How the RMB obtained the right to issue a global currency
There is no doubt that the US dollar is the unique global currency in the world today. Whether it is international payments (the transaction function of currency), foreign exchange reserves (the value storage function of currency), or international settlement (the currency's pricing benchmark function), the US dollar is ahead of other currencies.
How does the RMB obtain the right to issue global currency? Obviously, there is no possibility to do it in one step. It needs to be done step by step and step by step. First strive to make the RMB an important part of other countries’ foreign exchange reserves. On this basis, let the RMB become a tool for payment and settlement between small and medium-sized countries that have huge trade relations with China, and then become a tool for payment and settlement between these small and medium-sized countries, and then become a tool for payment and settlement between major countries in the world. Payment and settlement tools. Obviously, this is a long-term process. In this process, the U.S. dollar will still maintain its strong global currency status and respond to the challenges of the renminbi.
At this stage, it is simply unrealistic for the RMB to directly replace the US dollar. Attaching oneself to the U.S. dollar and turning oneself into a "shadow U.S. dollar" to gain the right to issue global currencies in disguise is a feasible and better strategy. Looking back at the history of the U.S. dollar being attached to gold and becoming a global currency will help us understand. Before the US dollar became a global currency and established global credibility. Gold is the global currency. In this process, the U.S. dollar became attached to gold, turning itself into "shadow gold" and thereby obtaining the right to issue global currency (gold) in disguise.
The specific approach of the United States is actually very simple, that is, the United States acts as the market maker of the US dollar. The United States promises that entities that own U.S. dollars can exchange them for gold at any time in a predetermined ratio. This commitment makes owning U.S. dollars equivalent to owning gold of equivalent value. Due to the scarcity of gold, when global trade volume gradually increases, more global currencies are needed, so countries are also willing to hold US dollars. The global economy also benefits from the liquidity provided by the U.S. dollar. Of course, the world's confidence in holding U.S. dollars is based on the U.S. dollar's huge gold reserves. As the amount of gold reserves dwindles relative to the dollar, countries' confidence often falters. When governments around the world held huge U.S. dollar foreign exchange reserves (thus being trapped by the U.S. dollar), the United States suddenly took action and forcibly decoupled the U.S. dollar from gold, launching a coup and knocking gold off its throne.
From the perspective of financial engineering, the United States actually "specifically synthesized" gold. The synthetic formula is: (synthetic) gold = US dollar + put option on the US dollar (provided by the Federal Reserve). Note that here, gold is the currency used as the standard of valuation.
Drawing on the experience of the United States, China can "specifically synthesize" the US dollar. The synthetic formula is: (synthetic formula) USD = RMB + (provided by the People’s Bank of China) put options on the RMB. By promising not to depreciate the yuan, the People's Bank of China is actually providing market-making services for the yuan. Through this arrangement, entities that own RMB can be sure that they will be able to exchange for a certain amount of U.S. dollars at any time. This arrangement, coupled with the appreciation of the renminbi and the interest rate differential relative to the U.S. dollar. Owning RMB is an advantageous strategy compared to owning US dollars. The risks of this dominant strategy are China's foreign exchange reserves (which reflects the strength of RMB market makers) and its commitment not to depreciate (which reflects the credibility of RMB market makers).
By analogy with the relationship between the central bank and commercial banks, "The Third Wave of Fortune" calls China's operation global currency issuance with the US dollar as the base currency, in which the United States is equivalent to the central bank and China is equivalent to commercial banks. bank.
In fact, in the process of the U.S. dollar becoming a global currency, holding U.S. dollar assets compared to gold is also because the return on U.S. dollar assets is higher than gold (gold has zero return). The risk of holding U.S. dollars is also that the U.S. dollar will fall in value.
Through the slow appreciation of the RMB and the high interest rate differential relative to the US dollar, international capital will slowly choose to use the RMB as foreign exchange reserves due to the pursuit of profits. In this process, the RMB has gradually trapped profit-seeking international capital through the global issuance of RMB-denominated debt. When international capital's RMB asset positions become huge, the RMB can be decoupled from the U.S. dollar. At this time, the internationalization of the RMB has completed the first step, that is, becoming a global value storage tool (performing one of the three functions of currency).
The RMB is pegged to the U.S. dollar like a leech, which is a form of institutional arbitrage against the U.S. dollar. The U.S. dollar is certainly not that bothersome. Therefore, the United States will propose three response strategies. One strategy is to create regional political turmoil, create a trend of RMB devaluation, and undermine international capital's confidence in the RMB. One strategy is to require a rapid and substantial appreciation of the renminbi, making it unbearable for China's real economy. Another option is to raise interest rates to exit QE and recover US dollar liquidity (this is equivalent to the central bank increasing reserves). Faced with this situation, China needs to maintain its composure and must not fall into the trap. Active devaluation is self-destruction of the Great Wall, which is ridiculous. The rapid and substantial appreciation under pressure is a lesson learned from Japan. Regarding the recovery of US dollar liquidity, China has US$4 trillion in foreign exchange reserves as a buffer (which is equivalent to the excess reserves of commercial banks), so there is no need to worry.
Currently, the global economic situation is not stable, and the direction of global capital is uncertain. Whoever occupies the high ground of capital’s confidence will gain the initiative in economic development.
The exchange rate is a tool used in the game between major powers, rather than an equilibrium price formed by some natural force. Currently, some people in China who have studied Western economics often analyze the Chinese economy based on the Troika, and try to depreciate in exchange for exports when the economy goes down. This is spineless behavior and a sign of lack of wisdom.
For the RMB to become a global international payment and settlement tool, it is more difficult and requires a more comprehensive system design and stronger support from China.
"The Third Wave of Fortune" believes that the slow appreciation of the RMB has enabled China to gain the right to issue global currency in disguise. As a result, China, together with the United States, has become a global black hole for capital and talent. Absorbing global resources and talents and using them for China's economic development is the inevitable path for China to become a global economic center. The trade deficit caused by the appreciation just fills the production capacity gap caused by China's excessive currency issuance and stabilizes China's price rise. In this process, China's capital market was driven by the overflow of global currencies and was able to break through the curse of bearish growth and bullish shortfall. However, many people are bound by orthodox Western economic views and cannot clearly understand this situation and choose appropriate strategies. There are also many so-called economists who do not understand modern finance at all and cannot understand the intricacies of real finance, but they try to achieve demanding economic goals with a simple financial means.