STAFF NEWS & ANALYSIS
China's Officials Debate Renminbi Convertibility
By - December 05, 2008

The Chinese authorities should raise the profile of the renminbi during the global financial turmoil and get ready for the currency's full convertibility, according to Wu Xiaoling, deputy director with the finance and economic committee of the National People's Congress. Comments from senior Chinese officials are rarely, if ever, made without an intention to signal a message of some sort. So, it is perhaps surprising that Ms Wu's comments on November 19 at a Beijing seminar have not been more widely discussed. Two days before Wu made her comments, Jin Liqun, the supervisory board chairman of the mainland's $200 billion sovereign wealth fund, said that Beijing would demand a more significant role in the global financial system if it was to inject additional capital into the International Monetary Fund (IMF). According to some analysts, these comments are significant. There is a clear consensus among policymakers that full convertibility is necessary – even urgent – and is a key to the eventual development of the renminbi as an alternative reserve currency, says Yiping Huang, Asia-Pacific economist at Citi. China needs an alternative to holding its vast foreign exchange reserves in US dollars and needs to encourage foreign investors to hold more renminbi-denominated assets. – Haymarket Media

Dominant Social Theme: A little tweaking and the Chinese will integrate just fine.

Free-Market Analysis: There is an increasingly contagious supposition that the Chinese, sooner or later, are fixing to offer the world the next reserve currency – and it is obviously being fanned by the Chinese themselves. But not so fast. We believe that Chinese currency, like the Chinese economy – will be a bigger factor in the future, but it is certainly something of a stretch to believe that the renminbi is about to become a common, universally accepted, currency worldwide.

Let's back up. In order to catch the bug of this particular perception, one ought to first be able to explain exactly what a reserve currency is. In simplest terms it is a currency accepted everywhere. But like everything else within a central banking economy, a "reserve" currency is more complicated than it sounds. In fact, it has been floated – and made complex – like almost everything else in this day and age, in an attempt to distract attention from the fungibility, portability and downright usefulness of gold and silver.

It bears repeating (we can never repeat it too much since hardly anyone else mentions it at all) that throughout history a gold and silver market standard comprised money – a real reserve currency, if you will – with each metal trading in a ratio with each other that, if disturbed, indicated some kind of funny business among the leadership of a given economy.

But the central banking economy of the 20th and now the 21st century has done everything but figuratively stand on its head to distract people from the reality that a perfectly good alternative to elite monetary control of the financial markets exists – honest money. Yes, gold and silver indeed comprise the true "reserve" currency, accepted everywhere, a universally valued, honest-money standard that cannot be compromised, misunderstood or easily diddled with.

Yet for just this reason, because gold and silver are universally available and can be dug out of the ground, these precious metals have proven far too plebian for the advanced and sophisticated operators who run high finance in the modern era. These individuals have taken it upon themselves to refine a more modern and malleable kind of financial system that is backed only by the full faith and credit of a given nationality and allows for the printing of as much money as is deemed necessary without the trouble of digging it up or refining it.

Of course, the problem with this kind of money, often called fiat money, is that it is prone to collapse. We have seen one such collapse recently, are living with it currently and it is not over yet. There is more trouble yet to come. The Masters of the Universe, in order to salvage their particular brand of money, have now taken to printing huge gobs of fiat money, especially the dollar, which means down the road King Dollar will be worth a good deal less than it is now, compounding the problem.

This is doubtless what has galvanized the Chinese. Yes, the idea of additional trillions of dollars hitting the market must have electrified them. The Chinese hold hundreds of billions of Treasurys – does anyone really know? – and they cannot be very happy with the prospect of constantly depreciating holdings. They think, perhaps, (the leadership apparently does anyway) that their own currency might be a better bet, at some point.

After Thoughts

The true import of what is happening now is not that the Chinese want to replace the US dollar with their own currency but that the leadership of that great country is obviously in the midst of making a decision, wholesale, to adopt the Western central banking methodology of running economies from the top down. Of course, given the Chinese's current authoritarian culture this is hardly surprising. They are already there. One had hopes that the Chinese leadership might seek to back their currency with gold or silver – which would truly have given their money a leadership position. No such luck. The Chinese have had at least six episodes of fiat money in their many thousand year history – and the rise and fall of their monetary systems should have provided an object lesson to the current leadership. Instead, like a bad but shiny penny, the allure of fiat has not faded.

And so the Chinese will weigh in with their billion-plus population and keep the fiction going that a central banking economy is useful for anyone but the handful of people at the top participating in the heady business of money creation. It is a most unfair and unstable system, and the Chinese involvement, in a bigger way, will not make it a whit less so. Those who can look past the size and might of the system – like the proverbial boy watching the ruler walk by – should bear in mind that the Emperor has no clothes. And a fiat money system is a terrible way to pay for them.

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