- 6 months ago
- #woosays
The US dollar has long ruled global finance but could that reign be nearing its end, dethroned by the Chinese Yuan? In this episode of #WooSays Professor Emeritus Datuk Woo Wing Thye and Melisa Idris unpack whether the yuan can ever rival the greenback, and what America stands to risk, if the dollar starts to lose its crown.
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00:00Hello, folks. Welcome to another episode of Wu Says, where we get real about the US, China,
00:18everywhere and everything in between two superpowers. It's one global story.
00:23This week, we're talking money, or more precisely, the power behind money.
00:30The US dollar has long ruled global finance, but could its reign be nearing the end?
00:37And could the Chinese yuan be the one to dethrone the dollar?
00:42I'm Melissa Idris, and joining me here on the show is Professor Wu Wingtai.
00:46He's here to unpack and explore this with us because he has been studying US-China relations
00:50long before tariffs became headline news.
00:53So, Profu, let's talk about the dominance of the US dollar in the global system.
00:57Does it still reign supreme, and how likely is it that the yuan could dethrone it?
01:05Well, one thing for sure, the international status of a currency does not last forever
01:14because we can see it that in the 19th century, the international currency of choice for trading
01:22was the British pound.
01:24And the pound was so widely used that it was the most convenient instrument to settle transactions
01:35between countries whose home currencies was not the pound.
01:40Like, for example, when the Mexicans trade with the Filipinos,
01:47they would use the pound to settle the deal between them.
01:51Right.
01:51And, but that disappeared pretty much, uh, pretty much after World War II.
02:02And that, and why?
02:04The reason is because by, let's say, 1914, at the start of World War I,
02:11the US economy was more than twice that of the United Kingdom.
02:18But it enjoyed the advantage of what we call economies of scale.
02:23Economies of scale means that the cost of doing something goes down
02:30when the number of times you do it increases.
02:33In other words, if you produce 100 billion widgets, it's, the cost is even lower
02:44if you produce 1,000 million widgets.
02:49Okay.
02:49So that the cost goes down with, uh, with scale.
02:53So even though the dollar was, uh, uh, even the US economy was a lot larger
03:00than the United Kingdom, which means that US trade volume was larger
03:05than UK trade volume, the currency was still, uh, the pound.
03:14But by the, by the, by, uh, 1930 or so, the US was like five times bigger
03:24than the UK, uh, economy.
03:26Wow.
03:26So there was such, so much trade was in with the United States
03:30that people just found it easier to switch over to the, to the US dollar.
03:37Now, clearly to be, uh, in the academic literature,
03:42what makes an international currency?
03:45There are three clear things.
03:47One is that you must be able to sell, buy and sell the currency easily,
03:52which means that the country has an open capital account.
03:58Money can come in, money can go out, uh, and easily changeable.
04:03The second one is that the financial market of that currency
04:09has to be pretty sophisticated.
04:12In others, in addition to, uh, if you do not want to hold the, the paper money,
04:17you can hold bonds denominated in that money.
04:22You can buy insurance, and the insurance premium is denominated in that currency.
04:28And you can buy stocks that is denominated in currency.
04:31So the market has to be sophisticated.
04:33The third condition is the market has to be safe.
04:37In other words, uh, if you get into a commercial dispute,
04:42the courts in that country are objective.
04:47They rule, uh, it will be fair and speedy.
04:51Okay.
04:52So the, so the, the, the, the, the judiciary system is important.
04:56And the final condition is there must, the inflation must be too high
05:00because if inflation is high, then the money is eroded.
05:03Nobody wants to hold it.
05:05On that criteria, the Danish kroner, the Swedish kroner
05:10are also international currencies, but they are not of the same status as the dollar.
05:16Why?
05:17Because the volume of trade that Denmark and, uh, and, and, and Sweden
05:26is much smaller than the U S whereas China will, will the Chinese economy,
05:33if it realizes its full potential, will be three times the size of the U S economy.
05:38Because right now, Chinese GNP is roughly one third, uh, GDP per capita.
05:46GDP per capita is roughly one third that of the U S.
05:49So if the Chinese are able to catch up with technological upgrading,
05:53they would be just as rich as the Americans.
05:56So that means their potential is three, four.
05:59So when they reach that, then the amount of trade done by China will be so much greater
06:07than the United States.
06:09So that, that is this inevitability about it.
06:13But however, right now, the Chinese currency cannot, uh, so the most fundamental condition
06:20is China must continue to grow.
06:23If it, if it shows any sign of not reaching its potential, it will not become big enough
06:28to matter.
06:29And now besides that, China must open its capital account.
06:35Mm.
06:35So, but then they don't because they are very much afraid of, uh, speculative flows in destabilizing
06:42their financial system, just like the Asian financial crisis.
06:47Why did we experience a crisis?
06:48There was a panic.
06:49People ran out of the Malaysian ringgit and the Malaysian stock market collapsed.
06:53And you see all the Southeast Asia.
06:55So opening a capital account is something that is potentially dangerous.
06:59Mm.
07:00So that's why Chinese have not done it.
07:02And, uh, second thing is, uh, the Chinese, uh, are also concerned about opening the market.
07:11Then the foreign banks will come in and dominate their market.
07:16Right.
07:17So the Chinese still have got work to do.
07:20Is that protectionism mainly?
07:22Uh, in financial matters?
07:25Yes.
07:26There is no protectionism under WTO.
07:29That is the one sector in which you can protect, largely because a financial crisis can completely
07:37torpedo a country.
07:38For sure.
07:39Yeah.
07:39I understand.
07:40So the Chinese potentially could, uh, displace the Roman Pee, but there are these other deregulation
07:48that they have to do.
07:49Talk to me about the sophistication of the finance markets of the, of China in, um, maybe
07:57chasing the primacy of the Chinese Yuan.
08:00For instance, I'm just wondering if we were to take the financial hubs of New York and London,
08:07for instance, could Shanghai maybe one day stand to challenge some of these financial hubs?
08:15Oh, that's a very good question.
08:17I think, yes, it could, but the first thing that must happen to be a big financial hub is
08:28that people like want to come use your bank.
08:31They want to come use your bank because they want to use your currency.
08:34So to be a great international financial center, the precondition is your currency must be an international currency.
08:43Right.
08:43Because then people want to use your currency, so they come use your banks.
08:47And because, uh, the, the important point here to note is, is what I saw, economies of scale.
08:56Mm-hmm.
08:56That means that if a banking sector is already very big, the cost of operating in that banking sector
09:04is lower than a small banking center like Singapore.
09:10Because New York is so much bigger that the cost of operating there is lower than Singapore.
09:16And so, uh, in the case of China, size is certainly not an issue in the future.
09:29It, it, it will get to that.
09:31But, uh, the question is, the, the, the, so economy scale is important.
09:40There's one, um, important fact to realize is that if we believe in what I say of economies of scale,
09:49in the end, there should only be one currency.
09:52The biggest currency would, uh, out-compete the second currency.
09:58So the biggest financial market should kill the second biggest financial market.
10:03So why is there London and New York?
10:06There should only be one if economies of scale is true.
10:08Yeah.
10:08The reason that it doesn't happen is because, uh, operating is because of geography.
10:16Operating at night is more expensive than operating in the day.
10:21Okay.
10:22So when it is, there, there's a long period of time when it's nighttime in London, daytime in New York.
10:28Okay.
10:29And the cost of New York is lower than in London at that point.
10:32So the transactions are in London.
10:34Okay.
10:35And then, there is a time where it is nighttime in New York, but daytime in London.
10:41Okay.
10:41And the cost is lower.
10:43But there are places, there are times where both markets are closed.
10:49And where, and that means, there is place for a third international financial market.
10:57And where would that be?
10:59That would be in East Asia.
11:02It will be, it could be Singapore, it could be Sydney, could be Shanghai, could be Tokyo, could be Seoul.
11:09So, now, we know there's an opening.
11:14Okay.
11:14Is China destined to get that opening?
11:18Okay.
11:19It will depend on how fast China opens its market and to foreign financial institutions.
11:31Right now, they have kept them out.
11:34So, the question is, now, why don't they open up?
11:38Because they say it's safety.
11:39We want to make sure that we have got all the right instruments in place so if a crisis happens, we can handle it.
11:46Yeah.
11:47Until we are ready for confidence to contain, to constrain a crisis, we're not going to open.
11:51So, how long do we have to wait?
11:56If, the question is, the problem is China, Richard, they have a small window to do it.
12:04If it doesn't do it within that time, it will not be the third.
12:08It's a missed opportunity.
12:10And who would that missed opportunity go to?
12:12India.
12:13Oh.
12:14In terms of size, who matches China?
12:17It's India.
12:18So, Bombay could be the threat to China, getting to be the third international financial centre.
12:28Does India fit the criteria of the volume and sophistication and safe and low inflation?
12:36Does it fit those criteria?
12:38No, it doesn't yet.
12:39So, they are both suffering from the same disadvantages.
12:42So, whoever can get in shape faster will be able to grab that spot.
12:50And so, all this talk about you've got to reform gradually, but not too gradually.
12:57Largely because if the other guy succeeds before you, he would have established a foothold and through economies of scale, you cannot catch up.
13:08So, that is the challenge facing China.
13:13China should be able to promote the use of RMB quite quickly because China is a net lender, not borrower.
13:24Since China is lending money, it can say, yes, I'll make loans, but the loans are in RMB.
13:31Instead of making loans in RMB, just like AIIB, the Asian Infrastructure Investment Bank that is headquartered in Beijing, is making most of its loans in RMB, just like the Asian Development Bank.
13:47China could say, well, I'm lending money, but I want to be in yuan, and I charge a lower interest rate.
13:57And that would certainly promote the use of the RMB.
14:02It would boost the volume for sure.
14:04Oh, of course.
14:05And there are not just one, it's not just AIIB, there's something called the New Development Bank.
14:13That is the bank of the BRICS.
14:17Oh.
14:18And that is going to rival the AIIB in size.
14:26So, you could see that Shanghai certainly has the ability to become very big and very quickly.
14:36Because right now, many of the Chinese companies are listing in Hong Kong.
14:45And just think if China were to say, you can list it, you must now list it in Shanghai instead of Hong Kong.
14:51You could think of the big sucking sound that is heard.
14:56It's the crowding of money, of trade.
14:59Hong Kong is almost as big as New York and London in terms of international transactions.
15:09And that's all because of Chinese firms listing in Hong Kong.
15:15And why are you in Hong Kong, not in Shanghai?
15:18Because Shanghai is not open.
15:19So, when the Chinese do put out the welcome mat,
15:22they would be able to grow very quickly.
15:28So, I'm intrigued by this possibility of China really deciding to push this forward
15:38to make the Chinese yuan the global dominant currency.
15:44But let's talk about trust, Profu.
15:46Because I think a large part of that also boils down to the trust in the currency itself.
15:51So, how important is trust, especially in the rule of law that you've spoken about just now,
15:59in terms of building a global currency standing?
16:02And is that where you think China might stumble a little or fall down in that respect?
16:08Well, before I answer the question, I want to congratulate you on your deep insight about the role of trust.
16:17Because at the back of the US dollar, it says,
16:21In God, we trust.
16:24Rather than, in gold, we trust.
16:26In real life, you add an L to it.
16:30In gold, we trust.
16:31But anyway, yes, that is something that China will have to earn.
16:38China will have to show that it has a judiciary system that is objective
16:46and rule of law that treats everyone as equal.
16:55Until and unless China can achieve that trust by other people in its legal system,
17:04it will be very hard for China to replace the US dollar.
17:13But it doesn't have to replace the US dollar.
17:16It could still be a significant international currency.
17:21People will hold a composition of currencies.
17:26Dollar, yuan, euro, and who knows, the ringgit, hopefully, in the future.
17:33Do you think that's possible?
17:35So, in a multi-polar world, do you think that there will also be multi-currency world?
17:43I think we will have a multi-currency world for a long time to come.
17:48Even when China reaches its full size.
17:52Wow.
17:53Largely because the important thing in managing your wealth is diversification of risk.
18:00So, you don't want to have everything in one basket.
18:06Okay.
18:06That's the fastest way to become a basket case.
18:10Okay.
18:11But then, let's think about it from the US's perspective.
18:18If that's the trajectory of the world, in a multi-polar world,
18:22the trajectory is to have multiple global currencies and diversification to diversify risk.
18:29How would the US react to that?
18:35Because, again, there's been a lot of talk about de-dollarization,
18:40and that is a significant fear for the US.
18:45We see that in Donald Trump's threats to BRICS and the like.
18:48How do you see that?
18:51One thing for sure is that the US will have to stop seizing the assets of other countries
19:00that are deposited in American banks.
19:02Okay.
19:03Because that reduces the safety of the dollar.
19:08It is able to do so now because of the lack of substitutes.
19:12When a substitute exists, we will find that the US will no longer be able to use the financial sector
19:22as a Cold War instrument.
19:27Okay.
19:27Does the US stand to lose?
19:32How much ground does the US stand to lose if there are other dominant global currencies?
19:38And will the US take that lying down, do you think?
19:41I think the US is not in a position to resist
19:45because US multinational firms will be the ones who would want to hold a portfolio of currencies.
19:57And given that US multinational corporations are the biggest political donors
20:04in the US political system,
20:08they would, the government would certainly think
20:12for the safety of our economy,
20:16it is the right policy stance to take.
20:23And in a way, that is safer for US businesses
20:30because then they are truly, they don't have to depend on one currency.
20:36And I think such that the US, it's not a thing of, would they be able to stop it?
20:44They would not.
20:45The only way they can stop it is if China does not grow to its potential
20:50and hence the Chinese economy will not be so overwhelmingly big
20:58that people naturally have to use the RMB.
21:02So stopping the growth of China is not an easy task.
21:07And it is a task that is dangerous to the rest of the world
21:11because the Chinese are certainly not going to take it lying down
21:15to have its right to develop blocked.
21:19And that would be highly dangerous for all of us bystanders.
21:23Yes, that's right.
21:25Do you see that there has been a push away from the dollar
21:32because of Donald Trump's policies, hostile policies, I might say?
21:39In our last few episodes, previously in an episode,
21:43we spoke about the weaponisation of the dollar.
21:45Do you think that countries are moving away from trading with the dollar
21:52specifically because of Donald Trump's hostile policies?
21:57For sure, because the US had put up trade tariff.
22:04Trade tariff means that you buy less of the other guy's goods.
22:09And since you buy less of his goods, that means that you demand less of his currency.
22:16So a tariff should make the US dollar appreciate
22:20because you don't have to trade so much dollars for his currency
22:26because you don't want less of his currency.
22:28So a tariff should appreciate the US dollar.
22:32But the US dollar has depreciated by more than 10% since the beginning of this year.
22:38And that is because people see that the US economy will be hurt
22:50and inflation will go up.
22:53And because inflation go up, the Federal Reserve is not going to lower interest rate,
22:58most likely raise interest rate to fight inflation.
23:01And that will slow down the economy and hurt the profitability of firms.
23:07So you could see that the projected negative trajectory of the US economy
23:18has caused the dollar to depreciate even though the tariffs by itself
23:27should be making the dollar go the other way.
23:31We spoke about the possibility of the dollar being dethroned
23:40as the currency of the global order
23:46and then the rise of the Chinese yuan.
23:50But is there a possibility that there could be another challenger to this equation?
23:59There'd be murmurs of maybe a common currency amongst BRICS countries.
24:04Do you see that as a possibility or is that quite far-fetched at this point in time?
24:09If there's a BRICS currency, it will be heavily yuan-based.
24:14Because unless India emerges as much more quickly as an economic power,
24:28India, the rupee certainly has potential.
24:34But India will have to up its act in terms of economic performance.
24:42And I am also very optimistic about India, by the way.
24:46I think you could see the potential of the economy.
24:58It has been the fastest-growing economy for the last few years.
25:01So I'm very impressed with the positive things that will happen in the future
25:10in both India and China.
25:14This is a very interesting way that you've positioned
25:16the challenger to the dollar and then now the challenger to the yuan.
25:22I actually find that so interesting.
25:23Prof, thank you so much for talking to us a little bit about this.
25:26This is really quite a fascinating topic.
25:28And it's really getting real about the US, China
25:31and everything and everywhere in between.
25:33I'm Melissa Idris and wrapping up this episode of Wu Says.
25:37I will see you in the next episode.
25:39Take care, folks.
25:39Thank you so much for the next program.
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