By MoneyMorning.com.au
One of the most interesting claims at After America in Sydney two weeks ago was that the whole premise of the conference was false. Dr. Paul Monk, in a very thoughtful and thought provoking speech, suggested Australia might not have to prepare for an Asian Century…because there wouldn’t be an Asian Century. His more direct point was that China is not ready to take over leadership of the global economy yet, and probably won’t be for many years.
Yet on the cover of a recent Financial Review you’ll find the following headline, “Historic $A Pact Seals China Ties.” The story provides details on a new $30 billion central bank currency swap arrangement between the Reserve Bank of Australia (RBA) and the People’s Bank of China. The Fin reported that:
The historic agreement highlights the important role Australia is playing in what the Gillard government calls “the Asian Century”, as the world’s fastest growing major economy integrates into global trade and financial markets…The deal with Australia is seen in official circles as a crucial sign that China is committed to opening up its foreign capital account and making its currency more convertible.
The agreement paves the way for more two-way trade between Australian and Chinese companies…without using US dollars. For example, a company like Fortescue could negotiate contracts with Chinese companies in Chinese currency, bypassing the dollar altogether. This is exactly the kind of thing that signals the end of the US dollar as the world’s reserve currency.
But beyond the headlines there are still problems with China making its currency fully convertible. One problem, for example, is that if China’s currency becomes fully convertible, Chinese savers might be keen to take their savings out of China’s banks in large quantities. In other words, the lack of convertibility is just as much about preventing money from leaving the country as it is preventing speculators from causing higher prices in anticipation of convertibility.
There are other more intricate issues involved with the Remnimbi becoming a global reserve currency. It has to provide the liquidity and price stability required by reserve currencies. But before any of that can happen, it has to be convertible. The minor agreement with the RBA is one of a series of small steps toward the internationalisation of China’s currency. But there’s a long way to go.
My view, especially after listening to all the presentations at the conference, is that there is a vast economic wasteland between the end of the dollar standard and whatever replaces it. Nothing is ready to replace it yet. That means it won’t be a smooth transition.
Dan Denning
Editor, Australian Wealth Gameplan
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