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New world currency will take time, so it's time to get started
By Sun Lijian |
April 6, 2009, Monday
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ALTHOUGH China's call for a super-sovereign reserve currency to replace the dominant US dollar has won the applause of many countries, the objective will take time to be realized.
That the US dollar can take the lead in today's international monetary system is largely attributable to the country's core competitiveness, long-term cultivation of an international US-dollar market as well as the globalization concept the United States has long been actively advocating.
True, the global financial crisis triggered by the US has brought great shocks to its currency. But the base that supports the US dollar-dominated monetary market system has not broken substantially.
For example, the US financial talents have by no means lost their ability in risk management and profit creation during the crisis.
What they lack is moral fiber: They took advantage of the "ignorance" of ordinary investors, relevant government departments and institutions that lack the same expertise, and shifted the financial risks onto them.
Such failure in supervision, which is widely criticized today, was not detected even when the US economy was prospering.
Therefore, if any other currency is to replace the US dollar as the world's dominant currency, the primary task for the country or area (like the eurozone) should be to improve core competitiveness in the financial area.
Both Asian and European countries lag far behind the US in this respect.
And the key to whether a currency can take the dominant position in the international monetary system lies in its network externalities - that is, whether other countries would feel inconvenienced without the currency.
At present, over 60 percent of both international trade and investment settlements as well as reserve currencies are in the form of US dollars.
Although the US overdraft consumption culture has resulted in great debts for the nation, the huge trade deficit actually helped to export US dollars.
By contrast, practicing the virtues of diligence and frugality, East Asian countries have unconsciously constrained the export of their currencies.
Yet for countries other than the US, especially China and other East Asian countries, to avoid the risks of US assets, they must learn to manage their own fortunes and risks.
The crisis has taught us that it is too risky to entrust the job to others.
Comparatively speaking, establishing a super-sovereign reserve currency is more realistic at present.
Countries in support of the new currency should start to develop a reasonable mechanism for the currency as well as seek the recognition of many other countries.
Hard landing
The new currency could at least enable many countries to get rid of or diversify the risks of US dollars and dollar assets to some extent.
This does not mean that the deterioration of the US dollar-dominated monetary system should be left untended.
In fact, the establishment of a new global currency would force the US government to improve its financial system so as to reduce the negative impacts that the fluctuation of US dollars would bring to the world's economy.
Given the highly imbalanced global economic environment today, the rapid collapse of the US dollar-dominated monetary system might result in the hard landing of the world's economy.
Besides, the current global financial tsunami has not been so serious as to destroy the core competitiveness of the US.
Nevertheless, more and more countries are coming to realize that if the world economy is monopolized by US dollars, systematic risks similar to those we are facing today will occur again.
Therefore, China finds it of strategic importance to establish a more reasonable currency system in the medium or long term. Thus the super-sovereign reserve currency it suggests is a constructive reform strategy.
(The author is professor of finance and executive vice dean of the School of Economics at Fudan University.)
That the US dollar can take the lead in today's international monetary system is largely attributable to the country's core competitiveness, long-term cultivation of an international US-dollar market as well as the globalization concept the United States has long been actively advocating.
True, the global financial crisis triggered by the US has brought great shocks to its currency. But the base that supports the US dollar-dominated monetary market system has not broken substantially.
For example, the US financial talents have by no means lost their ability in risk management and profit creation during the crisis.
What they lack is moral fiber: They took advantage of the "ignorance" of ordinary investors, relevant government departments and institutions that lack the same expertise, and shifted the financial risks onto them.
Such failure in supervision, which is widely criticized today, was not detected even when the US economy was prospering.
Therefore, if any other currency is to replace the US dollar as the world's dominant currency, the primary task for the country or area (like the eurozone) should be to improve core competitiveness in the financial area.
Both Asian and European countries lag far behind the US in this respect.
And the key to whether a currency can take the dominant position in the international monetary system lies in its network externalities - that is, whether other countries would feel inconvenienced without the currency.
At present, over 60 percent of both international trade and investment settlements as well as reserve currencies are in the form of US dollars.
Although the US overdraft consumption culture has resulted in great debts for the nation, the huge trade deficit actually helped to export US dollars.
By contrast, practicing the virtues of diligence and frugality, East Asian countries have unconsciously constrained the export of their currencies.
Yet for countries other than the US, especially China and other East Asian countries, to avoid the risks of US assets, they must learn to manage their own fortunes and risks.
The crisis has taught us that it is too risky to entrust the job to others.
Comparatively speaking, establishing a super-sovereign reserve currency is more realistic at present.
Countries in support of the new currency should start to develop a reasonable mechanism for the currency as well as seek the recognition of many other countries.
Hard landing
The new currency could at least enable many countries to get rid of or diversify the risks of US dollars and dollar assets to some extent.
This does not mean that the deterioration of the US dollar-dominated monetary system should be left untended.
In fact, the establishment of a new global currency would force the US government to improve its financial system so as to reduce the negative impacts that the fluctuation of US dollars would bring to the world's economy.
Given the highly imbalanced global economic environment today, the rapid collapse of the US dollar-dominated monetary system might result in the hard landing of the world's economy.
Besides, the current global financial tsunami has not been so serious as to destroy the core competitiveness of the US.
Nevertheless, more and more countries are coming to realize that if the world economy is monopolized by US dollars, systematic risks similar to those we are facing today will occur again.
Therefore, China finds it of strategic importance to establish a more reasonable currency system in the medium or long term. Thus the super-sovereign reserve currency it suggests is a constructive reform strategy.
(The author is professor of finance and executive vice dean of the School of Economics at Fudan University.)
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