Common "Chinese Dollar" -- Serious Proposal or Political Rhetoric?
Jun 28, 2002
stratfor.biz
Summary
A series of statements about currency is emanating from China -- from the suggestion of a common currency for the mainland and Taiwan to floating the yuan to creating an Asian currency system centered on the Chinese currency. With many of these appearing little more than wishful thinking, it raises the question of whether Beijing's rhetoric is simply that of a government nearing a highly sensitive political transition or if these reveal the unfolding of a new Chinese policy -- one that could spell the end of centralized, one-party rule.
Analysis
China floated a trial balloon June 28 positing a common Chinese currency for the mainland, Taiwan, Hong Kong and Macao that eventually could evolve into the core of an Asian common currency. An article in the official People's Daily suggested the formation of a "Chinese dollar" following the pattern of Europe's common currency, the euro. The optimistic 10-year plan could lead to the creation of an "Asian dollar," which could protect the region against currency fluctuations and economic crises, according to the report.
China's common currency proposal is obviously a non-starter, given that Taiwan would lose all economic independence if it acceded to the plan. Yet in some respects, it is a logical extension of a dual-track Chinese policy intended to bring about the peaceful integration of China and Taiwan and to reassure its Asian neighbors that China's economic growth is not a cause for alarm but a force for regional stability.
With China heading for one of its biggest leadership shakeups in the five-decade history of the People's Republic, the question that arises is whether the statements reflect simple posturing or in fact reveal new and unfolding economic and political policy.
In the People's Daily article, four benefits were put forward for the formation of an integrated Chinese currency. First, China's financial reforms could be guided by experts from Hong Kong and Taiwan, stabilizing the Chinese economy and strengthening the common system. Second, Hong Kong would gain a much broader market for its products and services. Third, Macao's vital tourist industry would be boosted by the more convenient single currency. The fourth and final benefit would be for Taiwan, which would be able to use the scale of China's economy to resist "external financial attack."
Although on some level, these are logical arguments, they overlook the central issue: that of Taiwan's political autonomy. Despite rapidly growing economic ties between Taiwan and the mainland, Taipei is still intent on remaining at least de facto independent of Beijing. The same argument seems to supersede another mainland proposal for economic ties with Taiwan. A spokesman for China's Taiwan Affairs Office said earlier this week that Beijing is ready to open the so-called three direct links with Taiwan -- as long as they are treated as domestic business affairs. The three direct links are mail, trade, and air and shipping services directly between Taiwan and China rather than through Hong Kong or other nations.
The spokesman said the key reason for the "domestic" label would be to avoid allowing foreigners to take over the shipping routes, as even with Taiwan and China's WTO entry, the United Nations allows countries to retain the rights to coastal transportation, fishing and commerce for its own business. Like the proposal for an integrated currency, this too avoids the question of Taiwan's sovereignty -- or rather it automatically assumes Taiwan is part of one China, something Taipei is steadily moving away from.
Beyond Taiwan, however, China is trying to project an image of economic magnanimity to all of Asia. Beijing has been campaigning hard to convince its Asian neighbors that China's economic growth does not challenge their economies. By floating the idea of a giant Chinese economy anchoring Asia amid a sea of financial instability and foreign pirates bent on "financial attack," Beijing seeks reshape the perception of China as an unscrupulous giant bent on economic conquest.
Building on this, China has taken the initiative in promoting the formation of a free trade zone with the Association of Southeast Asian Nations (ASEAN), basically suggesting to it that since China's growth is inevitable (if not unstoppable), they may as well come along for the ride. More tactically, Beijing is footing much of the bill for linking peninsular Southeast Asia into China via rail -- opening up the trade flows and giving ASEAN physically easier access to China's markets.
China's attempts to soften its image among its neighbors, however, are proving only minimally effective. Beijing sees itself as one of the last standard-bearers for the creation of a multi-polar world, one that allows China to set its own domestic political and economic policies without concern for what Washington may say or do. Yet the United States is by far the more economically, politically and militarily dominant power. And everything China does to narrow the gap -- be it through economic restructuring or buying Russian submarines -- only leads China's near neighbors to be more certain that Beijing harbors regional aspirations of glory and power.
Beijing's recent statements, then, raise an important question. Is China simply tossing out rhetoric during the run-up to the leadership change, or is it seriously preparing for a major shift in economic and political policy?
There are other actions Beijing is taking that appear to be a continued move toward liberalizing the economy, which in turn means less centralized control for Beijing or the Communist Party. China is opening foreign-exchange rights to domestic and some select foreign banks and is considering changing investment rules to allow foreign firms to invest in China in yuan, rather than foreign currencies. At the same time, financial officials repeatedly have suggested that the yuan is moving toward convertibility.
Allowing the yuan to float free, or even within a broader band, would erode Beijing's control over national economic policies. This in turn could have drastic consequences for Beijing's ability to control social instability, particularly if market forces trigger even more rapid rises in unemployment or drastic fluctuations in China's currency.
But if the fluctuations failed to materialize, Beijing could move the yuan toward a more regional and even international currency -- giving China much greater political leverage and an ability to counter the United States. This would of course require the continuation of China's phenomenal (if not entirely believable) growth rates -- something Beijing would have to be very sure about to risk the internal destabilization should they miscalculate.
If China's leaders truly believe that Beijing is on an unstoppable climb up the global economic ladder, then the short-term risks to stability can be countered by the long-term gains in international political and economic influence -- and by the ability to establish China as the other pole of the global system. With the transition of power near, however, the current round of rhetoric, and some of China's actions, may fade away as the new leaders begin consolidating power in 2003. |
