Sino-US Competition for the Reform of the International Financial System
By Yaping Lou
The financial crisis that originated in the United States hit US financial hegemony heavily and showed the vulnerability of a Dollar-based international monetary system. There is concern about the security of the Dollar and Dollar denominated assets, and such a loss in confidence could damage the role that the Dollar plays as the dominant reserve currency. In terms of the composition of official foreign exchange reserves, the proportion of the Dollar went down from 67.1% in 2002 to 62.1% in 2009; meanwhile, the proportion of Euro rose from 23.8% to 27.4%. The reform of the international financial system is now high on the agenda. The call for reform may not be new, but the need for reform has never been more urgent. The G20 Summit in New York in 2008 began the process of reforming the international financial system. The global financial crisis illustrates the shortcomings of the G8 regarding global economic governance. The G8 setting does not reflect the radical change that is occurring in the balance of international economic power. Without the participation and support of emerging economies, it will be difficult for developed countries to realize effective governance. Accordingly, the G20 is likely to become the most influential international economic forum. Among the big powers competing in shaping the reform of the international financial system, the US and China play the two most notable roles. Damaged by the crisis, the “Washington Consensus” is losing its attraction.
But the US, as the biggest beneficiary of the existing international financial system, would not like to give it up or to make substantial changes. In response to the international financial crisis, the Obama administration is seeking to govern the international economy through an adaptation of existing multilateral mechanisms supplemented by strengthened negotiation and cooperation on macro-economic policies among big powers. The Obama administration tries to consolidate the established international economic mechanisms dominated by the US, aiming at maintaining US leadership in international economic governance. China is trying to extend its own role. In March, 2009, Zhou Xiaochuan, Governor of the People’s Bank of China, released an article titled “Reform the International Monetary System”, in which he said, “The outbreak of the crisis and its spillover to the entire world reflected the inherent vulnerabilities and systemic risks in the existing international monetary system,” and proposed to the substitute “single reserve currency” for a “super-sovereign reserve currency”. His proposal was widely viewed as a direct challenge to the Dollar’s status as the international reserve currency. Unsurprisingly, the US opposed Zhou’s proposal quickly and strongly. Obama himself immediately stated that there was no necessity to create a “global currency”. Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben S. Bernanke told lawmakers at a House Financial Services Committee hearing that they rejected such a move.
Zhou Xiaochuan’s proposition was of course highly unlikely to be implemented. But, Zhou’s proposal was not the first attempt – a similar proposal for a global currency was already made by Keynes at the Bretton Woods conference in 1944, and then followed by similar concepts afterwards. None of them ever materialized. To turn the concept of a super-sovereign reserve currency into reality is not easy, neither politically nor in terms of implementation. Shifting the status of an accepted international currency like the Dollar is a long process. Although the financial crisis hurt the Dollar’s status greatly, the end of the Dollar as the primary reserve currency may still be some years away. Though decreased, the Dollar remains the primary reserve currency, representing more than 60% of total foreign exchange reserves in 2009. Until a substitute currency comes forth, the Dollar is still the hegemonic currency. Moreover, even if “super-sovereign reserve currency” could be created, it would still only be a small step towards challenging the control of financial big powers over the international financial system, as the US, for example, retains the biggest voting power within the IMF. Instead of being meant as a viable political proposal, many have interpreted China’s challenge to the Dollar as more of a political signal to the United States and other developed countries. The message it carried was clear: now that China has become a member of the G20 ‘elite club’, it would be no longer only the “audience”, but rather an active participant and fellow rule-maker.
The financial crisis also hit China, but China did increase its speaking power and advance its international status through financial diplomacy. In the future, G20 will possibly replace G8 as the most important institution in international financial governance. The change of power structure in international finance is beneficial to China. The basis of the Dollar has not collapsed, since, at present there is no currency that can substitute the Dollar. The US still has strongest economy. The gap between US and China will not disappear in the near future, but it is certain that, the competition between China and US on the reform of international financial system will continue.
Yaping Lou, a PhD candidate with Fudan University, is majoring in international relations.
