Neither the run-up to yesterday?s Summit at Yekaterinburg, nor what transpired there inspires much confidence in the Bric?s declared attempts to fix on a reserve-currency synergy by themselves. But, does such pussyfooting suit four emerging economies that represent 42% of the world population, and (IMF numbers say) contribute 10.7% to global GDP?
The Summit?s agenda included food, energy security, climate change and developmental aid of course. But the reserve currency issue is what turned out to be divisive. Indeed, just how complicated it is can be intuited from the fact that even the Bric states felt the need for prior coordination. And, even then, the matter continues to remain fissiparous, revealing intra-Bric cleavages.
That way, the biggest ?leadership failure? is China?s. The biggest Bric economy developed cold feet on the currency question almost on the threshold of the summit. And what followed was a hurried revision of its original stand that an SDR-based convertible currency should replace the dollar. The upshot: the dollar?s bonafides has been reinstated in Chinese eyes. As for the yuan, Beijing had been gearing up to launch it as a reserve currency on the basis of yuan-only transaction agreements with nine other regional economies. So the volte-face was indeed a surprise?the more so for having materialised from an economy that seemed so utterly committed to a ?depose-the-dollar? scheme.
But Beijing put a sudden stop to that earlier this year?and it did so despite a March 2009 publication on the virtues of yuan convertability by Zhou Xiaochuan, governor of the People?s Bank of China. So, whereas it had fallen to Zhou?s lot that he should be launching a critique of today?s dollar-dominated global monetary system, there volte-face occurred soon after. Today Chinese officials routinely deny that they ever had any intent of abandoning the US dollar! Vice-foreign minister He Yafei has even been quoted as saying: ?Nobody is talking about dumping the dollar. I don?t think this is realistic.? (Clearly, the dialectics of foreign exchange-management is alive.)
As for how China?s sudden reassertion of faith in the dollar measures up to what the others of Bric believe, the answer is that it is at variance with the views of Brazil, Russia?and even India. That is well-illustrated by the fact that all three shall soon be mustering $10 billion to bolster IMF?s operating finances. Besides which, the three would even go so far as to accept possibilities such as that either SDRs should replace the ?official? dollar?or that the IMF should lay the foundations of a ?super-sovereign reserve currency?.
In sum, recent Chinese assertions on the future role of the dollar fly right in the face of Lula and Medvedev. It rubbishes their oft-reiterated view favouring a rapid transition?not towards, but away from?the dollar, and in the direction of an alternate reserve currency. The Russians, especially, would be the happiest were the dollar to be shown its place. And they even think that a lower dollar profile would vacate space for other currencies with the potential for playing the part of ?reserve?. (That many such currencies can coexist is apparent from the G-5 experience.)
Meanwhile, all the cross-talk and dissonance have instilled serious doubts about whether the Bric has been doing enough to fabricate another reserve currency. They would have done much better if they had utilised the summit to co-coordinate positions for the September G20 meet in the US. Another faux pas has been to promote national currencies?a factor that explains why they have been finding it hard to elect any single currency to represent all others. The only thing the Bric have in common is their willing intent to increase the IMF?s liquidity through the purchase of IMF-issue bonds. And the idea behind that is to jointly hike its on-lending resource-base to $750 billion.
A reality check shows that the motive is ostensibly to provide the IMF with a financial cushion, but the parallel motive is that of revitalising the Fund so that it can lead to a world-wide transition towards SDR-clones, which might ultimately even rival the seignorage, and gravitational pull, of the dollar.
Finally, perhaps the best explanation of Beijing?s turnaround lies in the fact that 40% of its $1.9 trillion reserve holdings are in US Treasuries. That makes it America?s biggest creditor. But, precisely that is also what makes China so nervy about US exigencies like the financial meltdown, recession, Chapter 11 cases, and unemployment.
So Beijing?s biggest worry is to safeguard the value of what lies salted away in the US. And its biggest fear is that all of it might come to nought should Washington start taxing high, printing greenbacks, and spending/inflating its way out of the recession.
The only silver lining is that this approach of dollar-support might be for the best. Far worse would be its dethronement, for once that happens, demand will at once get depressed. Plus, owing to the surplus of greenbacks, the dollar would be under perennial downward pressure. What could occur then is immediate, and further, dollar devaluation (nominal as well as real), and an end to China?s competitiveness. The only way that China would be able to remain competitive then would be through sharp productivity rises. And they would have to occur in jumps so as to offset the anti-export bias of (what would by then be) a substantially higher yuan.
?Author is a fellow at the Maulana Abul Kalam Azad Institute of Asian Studies, Kolkata. These are his personal views