Today’s New York Times op-ed page features two columns on the dollar and the Chinese currency, the RMB. Nouriel Roubini concentrates on American policy. Victor Gao gives a somewhat depressing lesson in personal Chinese economic history.
It’s a better discussion than standard claims the PRC is trying to ruin the dollar. Gao correctly suggests that, cheap talk aside, China is a primary supporter of the dollar. As Roubini points out, it’s the U.S. that’s ruining the dollar.
There’s no official figure on this, which is important, but Gao puts the PRC’s dollar holdings at about $1.5 trillion. Brad Setser agrees. Individual Chinese may be less enthralled, but the Chinese government hasn’t lost the gleam in its eye for dollar assets. Beijing’s continued willingness to accumulate dollars and use them in ever growing trade and investment is a pillar of the dollar system.
Of course, the PRC does this for its own benefit, chiefly to locate as many jobs at home as possible. In the process, China created a system for itself that leaves no choice but to buy American bonds. Calls for inflation protection or collateral for Chinese investmentcan thus be ignored; no reason to offer discounts when the buyer can’t shop anywhere else.
Gao’s request for greater transparency from the U.S. spotlights the wrong side. While American policy toward foreign investment could be clearer and more consistent, the PRC does not acknowledge even basic facts about its holdings and behavior.
That’s one reason Roubini overstates the RMB’s threat to the dollar: any appeal of holding the RMB is greatly reduced by not knowing the assets and policies behind it. Perhaps the critical violation of transparency applies to Roubini’s claim that China has low public debt. China’s public debt is hidden — in bad loans at state banks, a pension system still largely just a façade, and, most important, in local governments that rarely are truthful about economic circumstances.
Roubini and Gao are right that the dollar is weakening, and we are weakening it. As the global economic leader, the U.S. has the power to shape the dollar’s future. Our fiscal and monetary policies right now point to an ugly fate.
