When there’s something wrong in your financial system, who you gonna call? The custodian of the far-from-perfect-yet-rarely-so-essential reserve currency. The dollar's stature is all the more impressive given the US’s receding share of the world economic pie. This gives American policymakers vast sway in shaping — and saving — global markets. China doesn’t come close.
That hasn’t stopped Beijing creating waves by lending to developing countries and becoming a player in bailouts, a controversial but critical arena that was once almost the exclusive preserve of America and the International Monetary Fund.
As Swiss officials wrestled UBS Group AG into acquiring Credit Suisse Group AG, the Federal Reserve beefed up dollar swap arrangements with five other monetary authorities to counter funding strains. This was the Fed showing muscle as backstop to the world. It drew on statecraft deployed after the collapse of Lehman Brothers Holdings Inc and enhanced during the volatile early stages of the pandemic. “The Fed has just nailed its role as global lender of last resort,” Nathan Sheets, chief global economist at Citigroup Inc, told a conference last week.
Not that the world is necessarily in love with the dollar. It’s the absence of a viable suitor that counts here. The euro had aspirations, but has struggled since the region’s debt crisis. China has a long-standing policy of making the yuan more attractive as a prospective rival, but progress has been very limited. This was one of the main themes of a recent symposium at the Peterson Institute for International Economics marking five decades since the advent of floating exchange rates. “Most of the people at the time, including a lot of US officials, both wanted and did expect that the dollar's role would decline,” C Fred Bergsten, a senior Treasury person in the 1970s, told the gathering at which Sheets also spoke. “It has a bit, but not a lot.”
Time and again, the dollar's demise has been predicted. There's often been a tinge of anti-Americanism, and envy, to prognostications. That sentiment runs up against some hard size and scope. About 60 percent of central bank reserves are in dollars, around half of cross-border loans and international debt is denominated in greenbacks. More than 80 percent of daily foreign-exchange trading involves the dollar. A frequent question at Peterson last week was along the lines of: What kind of US disaster would it take to kick the dollar addiction? One arch response was that DC messes up all the time, but there isn't a plausible alternative. Yet.
Enter China. While it isn’t trying to supplant the Fed, it does want to chip away at Pax Americana. The IMF’s power isn’t untrammeled, and China has boosted its international lending considerably. Credit is a major prong in the long campaign to establish a meaningful role in global finance to complement its heft in manufacturing and exports.
More than 20 nations have received $240 billion in rescue money since 2000, according to new research by a quartet of economists drawn from the World Bank and academia on both sides of the Atlantic. The majority of the largesse was extended in the past five years. The bulk took the form of swap lines from the People’s Bank of China. High-profile borrowers include Sri Lanka, Pakistan and Argentina. Each happens to be matter strategically.
But it would be a mistake to see this expansion as another milestone in a quest by China to best the West. It may be shadowing the IMF and its biggest shareholder, the US Treasury, but Beijing won’t outdo them.
It’s more a desire to lock in support for the Belt and Road initiative among countries that warmed to Chinese investment under the project's umbrella. The paper notes:
"China's bailouts are small compared to the IMF's global lending portfolio and dwarfed by the sweeping international USD liquidity support extended by the US Federal Reserve since 2007, primarily to advanced economies. We also find that Beijing has targeted a limited set of potential recipients, as almost all Chinese rescue loans have gone to low-and-middle income BRI countries with significant debts outstanding to Chinese banks."
The authors do so see historical parallels to the period after World War II when the US Ex-Im Bank, the Exchange Stabilisation Fund and the Fed channeled cash to countries with substantial debts to American banks and companies. (The Exchange Stabilisation Fund has an interesting history in its own right as a piggy bank: It starred in the SVB Financial Group saga as providing funding for a new government backstop. It was put in harm’s way during the days after Lehman’s bankruptcy when mutual funds were in grave jeopardy. In the mid-1990s, the ESF was tapped by the Clinton Administration to help bailout Mexico when Congress was wary.)
Beijing has put considerable resources into the IMF. It's one of the top members of the institution, albeit well short of the US's 17 percent stake. And while the fund has always been headed by a European with an American representative in the number two role, one of the three deputy managing directors is usually Chinese.
It's questionable whether China would want to shoulder the burden of undergirding a really big regional, let alone a series of sprawling rescues.
Better to pick your shots. Sure, politicians in Asia still bristle at high-handedness and misfires from DC during the Asian financial crisis. That doesn't mean they would be comfortable with the leverage China would exert over domestic policy.
Beijing would also have to own the consequences. A Chinese official would probably have been more culturally sensitive than IMF boss Michel Camdessus, who stood over Indonesian President Suharto in 1998 with arms folded ordering him to sign a document in full view of the cameras. Any supplication to China would have taken place behind closed doors. How would President Jiang Zemin have responded to the communal violence unleashed by the economic crash and Suharto’s fall? China's ally North Korea wouldn’t have been able to resist offering advice on the bailout of Seoul. It's a fascinating series of what-ifs.
Unless and until Beijing can come close to exercising that kind of influence, we are stuck with the dollar’s ubiquity and the financial architecture it has created. The greenback is desired yet not really loved. Fed Chair Jerome Powell isn’t exactly a household name, but he’s more recognized than Yi Gang of the PBOC. Those roles could ultimately be reversed, though probably not in their lifetime.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Views are personal and do not represent the stand of this publication.
Credit: Bloomberg
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