- 2018-12-11
The reserve crisis and the new world order
The entry of RMB into SDR is a historic moment. The importance of market consensus to this historic event focuses on the new foreign exchange liquidity that will be brought about by the entry of the RMB into the basket and the long-term promotion of the development of China's bond market.
Undoubtedly, these are important structural changes that the RMB will usher in after entering the SDR. However, the entry of the renminbi into the basket has far-reaching significance for China's monetary policy towards independence. Before the U.S. dollar as the core position of the global monetary system is shaken, the U.S. monetary policy and the trend of the U.S. dollar will still affect the global economic structure to a large extent-especially in 2016, the Fed has entered an interest rate hike cycle. In this context, the renminbi and the dollar are gradually decoupling, and the central bank's monetary policy is gradually relatively independent, which will improve China's ability to respond in times of crisis.
The market consensus believes that after the renminbi has become one of the reserve currencies in the basket, the central banks of other countries will inevitably increase their holdings of the renminbi. This is a misunderstanding of SDR basket currency members, reserve currencies and central bank reserve asset management. The best example is to look at the Australian and Canadian dollars. These two currencies are not in the SDR basket, but they account for about 1-2% of the non-gold reserve assets of global central banks. In other words, whether the SDR enters the basket is not necessarily related to whether other central banks increase their holdings of RMB. Therefore, the logic of estimating the inflow of incremental funds derived from the total amount of SDR and the proportion of RMB and inferring that the RMB exchange rate should strengthen is not correct.
The dominance of the dollar did not happen overnight. In the 1970s, after France recovered all its gold reserves stored in the United States, the latter officially announced its decoupling from gold due to pressure from international gold redemptions. The title "US dollar" has gradually been replaced by "US dollar". This great experiment actually laid the foundation for the future economic growth of the world. After all, a monetary system centered on gold is always facing the danger of either deflation or inflation.
This is because the amount of gold mined is not necessarily related to the world's economic growth. When the real economy grew much faster than gold, the bottleneck of gold supply became deflationary pressure. And when gold supply is accidentally discovered, such as the discovery of gold mines in the Americas on the European continent that year, assets and commodities are facing the danger of price bubbles. After the U.S. dollar became the U.S. dollar, the Federal Reserve gradually became the world's central bank, providing continuous liquidity for global economic growth.
But the role of global reserve currencies is not without costs. A country with a reserve currency must not only have strong military strength, sufficient agriculture and natural resources, but also have the courage to let its current account expand drastically in times of crisis to supplement and maintain the liquidity of the global system—— This is the famous Triffin Paradox. This is why in the latter part of the 2008 financial crisis, when the price of gold plummeted as the crisis worsened, the U.S. dollar appreciated strongly. From this point of view, there is no currency in the global monetary system that can replace the US dollar as the global reserve currency.
Since the 1960s, the trend of the US dollar index has had a bizarre 17-year cycle. In this 17-year cycle, the U.S. dollar index strengthened in the first six years and then weakened in the following ten years. In this cycle, every time the US dollar peaks strongly, a wave of economic or financial crisis will occur in a certain region, country, or even the global economy of the global economy. As shown in the figure below, the peak of the US dollar’s strength was followed by the oil crisis in the 1970s, the Latin American crisis in the mid-1980s, and the September 11 incident in 2001. (Our graph uses the trade volume-weighted real dollar exchange rate trend as an example. ). After the strength of the US dollar peaked and the global economic crisis appeared, the current account deficit of the United States began to deteriorate, indicating that the Federal Reserve has begun to play the role of the world's central bank and provide liquidity to the global economy. Currently, the US dollar index is once again close to the 100 mark. The strength of the U.S. dollar has been maintained for exactly 6 years.
We can use the current account deficit of the United States as a measure of the inflow of foreign savings into the United States. Historically, this channel has returned from the US Treasury bond market to the US mainly through the "petrodollars" in the Middle East and foreign exchange reserves accumulated by China and Japan. The foreign exchange reserves accumulated by China and Japan can be called "Chinese dollars" and "Japanese dollars". Since the development of the U.S. shale gas industry and the beginning of U.S. energy self-sufficiency and even export, petrodollars have gradually disappeared, oil prices have plummeted, and oil-producing countries in the Middle East have also fallen into financial difficulties. The accumulation of foreign exchange reserves in China and Japan has also begun to decline, and the Chinese and Japanese dollars have also begun to decline. These historically important US dollar circulation channels, or the channels through which the Fed provides liquidity to the world, have begun to experience problems.
Every time the strength of the U.S. dollar and the substantial improvement of the current account in history can be regarded as a contraction of international liquidity. The Middle East, Latin America, Asia, and the Far East have all been affected successively during the US dollar's strength since the 1970s. If history repeats itself in 2016-2017, then China must consider its response strategies. The renminbi is gradually decoupling from the US dollar, the central bank’s monetary policy is gradually independent, and interest rate liberalization is an important strategy to increase China’s ability to cope with systemic risks. Accordingly, the entry of the RMB into the SDR basket and the exchange rate reform that China has promoted since 2014, including the expansion of the fluctuation range and the one-off devaluation in August this year, are China’s advance preparations for events that may occur in the next year or two. .
2016 is destined to be a year of change. As China's capacity reduction, deleveraging, and capital market reforms deepen, various variables in the real economy and financial markets will have a compound reaction, and there will be some fluctuations that have no historical precedents and therefore test their ability to cope. China's current reforms in exchange rates, interest rates, bonds, stocks, and derivatives markets will all improve response capabilities. If our vision is like consensus, only staying at hundreds of billions or new bond liquidity, becoming an international reserve currency, etc., then we may have overlooked the forest and the hidden opportunities in the forest.