China's $2.4 Trillion Stash
Samuelson, Robert J., Newsweek
Byline: Robert J. Samuelson
Why the RMB won't replace the dollar.
China disclosed the other day that its foreign-exchange reserves had increased to about $2.4 trillion in 2009, a gain of $453 billion for the year. These stupendous figures--and the likelihood that the country's foreign-exchange reserves will rise by a comparable amount this year--have now become a financial, economic, and geopolitical reality of surpassing significance. The significance is not, as many imagine, that China might suddenly "dump" its dollars and dethrone the dollar as the world's major international currency, undermining American economic power and prestige. Two thirds or more of China's reserves are estimated to be held in dollars. As an economic strategy, dumping the dollar would boomerang. It would amount to a declaration of economic war in which everyone--Chinese, Americans, and many others--would lose.
Consider what would happen, hypothetically. China would first sell securities in which its dollars are invested. That would include an estimated $800 billion in U.S. Treasury bonds and securities, plus billions in American stocks and corporate bonds. After unloading the securities and collecting dollars, it would sell the dollars on foreign-exchange markets for other currencies: the euro, the Japanese yen, and who knows what else.
The massive disgorging of dollars could trigger another global economic collapse. As China's selling became known (as it would), other foreign and American investors might jump on the bandwagon, abandoning dollar securities and shifting currencies. If panic ensued, markets would fall sharply. Banks and investors would see their capital and wealth erode. The resumption of the global recession, even the onset of a depression, would shrink foreign markets for China's exports (in 2009, its exports fell 16 percent). To protect jobs, other countries might impose quotas or tariffs on Chinese imports.
Why would China do this to itself? The answer: it wouldn't.
The significance of the huge foreign-exchange reserves lies elsewhere. First, they measure China's mercantilist trade policies. A country that practices mercantilism strives to increase exports at the expense of its trading partners. China has done this by keeping its currency, the renminbi (RMB), at an artificially low rate that gives its exports a competitive advantage on world markets. …