China Joins Global Governance by unknow

Author:unknow
Language: eng
Format: epub
Publisher: Lexington Books
Published: 2012-08-15T00:00:00+00:00

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Coping with the Dollar Hegemony: China’s New Monetary Strategy and Its Implications for the Regional Monetary Governance

Wei Li

Over the past three decades, as a financially weak state, China has largely followed a “free-riding” strategy in the U.S. dollar–centered international monetary system, relying on the dollar as the international currency in its economic engagement with other countries. China showed very little willingness to expand the use of its own currency abroad due to its concern over unpredictable financial risks. This strategy has gone together with the process of China’s integration into the U.S.-led world market, and China has stayed quiet and acquiesced to the existing hierarchy of the international monetary system, which dates from the collapse of the Bretton Woods System in 1973.

However, this situation has been changing rapidly since the financial crisis of 2008. China is no longer satisfied with being a junior partner and staying silent in the international monetary structure. Instead, it is becoming increasingly concerned with the negative effects of the dollar dominated system, and has begun to take steps to internationalize its own currency. Furthermore, its voice on the reform of the international monetary system is becoming louder and louder. China, which has already overtaken Japan as the world’s second-largest economy in 2010, is trying to flex its monetary muscles in the global arena for the first time. This will definitely reshape the global and regional monetary order.

Why is the Chinese government trying to shift from its traditional monetary strategy of bandwagoning with the U.S. dollar to instead balancing against the global monetary hegemony?1 Faced with two different strategic choices, building a regional multilateral currency union or expanding its own currency unilaterally, which one will China take? How will China’s new monetary strategy affect East Asian regional monetary order building at present and in the future?

This chapter attempts to answer these questions and is structured into four sections. The first section surveys the so-called “dollar trap” that China confronts, and how it presses the Chinese government to change its previous international monetary strategy. The second section elaborates on China’s new monetary move in detail, discussing both its diplomatic and domestic policy changes. The third section reviews Germany and Japan’s experiences, and analyzes how they handle the dollar hegemony when they realized their period of economic rise in the 1970s and 1980s. This section also reviews the experiences of East Asian monetary cooperation during the past decade. The final section discusses China’s present and future monetary strategic choice and its implications for the regional monetary order building.

The Global Financial Crisis and China’s “Dollar Trap”

Discord, disputes, and even conflicts have been ubiquitous in the Sino-U.S. relationship after the establishment of bilateral diplomatic relations in 1979.2 Even though there have been many instances of Sino-U.S. confrontation in the political, economic and even militarily arenas, China has never taken substantial measures to reduce its economic dependence on the United States, particularly its monetary dependence. Keohane and Nye pointed out early in the late 1970s that asymmetric interdependence brings about certain

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