by YU YONGDING
China has built a foreign exchange-earning economy and accumulated US$3.3 trillion in reserves over the past few decades, but such policies are outdated and need to be adjusted.
Amid the Russian-Ukrainian conflict, the United States has punitively frozen $300 billion worth of Russian reserves. The incident shows that it is completely possible for the US to seize China’s overseas assets, particularly forex reserves, if it deems it necessary.
US inflation and foreign debt accumulation will lead to dollar depreciation. China should buy less US Treasury bonds, buy more commodities and strategic materials, and shift away from exports to domestic consumption.
It also should try to fulfill the Sino-US trade agreement as much as possible. It should spend its forex reserves. All these will help promote renminbi internationalization and improve the security of China’s overseas assets. (Translator’s summary)
Today, I want to talk about the reform of the international monetary system, the security of China’s foreign exchange reserves, and the renminbi internationalization.
After the collapse of the Bretton Woods system (a monetary management
system based on a link between gold and the United States dollar in
1944 to 1971), the exchange rate of gold was replaced by the US dollar.
The status of the US dollar was not weakened but strengthened.
Those who study international finance were confused by such a trend.
When the dollar was backed by gold, people did not have confidence in it. How come everyone trusts the dollar when it is not backed by gold?
The only reason is that people’s confidence in the dollar has not been shaken by the collapse of the Bretton Woods system.
The international monetary system, which is now called the dollar standard, has a fundamental internal contradiction. The word contradiction is neutral without any derogatory meaning.
The US has to maintain a current account deficit in order to provide
the world with dollar supply. In fact, it is providing the world with a
reserve currency.
?
After decoupling from gold, the US dollar is
purely a legal tender, which has no intrinsic value. Its value is based
on American credit. What is credit? It refers to a condition that the
purchasing powers of money and debt remain roughly the same. A
hundred-dollar debt should not be devalued to ten dollars because of
currency depreciation.
With the growth of world trade, the international demand for the reserve currency, mainly the US dollar, is also increasing.
The greater the US trade deficit, the greater the chance that the dollar will eventually depreciate. The possibility that the US will fail to comply with its credit is also growing. This issue is essentially a dilemma.
The US had a net foreign debt of US$15 trillion at the end of 2021 while the US’ foreign debt-to-GDP ratio kept surging. The dollar can still remain stable due to many reasons.
Asia Times for more