Let China sleep?

By Terry Lacey

(October 08, Jakarta, Sri Lanka Guardian) Napoleon said “Let China sleep. When China awakes, the world will awake”. China must have a good view of the world financial picture because China is sitting on a mountain of dollars, which gives a close and elevated view of the problem. Maybe too close and too elevated. Time for China to wake up.

If and when the dollar falls, what will this mean for China and for ASEAN?

The UK Independent recently reported the Gulf States have been in secret talks with Russia, China, Japan and France to replace the US dollar as the world´s main trading currency with a basket of currencies linked to oil prices.

Robert Fisk the independent-minded top journalist on the newspaper whose name reflects his spirit has been digging with his fluent Arabic around the Gulf Co-operation Council.

Although Saudi Arabia and the Gulf have a very different population and economic profile from China, the two have one big characteristic in common. They are both sitting on a mountain of dollars. And they are both too close if there is a landslide.

Fisk said the proposal was to move over a decade to a basket of currencies including the Japanese yen, the Chinese yuan, the euro, gold and a new unified Gulf currency including Saudi Arabia, the United Arab Emirates, Kuwait and Qatar.

“Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars”. (The Jakarta Post 07.10.09).

Although the details may be confidential everybody knows that Asian countries, ASEAN and China, and most of the newly emerging G20 group have all been discussing how to reduce dependence on the US dollar.

Iran already settles most of its crude oil exports in euros, although prices are still set in dollars. The continued growth of the European Union and the increasing use of the euro is also part of the gradual shift from the dollar.

But with the 2008 Western banking and financial crash and the launching of enormous rescue and stimulus packages, minds have focused on the medium term effects of the amount of debt that countries like the US and the UK are now carrying.

Kenneth Rogoff, a Havard professor, points out that China already holds US$2 trillion in cash and T-bills and this could go up to $4 trillion in the next five or ten years (The Jakarta Post, 06.10.09). Does China really want a dollar mountain that high?

Indonesia and other Asia countries have also been eying the investment potential of the reported $1.6 trillion of US reserves in the Gulf States and Saudi Arabia, from when the oil prices were high. But if it suddenly loses value there will be less to go round in Asia.

Saudi Arabia and the Gulf States also need to use a solid chunk of these dollar reserves to finance their own infrastructure and diversification away from oil before the dollar falls or the historical decline of oil gets going.

Rogoff concurs that whilst a dollar crisis may not be around the corner, China is right to worry about the risk it carries with its dollar T-bill holdings.

China, Indonesia, Malaysia and Thailand have been talking to promote a new international reserve currency, to replace overdependence on the US dollar. ASEAN+3 trade and currency reserve support measures already reflect this.

Thomas Harr, a currency strategist at Standard Charter Plc Singapore said earlier this year “Asian central banks have been diversifying out of US dollars for some time and they´re concerned about the sustainability of the US financial system”. (Bloomberg and Jakarta Post 28.03.09)

So China, Asia and ASEAN, as well as the Gulf States and the G20 need to work urgently on Plan B. The dollar cannot stay king of the castle.

Wake up China and lead the world to a new reserve currency! Or it may be your leaders left holding the baby because you slept for too long.

Terry Lacey is a development economist who writes from Jakarta on modernization in the Muslim world, investment and trade relations with the EU and Islamic banking.

-Sri Lanka Guardian