When Australia’s Treasurer, Wayne Swan, heads to Beijing next week he’s expected to ink a deal to make the Australian dollar directly convertible with the Chinese yuan. If successful, Australia would become only the third country to negotiate such a deal, joining Japan and New Zealand.Direct conversion reduces costs for importers and exporters by obviating the cumbersome need to transact deals in a third-party currency – usually the US dollar. From the Australian perspective this agreement makes a lot of sense given the centrality of the Chinese market to Australian trade flows.But might it also presage a longer term move in the Game of Thrones? The Wall Street Journal expects China to reach more such agreements in the coming years:
Beijing aims to have 30% of foreign trade settled in yuan by 2015, a threefold increase from current levels, and has been working to establish international trading hubs beyond Hong Kong to increase global liquidity in its currency…Bankers say it could also encourage more Chinese investment in Australia’s resources industry. China is Australia’s largest trading partner, accounting for about 60% of its exports, largely raw materials such as iron ore and coal.
China’s tightly controlled capital markets, including its restrictions on the yuan, have long been cited by economists as an impediment to future economic growth. As the country moves up the development ladder and its economy becomes increasingly sophisticated, a more liberal financial sector may come to be seen in Beijing as an imperative.There are some analysts out there who see these moves by Beijing as signs of American decline or as threats to American power. This strikes us as a classic example of vulgar economics in geopolitical thinking. The relationship between currency and power is not a simple one, and the further cementing of the Chinese economy into the international system by the progressive internationalization of its currency is, we think, an asset rather than a liability for America’s core international goals.The US has been urging China for many years to follow a less arbitrary currency policy and to make it more responsive to normal market forces. That is where these swap arrangements are headed.The future of the dollar lies entirely in America’s hands. Managing our long term fiscal picture wisely and implementing policies at home that promote investment and growth will keep the dollar strong and make it welcome on world markets no matter what China does. Failing to manage our affairs will undermine our strength — not because a weak currency leads to a weak country, but because a weak national economy and irresponsible national finance will undermine the US economy.