A paper by Chinese central bank chief Zhou Xiaochuan — arguing the world should move off the dollar system — has attracted much attention. Like so many economic stories involving the PRC, there is less here than meets the eye.
It is hardly a new thought. Beijing has wistfully imagined for almost a decade a future where the dollar has been replaced, most prominently when it claimed (falsely) to have decoupled from the dollar in July 2005.
There are gigantic practical problems Zhou is well aware of. Any sudden move off the dollar would destabilize a tottering world economy and, in fact, sharply reduce the value of China’s huge stash of foreign reserves. But a slow shift away from a dollar system risks creating competing currency blocs, which are historically associated with the length of the Great Depression and the ensuing war.
Not coincidentally, the balance of payments system the PRC created for itself actually supports the dollar. China accumulates dollars in unprecedented amounts through trade, then invests them in gigantic amounts overseas. This extends the dollar’s use in trade, deepens bond and stock markets that use dollars, and spreads the use of dollars in less developed economies with desirable resources.
Last and least, Zhou’s alternative to the dollar — special drawing rights at the IMF — is a joke. As Jeff Frankel aptly put it, the SDR is “the Esperanto, at best, of international currencies.” (7)
American economic policy, in particular spending far more money than we have, undermines the dollar. The dollar’s decline is slow, uneven, and usually not even visible, but it is leading to a world where the U.S. has far fewer economic options. Even so, it’s what we do to support or weaken the dollar’s status as the world’s currency that matters, not more cheap talk from Beijing.
