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Geopolitical strains over China currency

It’s our currency and your problem — US Treasury Secretary John Connally famously said of the dollar in 1971.

Written by Reuters |
October 5, 2012 1:03:21 am

It’s our currency and your problem — US Treasury Secretary John Connally famously said of the dollar in 1971.

More than 40 years later,China is doing something about it. Fed up with what it sees as Washington’s malign neglect of the dollar,China is busily promoting the cross-border use of its own currency,the yuan,also known as the renminbi,in trade and investment. The aim is both narrowly commercial — to reduce transaction costs for Chinese exporters and importers — and sweepingly strategic.

Displacing the dollar,Beijing says,will reduce volatility in oil and commodity prices and belatedly erode the ‘exorbitant privilege’ the US enjoys as the issuer of the reserve currency at the heart of a post-war international financial architecture it now sees as hopelessly outmoded. Zha Xiaogang,a researcher at the Shanghai Institutes for International Studies,said Beijing wants to see a better-balanced international monetary system consisting of at least the dollar,euro and yuan and perhaps other currencies such as the yen and the rupee.

“The shortcomings of the current international monetary system pose a big threat to China’s economy,” he said. “With more alternatives,the margin for the US would be greatly narrowed,which will certainly weaken the power basis of the US.” Zha’s comments were in a paper prepared for a seminar in Bahrain this week on the geopolitics of currencies organized by the International Institute for Strategic Studies,a London think tank.

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The great financial crisis,alongside the ascent of China and other emerging markets and the existential threat to the euro,is prompting policymakers in the West,too,to question the established monetary order.

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