China Begins G-20 Leadership With Ideas to Reduce Dollar's Role

China Outlines G-20 Leadership Priorities
  • South Korea, France to lead working group exploring SDR use
  • China exploring ways to make system more resilient to shocks

As China takes the reins of the Group of 20 for the coming year, the first indications are emerging of its agenda.

QuickTake The People’s Currency

Among the priorities: making the global system more resilient to shocks and, perhaps, less reliant on the U.S. dollar. China is setting up a working group led by South Korea and France to develop proposals, including on ways to strengthen the role of the International Monetary Fund’s reserve-currency unit, which is set to incorporate China’s yuan as a component next year.

China also wants a discussion around whether some commodities should be priced in the IMF’s reserve currency, known as Special Drawing Right or SDR, according to a European official involved in the G-20 talks.

Notably absent from a senior role so far is the U.S., owner of what’s still the world’s dominant currency. China’s leadership has for years sought to strengthen the international use of the yuan, and encourage debate about lessening reliance on the dollar.

A surge in demand for dollars as a haven during the 2007-2009 global financial crisis first spurred China’s calls. As chair of the G-20 in 2010, South Korea attempted to lead an effort to widen the international financial safety net, urging the adoption of permanent currency swap lines. The U.S. nixed the idea, with then-Federal Reserve Chairman Ben S. Bernanke saying officials shouldn’t provide a "permanent service" to financial markets.

Chinese Imprint

Half a decade later, Chinese President Xi Jinping has the chance to put his imprint on a forum first set up during the Asian financial crisis of the late 1990s as a grouping of the largest emerging and developed markets to address systemic risks.

"We have seen China grasping every multilateral occasion to enhance its image and leadership role, be it regionally or globally," said Yun Sun, a senior associate with the East Asia Program at the Stimson Center in Washington. "There is little reason for China not to fully exploit the G-20 chairmanship."

China has an ever bigger stake in global financial stability as it endeavors to reduce its own limits on cross-border capital flows, part of a broader plan to give markets a more prominent role in the Communist-run country. Among the challenges for the coming year will be weathering the Fed’s shift to monetary tightening, potentially sending emerging market currencies lower as money heads into higher-yielding dollars.

The G-20 under China’s presidency will also need to consider whether to let expire $250 billion worth of its reserve unit issued in 2009 to boost liquidity during the global financial crisis.

Arms Length

Giving South Korea and France the job as chairs of the working group offers China some distance from the effort, after past failures to head off the repeated financial crises that afflicted the global economy since the G-20’s 1999 foundation. South Korea said last month that the provisional agenda will include action plans to address capital-flow volatility, sovereign-debt restructuring and ways to enhance the IMF’s unit of account, or SDR.

President Xi has called on the G-20 to do more to address global economic disruptions and secure balanced growth, according to a Xinhua Finance report.

China itself saw its regulators cast in poor light this year after doing little to counter a stock-market bubble, then mounting a rushed response including trading suspensions, as some $5 trillion worth of capitalization evaporated. A sudden move on Aug. 11 to change the yuan’s exchange-rate mechanism also jolted global markets.

"Given the clumsy behavior of the government, what confidence can investors have that would lead them to buy securities denominated in the renminbi?" said Robert Aliber, professor of International Economics and Finance Emeritus at the University of Chicago, using another term for the yuan. "China’s role as chair of the G-20 and the inclusion of the renminbi in the SDR are trivial sideshows compared with these market developments."

SDR Inclusion

China’s G-20 chairmanship began at the start of the month, a day after the IMF said the yuan met the requirements for joining the dollar, euro, yen and pound as one of the currencies backing the SDR, a sort of overdraft account for IMF members. China central bank Governor Zhou Xiaochuan in 2009 advocated expanding the use of the SDR unit in calling for a "super-sovereign reserve currency."

Nothing came of Zhou’s call six years ago, and changing the global financial architecture now remains difficult, analysts say.

"We will need another global crisis, and one whose roots can be clearly identified in the shortcomings of the current non-system, for this to happen," said William White, an adviser to the Organization for Economic Cooperation and Development. The G-20’s agenda can also become dominated by pressing issues of the moment.

"I suspect that geopolitical issues will trump economic ones," White said.

Global Role

Whatever else, China’s leadership of the group offers Xi a vehicle to promote his country’s rising global role. The last time China hosted the G-20, in 2005, it was the world’s fifth-largest economy. It’s now No. 2, having surpassed the U.K., Germany and Japan. Its Asian rival will be chairing the Group of Seven developed nations next year.

G-20 members are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the U.S., the U.K. and the EU.

"China can and should look to be ambitious, and aim for actions that demonstrate global leadership," said Tristram Sainsbury, a research fellow at the G-20 Studies Center at the Lowy Institute for International Policy in Sydney. "But China needs to be realistic of the limitations of the G-20 forum -- it is consensus based, and has several design flaws, such as a rotating presidency and a lack of focus stemming from an inability to drop items off the agenda."

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