By Mike Bird and Saumya Vaishampayan
Beijing and Moscow have rarely had more reasons to rue the
dollar's global dominance. Yet changing the status quo will be
difficult, and recent efforts to do so have yielded little.
The dollar isn't only the primary reserve currency held by other
central banks. It is also ubiquitous in trade and international
capital markets, making it crucial to the stability of emerging
economies. Last year a soaring dollar rattled the developing world
by making dollar debt more expensive for foreign borrowers to
service.
The dollar's primacy boosts overseas demand for American assets,
which some economists believe lowers U.S. borrowing costs. It also
gives Washington the ability to cut countries and organizations off
from the world financial system, because access ultimately requires
links to U.S. banks.
That power rankles in Tehran, Beijing, Moscow, Brussels and
elsewhere. Yet, after a drawn-out crisis in the eurozone, and a
more recent slowdown in China, the dollar's international
pre-eminence looks safer than ever. Concerns that a U.S.
administration with an America First platform would diminish the
dollar's global role haven't been borne out, either.
"We have seen a resurgence in the dominance of the dollar in
cross-border debt and a persistence in its role as a reserve
currency," says Catherine Schenk, an economic historian at the
University of Oxford. That is a product not just of euro weakness
and a slowdown in yuan internationalization, she says, but also of
the dollar's underlying advantages.
"In times of uncertainty like today, the liquidity of markets
becomes even more important," Prof. Schenk says.
As the pool of dollar bonds issued by non-U.S. governments and
companies more than doubled between mid-2008 and last year, to
$9.564 trillion from $4.299 trillion, international bonds in other
currencies shrank to $5.672 trillion from $6.129 trillion,
according to the Bank for International Settlements.
International use of the euro, once the dollar's clearest
challenger, has diminished since the eurozone sovereign-debt crisis
raised the specter of default on debts previously believed safe.
The euro's share of global reserves shrank to 20.5% in the third
quarter of 2018 from 28% in 2009.
China, meanwhile, has spent years trying to boost the
international use of its currency, including by encouraging
offshore yuan trading and by recently introducing yuan oil
contracts.
It has had some successes, such as gaining a place in the
International Monetary Fund's basket of reserve currencies. But to
make the yuan an international force, economists and investors have
long maintained, Beijing must permit freer movement of money across
its borders.
Instead, facing a flood of capital outflows in 2015-16, it
clamped down on investment outside of China. And it is unlikely to
make it easier to move money in and out of China now, as growth
slows and U.S. tariffs pinch its manufacturers.
The data isn't encouraging for Beijing. The offshore yuan bond
market has shriveled in size, FTSE data shows, and the yuan's share
of global payments has receded, according to figures from the Swift
banking network. Currency swap lines, which China extended across
South America, Africa, Europe and Asia, have largely gone
unused.
Beijing's flagship Belt and Road Initiative, meanwhile, a $1
trillion program to fund infrastructure linking East Asia and
Europe, is often compared with the U.S. Marshall Plan, the postwar
aid program that helped rebuild Europe. But while that plan sated
Europe's desperate need for dollars for trade, Belt and Road
borrowers don't need or want much Chinese yuan.
According to research by Citigroup economists, Belt and Road
contractors prefer to receive dollars, and all major
recapitalizations of Chinese lenders funding the program have been
done in dollars.
The dollar does face some challenges. Russia's central bank sold
or moved most of its U.S. Treasurys last year, official data shows,
as part of an overt de-dollarization policy that includes closer
links to China. And in the long term the yuan's clout is likely to
increase.
"There are still capital controls and questions about the
credibility of the [Chinese] institutions, so it's far-fetched to
look at it as a reserve currency," says Claire Dissaux, head of
global economics and strategy at Millennium Global Investments in
London. But she says use of the yuan is likely to grow, fueled by
foreign investment in China's vast bond market.
The yuan also will eventually gain some reserve-currency
attributes, especially within Asia, says Arvind Subramanian, a
nonresident senior fellow at the Peterson Institute for
International Economics. The yuan is tracked by several regional
currencies, he notes, largely because other export nations in the
region don't want to appear less competitive.
"The fact that China has become a big trader helps its case for
its currency to become a reserve currency," Mr. Subramanian
says.
For the yuan to truly become a global reserve currency, as a
2011 book of his predicted would happen by the next decade, he says
China must stabilize its economy and clean up its financial
system.
Mr. Bird and Ms. Vaishampayan are Wall Street Journal reporters
based in Hong Kong. Reach them at mike.bird@wsj.com and
saumya.vaishampayan@wsj.com.
(END) Dow Jones Newswires
January 20, 2019 09:35 ET (14:35 GMT)
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