Features
Why yuan can’t replace dollar as the global currency
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.
The perceptive commentator seeking to make some sense of social and economic developments within most Southern countries today has no choice but to revisit, as it were, that classic on post-colonial societies, ‘The Wretched of the Earth’ by Frantz Fanon. Decades after the South’s initial decolonization experience this work by the Algerian political scientist of repute remains profoundly relevant.
The fact that the Algeria of today is seeking accountability from its former colonizer, France, for the injustices visited on it during the decades of colonial rule enhances the value and continuing topicality of Frantz’s thinking and findings. The fact that the majority of the people of most decolonized states are continuing to be disempowered and deprived of development should doubly underline the significance of ‘The Wretched of the Earth’ as a landmark in the discourse on Southern questions. The world would be erring badly if it dismisses this evergreen on decolonization and its pains as in any way outdated.
Developments in contemporary China help to throw into relief some of the internal ‘structural deficiencies’ that have come to characterize most Southern societies in current times. However, these and many more ‘structural faults’ came to the attention of the likes of Fanon decades back.
It is with considerable reservations on their truthfulness that a commentator would need to read reports from the US’ Office of the Director of National Intelligence (ODNI) on developments in China, but one cannot approach with the same skepticism revelations on China by well-known media institutions such as Bloomberg News.
While an ODNI report quoted in this newspaper on March 25th, 2025, elaborated on the vast wealth believed to have been amassed by China’s contemporary rulers and their families over the years, Bloomberg News in a more studied manner said in 2012, among other things, on the same subject that, ‘Xi’s extended family had amassed assets totaling approximately $376 million, encompassing investments in sectors like rare earth minerals and real estate. However, no direct links were established between these assets and Xi or his immediate family.’
Such processes that are said to have taken hold in China in post- Mao times in particular are more or less true of most former colonies of the South. A clear case in point is Sri Lanka. More than 75 years into ‘independence’ the latter is yet to bring to book those sections of its ruling class that have grown enormously rich on ill-gotten gains. It seems that, as matters stand, these sections would never be held accountable for their unbounded financial avarice.
The mentioned processes of exploitation of a country’s wealth, explain in considerable measure, the continuing underdevelopment of the South. However, Fanon foresaw all these ills and more about the South long ago. In ‘The Wretched of the Earth’ he speaks insightfully about the ruling classes of the decolonized world, who, having got into the boots of the departing colonizers, left no stone unturned to appropriate the wealth of their countries by devious means and thereby grow into the stratum described as ‘the stinking rich.’
This is another dimension to the process referred to as ‘the development of underdevelopment.’ The process could also be described as ‘How the Other Half Dies’. The latter is the title of another evergreen piece of research of the seventies on the South’s development debacles by reputed researcher Susan George.
Now that the Non-aligned Movement is receiving some attention locally it would be apt to revisit as it were these development debacles that are continuing to bedevil the South. Among other things, NAM emerged as a voice of the world’s poor. In fact in the seventies it was referred to as ‘The trade union of the poor.’ Accordingly, it had a strong developmental focus.
Besides the traditional aims of NAM, such as the need for the South to keep an ‘equidistance’ between the superpowers in the conduct of its affairs, the ruling strata of developing countries were also expected to deliver to their peoples equitable development. This was a foremost dimension in the liberation of the South. That is, economic growth needed to be accompanied by re-distributive justice. In the absence of these key conditions no development could be said to have occurred.
Basing ourselves on these yardsticks of development, it could be said that Southern rulers have failed their peoples right through these decades of decolonization. Those countries which have claimed to be socialistic or centrally planned should come in for the harshest criticism. Accordingly, a central aim of NAM has gone largely unachieved.
It does not follow from the foregoing that NAM has failed completely. It is just that those who have been charged with achieving NAM’s central aims have allowed the Movement to go into decline. All evidence points to the fact that they have allowed themselves to be carried away by the elusive charms of the market economy, which three decades ago, came to be favoured over central planning as an essential of development by the South’s ruling strata.
However, now with the returning to power in the US of Donald Trump and the political Right, the affairs of the South could, in a sense, be described as having come full circle. The downgrading of USAID, for instance, and the consequent scaling down of numerous forms of assistance to the South could be expected to aggravate the development ills of the hemisphere. For instance, the latter would need to brace for stepped-up unemployment, poverty and social discontent.
The South could be said to have arrived at a juncture where it would need to seek ways of collectively advancing its best interests once again with little or no dependence on external assistance. Now is the time for Southern organizations such as NAM to come to the forefront of the affairs of the South. Sheer necessity should compel the hemisphere to think and act collectively.
Accordingly, the possibility of South-South cooperation should be explored anew and the relevant institutional and policy framework needs to be created to take on the relevant challenges.
It is not the case that these challenges ceased to exist over the past few decades. Rather it is a case of these obligations being ignored by the South’s ruling strata in the belief that externally imposed solutions to the South’s development questions would prove successful. Besides, these classes were governed by self- interest.
It is pressure by the people that would enable their rulers to see the error of their ways. An obligation is cast on social democratic forces or the Centre-Left to come to center stage and take on this challenge of raising the political awareness of the people.
On the morning of 21 March, 2025, a Chinese-built K-8 jet trainer aircraft of the Sri Lanka Air Force (SLAF) crashed at Wariyapola. Fortunately, the two pilots ejected from the aircraft and parachuted down to safety.
A team of seven has been appointed to investigate the accident. Their task is to find the ‘cause behind the cause’, or the root cause. Ejecting from an aircraft usually has physical and psychological repercussions. The crew involved in the crash are the best witnesses, and they must be well rested and ready for the accident inquiry. It is vital that a non-punitive atmosphere must prevail. If the pilots believe that they are under threat of punishment, they will try to withhold vital information and not reveal the truth behind what happened, prompting their decision to abandon the stricken aircraft. In the interest of fairness, the crew must have a professional colleague to represent them at the Inquiry.
2000 years ago, the Roman philosopher Cicero said that “To err is human.” Alexander Pope said, “To err is human. To forgive, divine.” Yet in a Royal Air Force (RAF) hangar in the UK Force (RAF) hangs a sign declaring: “To err is human. To forgive is not RAF policy” These are the two extremes.
Over the years, behavioural scientists have observed that errors and intelligence are two sides of the same coin. In other words, an intelligent human being is liable to make errors. They went on to label these acts of omission and commission as ‘Slips, Lapses, Mistakes and Violations’.
To illustrate the point in a motoring context, if one was restricted to driving at a speed limit of 100 kph along an expressway and the speed crept up to 120 kph, then it is a ‘Slip’ on one’s part. If you forgot to fasten the seatbelt, it is a ‘Lapse’. While driving along a two-lane road, if a driver thinks in his/her judgement that the way is clear and tries to overtake slower traffic on the road, using the opposite lane, then encounters unanticipated opposite traffic and is forced to get back to the correct lane, that is a ‘Mistake’. Finally, if a double line is crossed while overtaking, while aware that the law is being broken, that is labelled as a ‘Violation’. In theory, all of the above could be applied to flying as well.
In the mid-Seventies, Elwyn Edwards and Frank Hawkins proposed that good interaction between Software (paperwork), Hardware (the aircraft and other machines), Liveware (human element) and the (working) environment are the essentials in safe flight operations. Labelled the ‘SHELL’ concept, it was adopted by the International Civil Aviation Organisation. (ICAO). (See Diagram 01)
In diagram 01, two ‘L’s depict the ‘Liveware’, inside and outside an aircraft flightdeck. The ‘L’ at the centre is the pilot in command (PIC), who should know his/her strengths and weaknesses, know the same of his/her crew, aircraft, and their mission, and, above all, be continuously evaluating the risks.
Finally, Prof. James Reason proposed the Swiss Cheese Theory of Accident Causation. (See Diagram 02)
From this diagram we see that built in defences in a system are like slices of Swiss cheese. There are pre-existing holes at random which, unfortunately, may align and allow the crew at the ‘sharp end’ to carry out a procedure unchecked.
Although it is easy and self-satisfying to blame a crew, or an individual, at an official accident investigation, what should be asked, instead, is why or how the system failed them? Furthermore, a ‘just culture’ must prevail.
The PIC and crew are the last line of defence in air safety and accident prevention. (See Diagram 3)
A daily newspaper reported that it is now left to be seen whether the crash on 21 March was due to mechanical failure or pilot error. Why is it that when a judge makes a wrong judgement it is termed ‘Miscarriage of Justice’ or when a Surgeon loses a patient on the operating table it is ‘Surgical Misadventure’, but when a pilot makes an honest error, it is called ‘Pilot Error’? I believe it should be termed ‘Human Condition’.
Even before the accident investigation had started, on 23 March, 2025, Minister of Civil Aviation, Bimal Ratnayake, went on record saying that the Ministry of Defence had told him the accident was due to an ‘athweradda’ (error). This kind of premature declaration is a definite ‘no-no’ and breach of protocol. The Minister should not be pre-empting the accident enquiry’s findings and commenting on a subject not under his purview. Everyone concerned should wait for the accident report from the SLAF expert panel before commenting.
God bless the PIC and crew!
– Ad Astrian
Yes, it’s happening tomorrow, Friday (28th), and Saturday (29th,) and what makes this scene extra special is that you don’t need to rush and pack your travelling bags and fork out a tidy sum for your airfare to Thailand.
The Thai Street Food Festival, taking place at Siam Nivasa, 43, Dr. CWW Kannangara Mawatha, Colombo 7, will not only give you a taste of Thai delicacies but also Thai culture, Thai music, and Thai dancing.
This event is being organised by the Thai Community, in Sri Lanka, in collaboration with the Royal Thai Embassy in Colombo.
The Thai Community has been very active and they make every effort to promote Amazing Thailand, to Sri Lankans, in every possible way they can.
Regarding the happening, taking place tomorrow, and on Saturday, they say they are thrilled to give Sri Lankans the vibrant Thai Street Food Festival.
Explaining how Thai souvenirs are turned out
I’m told that his event is part of a series of activities, put together by the Royal Thai Embassy, to commemorate 70 years of diplomatic relations between Thailand and Sri Lanka.
At the Thai Street Food Festival, starting at 5.00 pm., you could immerse yourself in lively Thai culture, savour delicious Thai dishes, prepared by Colombo’s top-notch restaurants, enjoy live music, captivate dance performances, and explore Thai Community members offering a feast of food and beverages … all connected with Amazing Thailand.
Some of the EXCO members of the Thai Community, in Sri Lanka,
with the Ambassador for Thailand
I’m sure most of my readers would have been to Thailand (I’ve been there 24 times) and experienced what Amazing Thailand has to offer visitors … cultural richness, culinary delights and unique experiences.
Well, if you haven’t been to Thailand, as yet, this is the opportunity for you to experience a little bit of Thailand … right here in Colombo; and for those who have experienced the real Thailand, the Thai Street Food Festival will bring back those happy times … all over again!
Remember, ENTRANCE IS FREE.
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