the rise of the redback
China will have to open its financial market if it wants the yuan to rival the dollar
Jan 20th 2011 | from PRINT EDITION
IN 1965 Valéry Giscard d’Estaing, then France’s finance minister, complained that America, as the issuer of the world’s reserve currency, enjoyed “an exorbitant privilege”. China’s president, Hu Jintao, does not have quite the same way with words. But on the eve of his visit to America this week he told two of the country’s newspapers that the international currency system was a “product of the past”. Something can be a product of the past without being a thing of the past. But his implication was clear: the dollar’s role reflects America’s historical clout, not its present stature.
Mr Hu is right that America’s currency punches above its economy’s diminished weight in the world. America’s share of global output (20%), trade (only 11%) and even financial assets (about 30%) is shrinking, as emerging economies flourish. But many of those economies, such as South Korea, still sell their exports for dollars; many, including China, still peg their currencies to the greenback, however loosely; and about 60% of the world’s foreign-exchange reserves remain in dollars.
This allows America to borrow cheaply from the rest of the world. Its government has been able to overspend, secure in the knowledge that its IOUs will be bought by foreign central banks, which are not too fussy about price. America would show more self-discipline, many Chinese believe, if the dollar had a little bit more competition.