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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

Govt.’s choice is dialogue over confrontation

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By Jehan Perera

Preparing for the forthcoming UN Human Rights Council cannot be easy for a government elected on a nationalist platform that was very critical of international intervention. When the government declared its intention to withdraw from Sri Lanka’s co-sponsorship of the October 2015 resolution No. 30/1 last February, it may have been hoping that this would be the end of the matter. However, this is not to be. The UN Human Rights High Commissioner’s report that will be taken up at the forthcoming UNHRC session in March contains a slate of proposals that are severely punitive in nature and will need to be mitigated. These include targeted economic sanctions, travel bans and even the involvement of the International Criminal Court.

Since UN Secretary General Ban Ki-Moon’s visit in May 2009 just a few days after the three-decade long war came to its bloody termination, Sri Lanka has been a regular part of the UNHRC’s formal discussion and sometimes even taking the centre stage. Three resolutions were passed on Sri Lanka under acrimonious circumstances, with Sri Lanka winning the very first one, but losing the next two. As the country became internationally known for its opposition to revisiting the past, sanctions and hostile propaganda against it began to mount. It was only after the then Sri Lankan government in 2015 agreed to co-sponsor a fresh resolution did the clouds begin to dispel.

Clearly in preparation for the forthcoming UNHRC session in Geneva in March, the government has finally delivered on a promise it made a year ago at the same venue. In February 2020 Foreign Minister Dinesh Gunawardena sought to prepare the ground for Sri Lanka’s withdrawal from co-sponsorship of UN Human Rights Council resolution No 30/1 of 2015. His speech in Geneva highlighted two important issues. The first, and most important to Sri Lanka’s future, was that the government did not wish to break its relationships with the UN system and its mechanisms. He said, “Sri Lanka will continue to remain engaged with, and seek as required, the assistance of the UN and its agencies including the regular human rights mandates/bodies and mechanisms in capacity building and technical assistance, in keeping with domestic priorities and policies.”

Second, the Foreign Minister concluding his speech at the UNHRC session in Geneva saying “No one has the well-being of the multi-ethnic, multi-lingual, multi-religious and multi-cultural people of Sri Lanka closer to their heart, than the Government of Sri Lanka. It is this motivation that guides our commitment and resolve to move towards comprehensive reconciliation and an era of stable peace and prosperity for our people.” On that occasion the government pledged to set up a commission of inquiry to inquire into the findings of previous commissions of inquiry. The government’s action of appointing a sitting Supreme Court judge as the chairperson of a three-member presidential commission of inquiry into the findings and recommendations of earlier commissions and official bodies can be seen as the start point of its response to the UNHRC.

 

 

NEGATIVE RESPONSE

 

The government’s setting up of a Commission of Inquiry has yet to find a positive response from the international and national human rights community and may not find it at all. The national legal commentator Kishali Pinto Jayawardene has written that “the tasks encompassed within its mandate have already been performed by the Lessons Learnt and Reconciliation Commission (LLRC, 2011) under the term of this President’s brother, himself the country’s Executive President at the time, Mahinda Rajapaksa.” Amnesty International has stated that “Sri Lanka has a litany of such failed COIs that Amnesty International has extensively documented.” It goes on to quote from the UN High Commissioner for Human Rights that “Domestic processes have consistently failed to deliver accountability in the past and I am not convinced the appointment of yet another Commission of Inquiry will advance this agenda. As a result, victims remain denied justice and Sri Lankans from all communities have no guarantee that past patterns of human rights violations will not recur.”

It appears that the government intends its appointment of the COI to meet the demand for accountability in regard to past human rights violations. Its mandate includes to “Find out whether preceding Commissions of Inquiry and Committees which have been appointed to investigate into human rights violations, have revealed any human rights violations, serious violations of the international humanitarian law and other such serious offences.” In the past the government has not been prepared to accept that such violations took place in a way that is deserving of so much of international scrutiny. Time and again the point has been made in Sri Lanka that there are no clean wars fought anywhere in the world.

International organisations that stands for the principles of international human rights will necessarily be acting according to their mandates. These include seeking the intervention of international judicial mechanisms or seeking to promote hybrid international and national joint mechanisms within countries in which the legal structures have not been successful in ensuring justice. The latter was on the cards in regard to Resolution 30/1 from which the government withdrew its co-sponsorship. The previous government leaders who agreed to this resolution had to publicly deny any such intention in view of overwhelming political and public opposition to such a hybrid mechanism. The present government has made it clear that it will not accept international or hybrid mechanisms.

 

 

SEQUENTIAL IMPLEMENATION

 

In the preamble to the establishment of the COI the government has made some very constructive statements that open up the space for dialogue on issues of accountability, human rights and reconciliation. It states that “the policy of the Government of Sri Lanka is to continue to work with the United Nations and its Agencies to achieve accountability and human resource development for achieving sustainable peace and reconciliation, even though Sri Lanka withdrew from the co-sponsorship of the aforesaid resolutions” and further goes on to say that “the Government of Sri Lanka is committed to ensure that, other issues remain to be resolved through democratic and legal processes and to make institutional reforms where necessary to ensure justice and reconciliation.”

As the representative of a sovereign state, the government cannot be compelled to either accept international mechanisms or to prosecute those it does not wish to prosecute. At the same time its willingness to discuss the issues of accountability, justice and reconciliation as outlined in the preamble can be considered positively. The concept of transitional justice on which Resolution No 30/1 was built consists of the four pillars of truth, accountability, reparations and institutional reform. There is international debate on whether these four pillars should be implemented simultaneously or whether it is acceptable that they be implemented sequentially depending on the country context.

The government has already commenced the reparations process by establishing the Office for Reparations and to allocate a monthly sum of Rs 6000 to all those who have obtained Certificates of Absence (of their relatives) from the Office of Missing Persons. This process of compensation can be speeded up, widened and improved. It is also reported that the government is willing to consider the plight of suspected members of the LTTE who have been in detention without trial, and in some cases without even being indicted, for more than 10 years. The sooner action is taken the better. The government can also seek the assistance of the international community, and India in particular, to develop the war affected parts of the country on the lines of the Marshall Plan that the United States utilized to rebuild war destroyed parts of Europe. Member countries of the UNHRC need to be convinced that the government’s actions will take forward the national reconciliation process to vote to close the chapter on UNHRC resolution 30/1 in March 2021.

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Features

Album to celebrate 30 years

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Rajiv Sebastian had mega plans to celebrate 30 years, in showbiz, and the plans included concerts, both local and foreign. But, with the pandemic, the singer had to put everything on hold.

However, in order to remember this great occasion, the singer has done an album, made up of 12 songs, featuring several well known artistes, including Sunil of the Gypsies.

All the songs have been composed, very specially for this album.

Among the highlights will be a duet, featuring Rajiv and the Derena DreamStar winner, Andrea Fallen.

Andrea, I’m told, will also be featured, doing a solo spot, on the album.

Rajiv and his band The Clan handle the Friday night scene at The Cinnamon Grand Breeze Bar, from 07.30 pm, onwards.

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Features

LET’S DO IT … in the new normal

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The local showbiz scene is certainly brightening up – of course, in the ‘new normal’ format (and we hope so!)

Going back to the old format would be disastrous, especially as the country is experiencing a surge in Covid-19 cases, and the Western Province is said to be high on the list of new cases.

But…life has to go on, and with the necessary precautions taken, we can certainly enjoy what the ‘new normal’ has to offer us…by way of entertainment.

Bassist Benjy, who leads the band Aquarius, is happy that is hard work is finally bringing the band the desired results – where work is concerned.

Although new to the entertainment scene, Aquarius had lots of good things coming their way, but the pandemic ruined it all – not only for Aquarius but also for everyone connected with showbiz.

However, there are positive signs, on the horizon, and Benjy indicated to us that he is enthusiastically looking forward to making it a happening scene – wherever they perform.

And, this Friday night (January 29th), Aquarius will be doing their thing at The Show By O, Mount Lavinia – a beach front venue.

Benjy says he is planning out something extra special for this particular night.

“This is our very first outing, as a band, at The Show By O, so we want to make it memorable for all those who turn up this Friday.”

The legendary bassist, who lights up the stage, whenever he booms into action, is looking forward to seeing music lovers, and all those who missed out on being entertained for quite a while, at the Mount Lavinia venue, this Friday.

“I assure you, it will be a night to be remembered.”

Benjy and Aquarius will also be doing their thing, every Saturday evening, at the Darley rd. Pub & Restaurant, Colombo 10.

In fact, they were featured at this particular venue, late last year, but the second wave of Covid-19 ended their gigs.

Also new to the scene – very new, I would say – is Ishini and her band, The Branch.

Of course, Ishini is a singer of repute, having performed with Mirage, but as Ishini and The Branch, they are brand new!

Nevertheless, they were featured at certain five-star venues, during the past few weeks…of their existence.

 

 

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