The panelists discussed the future of the US dollar as the key international currency; whether short-term recovery of the global economy can be translated into medium-term sustainable growth; how to prevent future global imbalances; institutional innovation in China and the state of China’s economy; and internationalization of the Chinese RMB.
Currencies and Global Imbalances Panel
Chair: John Curtis, CIGI distinguished fellow
Eric Helleiner, CIGI chair in international economic governance, Balsillie School of International Affairs
Paolo Guerrieri, vice president, Istituto Affari Internazionali
Gregory T. Chin, CIGI senior fellow
Eric Helleiner discussed the future of the US dollar as the key international currency. Differing opinions exist, he said, and the dollar's future is currently a subject of heated debate among scholars and policy makers. The dollar's global role gives the US a unique position in the global economy and bolsters US power. According to Dr. Helleiner, predictions of the dollar's decline as the world's key currency have been made as far back as the 1960s and the latest predictions occurred at the outbreak of the recent financial crisis in 2007 when some initially predicted that the crisis might provoke a collapse in confidence in the US dollar. But demand for the US dollar actually increased as the crisis intensified during 2008.
The enduring strength of the US dollar was linked to the liquidity and perceived safety of US treasury bills, as well as continued official support from large dollar-holding countries such as China, Japan, and the Gulf Cooperation Council (GCC) countries. And while the euro was deemed a credible alternative to the US dollar, during the recent crisis it looked much less stable than originally thought. There have been many predictions of the dollar's decline as a world currency, but they have always proven wrong, Dr. Helleiner said.
With the crisis waning, the case about the dollar's future decline is now being made again. One reason has to do with the US fiscal situation. Another is the growing political dissatisfaction with the unipolar monetary order as expressed by the BRIC nations, GCC countries and even the new Japanese government (Japan has the second largest official holdings of US dollar reserves). Despite these trends, Dr. Helleiner does not foresee moving away from the dollar-based order in the immediate future.
The world may, however, face a challenge over the medium term, Dr. Helleiner said, and it would be good to be prepared for a more multi-polar currency order. Europeans need a more consolidated voice and it would be useful to give Special Drawing Rights (SDRs) a greater role. Governor Zhou’s proposals regarding SDRs are quite modest and deserve serious consideration.
The massive intervention of public policies implemented by all major countries is improving short-term economic activity, said Paolo Guerrieri. There is no promise however regarding a sustainable medium-term recovery; rather the risk of a double dip exists. Two key issues are: 1) how to transform short-term recovery into medium-term sustainable growth; and 2) how to prevent future global imbalances. Reversing imbalances is needed to sustain economic recovery, he explained. As such, the sum of current account balances should be zero at the world level.
The US economy, which has played a fundamental role of last resort deficit country, can’t play it anymore, Mr. Guerrieri noted. There is the risk of lack of global aggregate demand relative to supply which could weaken growth. The current downturn is leading to rebalancing due to cyclical factors, not structural wants. Therefore there needs to be greater flexibility in the Asian exchange rates, as well as international cooperation to coordinate macroeconomic adjustment policy. Furthermore, the IMF should be endowed with multilateral surveillance tools. He concluded by stating that more can and should be done to sustain a medium-term recovery.
Gregory T. Chin
In his presentation, Gregory Chin stated that China is engaging in institutional innovation, and that Hong Kong potentially has a key role to play in such experimentation, especially on RMB internationalization. An important breakthrough at the G20 Pittsburgh was the consensus that was reached on dealing with macro-imbalances as a priority issue. This can be seen in Points 13, 14, 15 and 18 of the G20 Joint Communiqué. Dr Chin added that the G20 now had to turn to the difficulties of ensuring implementation over the next 2-3 years. However, the new consensus is significant as it reflects Beijing's willingness to work according to the policy consensus among "the 20."
He also noted that Chinese authorities are concerned about China's current economic vulnerabilities. Chinese leaders have clearly understood for awhile now that the current growth models are/were not sustainable over the longer term, and they were/are aware that changes are needed. This awareness was already there as long as 10 years ago. They have understood the importance of the need to increase domestic consumption for awhile now. The current global economic crisis has only highlighted China’s vulnerabilities. It has helped create the unified political will needed to bring about the reorientation in economic policy and growth strategy. This includes the need to ensure diversification in demand. Chinese authorities also feel the need to diversify their currency options. They are aware of the "dollar trap" scenario and that the "currency bomb" is not a real option for China to take; therefore, the need for institutional innovation exists.
Dr. Chin stated it would likely take 10-15 years to internationalize the RMB; that the confidence of international investors would first need to be built up. China is looking both inside and outside the box for options, for example, on reforming the international monetary system. China's diversification strategy entails diversifying existing currency options and gradually increasing the international use of its own currency. Hong Kong is strategically positioned to play a role in such experimentation. There is reason to wonder whether New York and London will still be the main global financial centres in 15-20 years time.
He noted that the current crisis is giving further impetus to financial regionalism. He referred to the 1997 Chiang Mai Initiative plus efforts in East Asia since the onset of the crisis. China is cooperating more through the G20 process, while at the same time, looking at gradually internationalizing the RMB, and continue promoting financial regionalism in East Asia. Here, cooperation between China and Japan in the future would be crucial. Dr. Chin also said he anticipates a future where there is both increased global financial and monetary cooperation, through the G20 process, but also increasing indirect currency rivalry at the regional level.