Analysis: China's currency foray augurs geopolitical strains

Wed Oct 3, 2012 10:00am EDT
 
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By Alan Wheatley, Global Economics Correspondent

BAHRAIN (Reuters) - "It's our currency and your problem," U.S. 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 United States 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 Indian rupee.

Competition among major currency issuers and a wider menu of options when investing, trading or seeking a store of value would produce better results for the world economy, Zha argued.

"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 U.S. would be greatly narrowed, which will certainly weaken the power basis of the U.S."   Continued...