. These social elements understand the realities behind the call for opening capital markets in China.
It is the left and the progressive forces in China who agree with Mao that the RMB is the people’s currency and that the most important currency is the Chinese people. It is not usual for this writer to quote from Time magazine, but in the arguments ofFareed Zakaria on the question of overvalued currency, this author would concur, ‘The Real Challenge from China: Its People, Not Its Currency.’
‘China is beginning a move up the value chain into industries and jobs that were until recently considered the prerogative of the Western world. This is the real China challenge. It is not being produced by Beijing’s currency manipulation or hidden subsidies but by strategic investment and hard work. The best and most effective response to it is not threats and tariffs but deep, structural reforms and major new investments to make the U.S. economy dynamic and its workers competitive.’
And Zakaria might have added that the US cannot be competitive as long as it imprisons the best of the young people of colour in the prison industrial complex.
The lessons learnt from the last capitalist depression are that competitive devaluations, trade wars, currency disputes and new alliances sow the seeds of hostilities and provide the climate for incidents. Incidents then spin out of control beyond diplomacy. The contagion from the capitalist crisis will spread and the forces of socialist transformation will have to be even more alert and vigilant to balance the formation of a regional currency block while supporting the creation of the multipolar world to end the era of dollar and pound/sterling hegemony.
Those regions of the world that have not awoken to the slow demise of the dollar need to pay closer attention. Planned diversification away from the dollar is preferable to rushed monetary unions. The African peoples have a lot of lessons to learn from both the capitalist crisis in Europe and the new financial arrangements between China and Japan.
Horace Campbell is professor of African American Studies and Political Science at Syracuse University.