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Why yuan can’t replace dollar as the global currency

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by Kumar David

There is a school of thought (my sparring partners I call them) which contends that the mighty dollar is on its way out as the global trade and reserve currency. Though the argument is flawed it is not without merit. The IMF estimates that China’s economy grew by about 1.9% in pandemic ravaged year 2020 while it declined by 4.3% in the US in the same year. Forecasters now expect the Chinese economy to expand by a stellar 8% in 2021 and the US at a modest 2%; star gazing beyond 2021 is silly till the shape of the post-corvid universe is clearer. Depending on which ‘erudite’ bunch of dismal scientists you consult, the Chinese economy will overtake the American in size somewhere between 2028 and 2032 on a nominal currency basis – it is already bigger on a PPP (purchasing power parity) basis. These numbers are impressive and relevant for a different discussion, viz. choice of a development model (free-market capitalism supported by liberal democracy versus a government-led mixed economy under the guardianship of a strong centralised state) for the developing world if not others as well. But I argue that these striking statistics do not sufficiently support my challengers’ case for the likelihood of the Yuan emerging as an alternative to the dollar as the world’s global currency.

My sparring partners then respond with two other economic trends that are more relevant to the dispute – foreign trade balances and interest rates. China’s trade surplus has averaged about $40 to $50 billion a month since 2015 and in post-covid November 2020 shot up to $75 billion. The high positive trade balance scenario is likely to persist throughout 2021 and 2022 as the rest of the world recovers and imports capital good from China to underpin recovery. Or, other economists argue, it may be a short-lived spike since others will enhance their output and need less from China. (It was Harry Truman who lamented “Oh for a one-handed economist. All my economists say ‘on one hand…’, then ‘but on the other…”). Admittedly the currency of a country with a large trade balance and foreign currency reserves ($1 trillion in China’ case) is a candidate for global status.

The second point that proponents of the Yuan-thesis advance is that China is the only country offering positive interest rates on one-year government bonds after the conventional deflators to deduct the effect of inflation on yields are taken into account. They, my detractors, back it up with remarks like “The whole US$ house of cards will tumble when inflation flares up in the US – already happening but hidden by using bogus inflation measures such as PCE (Personal Consumption Expenditure) inflation, which measures the inflation experienced by the rich 1%. Before long even PCE inflation will exceed 2%”. (The Personal Consumption Expenditure in gross domestic product consists of expenditure of households on durable and non-durable goods and services). I do not agree that PCE is a bogus inflation deflator, but I do concede that an increase in the US inflation rate above the prevailing 1.2% to 1.5% range is very likely. Advocates of MMT that is Modern Monetary Theory (the debt obsessed guys who want to run the electronic money printing press all day and all night) are deluded that inflation is a bogey of a bygone era. I am not a convert to MMT but let that pass; I have discussed it in previous columns.

There are five fundamental reasons why the Yuan cock won’t fight nor win the battle to become the global payments and reserve currency option in the foreseeable future. They are:-

 

= There is nowhere near enough Yuan in circulation to lubricate all global investment and trade. Or to put it in other words; Chinese financial pockets are nowhere near deep enough to meet global needs.

= The Yuan is not freely convertible, either due to restrictions or because some jurisdictions are not in a position to process Yuan transactions with adequate flexibility.

= Chinese financial markets and banks still constitute a relatively ‘closed economy’.

= The dollar’s successor will be a bastard mix of the Dollar, Gold, Euro, Yuan and SDRs – (Yen?).

 

There is about $2 trillion worth of US dollar bills in circulation. It is the most popular currency in use worldwide — central-bank reserves, wealthy people’s cash holdings, and money laundering. Grounded on the historical reach and power of US Imperialism since WW2 and because of America’s political stability (Trump’s attempted coup gave everyone a fright though) it is the most liquid currency as a global store of value and safety net. There is about $5 trillion worth, in all currencies, in circulation throughout the world, most of it domestic except the $, Euro, Pound and Yen. The five trillion is what is called the narrow money supply, which is notes and coins. But using a more inclusive definition of money called broad money the amount is much higher since it adds the money in bank current and savings accounts and money-market accounts. This is all money that can be quickly digitally accessed and used. Estimates of the quantum of global broad money vary; the IMF puts it at $35 trillion and the CIA $80 trillion. Take one more step pertinent to my argument and include global hedge funds and derivatives, investments and market capitalisations, then global financial value is estimated at between $500 trillion and $1000 trillion. I cannot be sure, but say a third or more is capitalised in US$.

The narrow money supply in China is equivalent to $1.2 trillion in US dollar terms and therefore comparable to the US, while broad money supply is estimated as equivalent to $33 trillion, again comparable to US dollar money supplies. But nearly all of China’s money supplies are held within China and Hong Kong. However, it is when it comes to the value of global investments, funds and market capitalisations that a big difference shows up. Ali’s Ant Groups whose recent IPO was thwarted (or deferred) by the authorities is valued at $200 billion, while the market capitalisation of China’s largest banks including Hong Kong’s banks is equivalent to about $2 trillion. It is impossible for me with zero research support to make a proper estimate of the capitalisation of China’s companies and giant corporations (many state owned) and China’s overseas holdings. But I would be amazed if it all tots up to more than $50 trillion, which is only a tenth to twentieth of global financial values. This is what makes the Chinese Yuan far from ready to sally forth as an alternative global currency.

China has a few useful cards up its sleeve that could tilt the balance to a degree if it decided to play hardball. A shift from the $ to Yuan could happen in the oil market if China, as the world’s largest importer, attempted to create a Yuan-denominated crude-oil market. Or if it demand payment in Yuan for its exports, which will handicap the US which doesn’t earn sufficient Yuan through exports to China to pay for imports from China. At this stage in the discussion I think it necessary to interject that China does not want to launch the Yuan as a global currency and as major alternative reserve and payments mechanism. Anyone who is witness to the currency chaos that the US may soon run into would be wary. The reserve currency status of the $ has let America pay for everything by merely printing money. This can go on for only so long as people are willing to accept it for purchases or to hold it as a reserve. Has China been playing a long game to dethrone the $, as one of my discussants suggests? I am not sure, but for sure US sanctions on Chinese and Hong Kong leaders and attempts to undermine Chinese technology companies (Huawei most clearly) must be pushing Beijing nearer the edge. There is evidence that China has been accumulating gold and furthermore the Chinese 10-year bond yield now is relatively high at 3% – meaning the Yuan is payments-secure.

A reserve currency should be a medium of exchange, a unit of account and also a store of value. The $ passes with flying colours on the first two counts but with a real interest rate of -2% it is failing as a store of value compared to the Yuan which offers investors a real interest rate of +1%. But the depreciation of the dollar against major currencies is a slow and uneven process. On balance and taking into account the arguments I have advanced in this column, clearly the Yuan’s day has still not dawned. And there is a sting in the tail for Sri Lanka; the gods atop mount Yuan are not in a place from which to vaporise our foreign debt chaos by magic.



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Features

Strong on vocals

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The group Mirage is very much alive, and kicking, as one would say!

Their lineup did undergo a few changes and now they have decided to present themselves as an all male group – operating without a female vocalist.

At the helm is Donald Pieries (drums and vocals), Trevin Joseph (percussion and vocals), Dilipa Deshan (bass and vocals), Toosha Rajarathna (keyboards and vocals), and Sudam Nanayakkara (lead guitar and vocals).

The plus factor, where the new lineup is concerned, is that all five members sing.

However, leader Donald did mention that if it’s a function, where a female vocalist is required, they would then feature a guest performer.

Mirage is a very experience outfit and they now do the Friday night scene at the Irish Pub, in Colombo, as well as private gigs.

 

 

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Dichotomy of an urban-suburban New Year

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Ushered in by the ‘coo-ee’ of the Koel and the swaying of Erabadu bunches, the Sinhala and Tamil New Year will dawn in the wee hours of April 14. With houses to clean, preparation of sweetmeats and last-minute shopping, times are hectic…. and the streets congested.

It is believed that New Year traditions predated the advent of Buddhism in the 3rd century BC. But Buddhism resulted in a re-interpretation of the existing New Year activities in a Buddhist light. Hinduism has co-existed with Buddhism over millennia and no serious contradiction in New Year rituals are observed among Buddhists and Hindus.

The local New Year is a complex mix of Indigenous, Astrological, Hindu, and Buddhist traditions. Hindu literature provides the New Year with its mythological backdrop. The Prince of Peace called Indradeva is said to descend upon the earth to ensure peace and happiness, in a white carriage wearing on his head a white floral crown seven cubits high. He first plunges, into a sea of milk, breaking earth’s gravity.

The timing of the Sinhala New Year coincides with the New Year celebrations of many traditional calendars of South and Southeast Asia. Astrologically, the New Year begins when the sun moves from the House of Pisces (Meena Rashiya) to the House of Aries (Mesha Rashiya) in the celestial sphere.

The New Year marks the end of the harvest season and spring. Consequently, for farming communities, the traditional New Year doubles as a harvest as well. It also coincides with one of two instances when the sun is directly above Sri Lanka. The month of Bak, which coincides with April, according to the Gregorian calendar, represents prosperity. Astrologers decide the modern day rituals based on auspicious times, which coincides with the transit of the Sun between ‘House of Pisces’ and ‘House of Aries’.

Consequently, the ending of the old year, and the beginning of the new year occur several hours apart, during the time of transit. This period is considered Nonegathe, which roughly translates to ‘neutral period’ or a period in which there are no auspicious times. During the Nonegathe, traditionally, people are encouraged to engage themselves in meritorious and religious activities, refraining from material pursuits. This year the Nonegathe begin at 8.09 pm on Tuesday, April 13, and continues till 8.57 am on 14. New Year dawns at the halfway point of the transit, ushered in bythe sound of fire crackers, to the woe of many a dog and cat of the neighbourhood. Cracker related accidents are a common occurrence during new year celebrations. Environmental and safety concerns aside, lighting crackers remain an integral part of the celebrations throughout Sri Lanka.

This year the Sinhala and Tamil New Year dawns on Wednesday, April 14, at 2.33 am. But ‘spring cleaning’ starts days before the dawn of the new year. Before the new year the floor of houses are washed clean, polished, walls are lime-washed or painted, drapes are washed, dried and rehang. The well of the house is drained either manually or using an electric water pump and would not be used until such time the water is drawn for first transaction. Sweetmeats are prepared, often at homes, although commercialization of the new year has encouraged most urbanites to buy such food items. Shopping is a big part of the new year. Crowds throng to clothing retailers by the thousands. Relatives, specially the kids, are bought clothes as presents.

Bathing for the old year takes place before the dawn of the new year. This year this particular auspicious time falls on April 12, to bathe in the essence of wood apple leaves. Abiding by the relevant auspicious times the hearth and an oil lamp are lit and pot of milk is set to boil upon the hearth. Milk rice, the first meal of the year, is prepared separate. Entering into the first business transaction and partaking of the first meal are also observed according to the given auspicious times. This year, the auspicious time for preparing of meals, milk rice and sweets using mung beans, falls on Wednesday, April 14 at 6.17 am, and is to be carried out dressed in light green, while facing east. Commencement of work, transactions and consumption of the first meal falls on Wednesday, April 14 at 7.41 am, to be observed while wearing light green and facing east.

The first transaction was traditionally done with the well. The woman of the house would draw water from the well and in exchange drop a few pieces of charcoal, flowers, coins, salt and dried chillies into the well, in certain regions a handful of paddy or rice is also thrown in for good measure. But this ritual is also dying out as few urban homes have wells within their premises. This is not a mere ritual and was traditionally carried out with the purification properties of charcoal in mind. The first water is preferably collected into an airtight container, and kept till the dawn of the next new year. It is believed that if the water in the container does not go down it would be a prosperous year. The rituals vary slightly based on the region. However, the essence of the celebrations remains the same.

Anointing of oil is another major ritual of the New Year celebrations. It falls on Saturday, April 17 at 7.16 am, and is done wearing blue, facing south, with nuga leaves placed on the head and Karada leaves at the feet. Oil is to be applied mixed with extracts of Nuga leaves. The auspicious time for setting out for professional occupations falls on Monday, April 19 at 6.39 am, while dressed in white, by consuming a meal of milk rice mixed with ghee, while facing South.

Traditionally, women played Raban during this time, but such practices are slowly being weaned out by urbanization and commercialisation of the New Year. Neighbours are visited with platters of sweetmeats, bananas, Kevum (oil cake) and Kokis (a crispy sweetmeat) usually delivered by children. The dichotomy of the urban and village life is obvious here too, where in the suburbs and the village outdoor celebrations are preferred and the city opts for more private parties.

 

 

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New Year games: Integral part of New Year Celebrations

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Food, games and rituals make a better part of New Year celebrations. One major perk of Avurudu is the festivals that are organised in each neighbourhood in its celebration. Observing all the rituals, like boiling milk, partaking of the first meal, anointing of oil, setting off to work, are, no doubt exciting, but much looked-forward-to is the local Avurudu Uthsawaya.

Avurudu Krida or New Year games are categorised as indoor and outdoor games. All indoor games are played on the floor and outdoor games played during the Avurudu Uthsava or New Year festival, with the whole neighbourhood taking part. Some of the indoor games are Pancha Dameema, Olinda Keliya and Cadju Dameema. Outdoor games include Kotta pora, Onchili pedeema, Raban geseema, Kana mutti bindeema, Placing the eye on the elephant, Coconut grating competition, Bun-eating competition, Lime-on-spoon race, Kamba adeema (Tug-o-War) and Lissana gaha nageema (climbing the greased pole). And what’s an Avurudhu Uthsava sans an Avurudu Kumari pageant, minus the usual drama that high profile beauty pageants of the day entail, of course.

A salient point of New Year games is that there are no age categories. Although there are games reserved for children such as blowing of balloons, races and soft drinks drinking contests, most other games are not age based.

Kotta pora aka pillow fights are not the kind the average teenagers fight out with their siblings, on plush beds. This is a serious game, wherein players have to balance themselves on a horizontal log in a seated position. With one hand tied behind their back and wielding the pillow with the other, players have to knock the opponent off balance. Whoever knocks the opponent off the log first, wins. The game is usually played over a muddy pit, so the loser goes home with a mud bath.

Climbing the greased pole is fun to watch, but cannot be fun to take part in. A flag is tied to the end of a timber pole-fixed to the ground and greased along the whole length. The objective of the players is to climb the pole, referred to as the ‘tree’, and bring down the flag. Retrieving the flag is never achieved on the first climb. It takes multiple climbers removing some of the grease at a time, so someone could finally retrieve the flag.

Who knew that scraping coconut could be made into an interesting game? During the Avurudu coconut scraping competition, women sit on coconut scraper stools and try to scrape a coconut as fast as possible. The one who finishes first wins. These maybe Avurudu games, but they are taken quite seriously. The grated coconut is inspected for clumps and those with ungrated clumps are disqualified.

Coconut palm weaving is another interesting contest that is exclusive to women. However men are by no means discouraged from entering such contests and, in fact, few men do. Participants are given equally measured coconut fronds and the one who finishes first wins.

Kana Mutti Bindima involves breaking one of many water filled clay pots hung overhead, using a long wooden beam. Placing the eye on the elephant is another game played while blindfolded. An elephant is drawn on a black or white board and the blindfolded person has to spot the eye of the elephant. Another competition involves feeding the partner yoghurt or curd while blindfolded.

The Banis-eating contest involves eating tea buns tied to a string. Contestants run to the buns with their hands tied behind their backs and have to eat buns hanging from a string, on their knees. The one who finishes his or her bun first, wins. Kamba adeema or Tug-o-War pits two teams against each other in a test of strength. Teams pull on opposite ends of a rope, with the goal being to bring the rope a certain distance in one direction against the force of the opposing team’s pull.

Participants of the lime-on-spoon race have to run a certain distance while balancing a lime on a spoon, with the handle in their mouths. The first person to cross the finish line without dropping the lime wins. The sack race and the three-legged race are equally fun to watch and to take part in. In the sack race, participants get into jute sacks and hop for the finish line. The first one over, wins. In the three-legged race one leg of each pair of participants are tied together and the duo must reach the finish line by synchronising their running, else they would trip over their own feet.

Pancha Dameema is an indoor game played in two groups, using five small shells, a coconut shell and a game board. Olinda is another indoor board game, normally played by two players. The board has nine holes, four beads each. The player who collects the most number of seeds win.

This is the verse sung while playing the game:

“Olinda thibenne koi koi dese,

Olinda thibenne bangali dese…

Genath hadanne koi koi dese,

Genath hadanne Sinhala dese…”

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