Business "B-20": Screw the $, Internationalize RMB

♠ Posted by Emmanuel in ,, at 11/02/2011 04:07:00 PM
Darn, just when you thought the states-and-markets IPE literature was becoming increasingly stale comes this news. But first, did you know that there's now a "B-20" parallel to the "G-20" composed of 200 major companies from G-20 countries? I suppose that firms desire a larger stake in the current global governance picture. So, just as the World Economic Forum spawned a concurrent alter-globalization doppelgänger (of sorts) in the World Social Forum, we now have a B-20 convening alongside the upcoming G-20 summit in Cannes, France.

There will of course be less of The Beautiful People in Cannes this time around, and a heckuva lot more of The Angry People. What we may have in a few days is not the Cannes Film Festival but the Cannes Rioter Festival. All the same, businesses the world over have a new gripe that may be unexpected to some. You would think that having the dollar as the world's reserve vehicle currency is generally desirable especially among MNCs that would prefer to deal less with foreign exchange losses and uncertainty over the same. But wait, the answer is a big, bold NO. All this Yankee helicopter dropping is prompting the B-20--which includes several American firms, no less--to call for the further internationalization of a currency of the future and not of the past with an appreciating and not a depreciating bias in the Chinese renminbi.

The Wall Street Journal covers this clamour for real money:
Business leaders meeting alongside the Group of 20 industrial and developing nations summit in France on Wednesday endorsed a move toward a "multipolar" global currency system, with a greater role for the Chinese yuan. But they also called on China to allow full convertibility and greater flexibility for the yuan, saying such a move would be in China's own interest.

The B-20, a group of dozens of top executives from firms around the world, made the recommendations in a report released one day before the start of two-day G-20 summit in Cannes, France. "The current U.S. dollar-dominated system amplifies the risks of the global economy," the group said in a statement. A multi-polar currency system, it said, would reduce uncertainties and transaction costs for companies, "and would lead to a more balanced global economy."

"In a multi-polar system, the dollar and the euro should be followed by the Chinese yuan and other emerging market currencies," the report said. At the same time, a fully convertible yuan would facilitate global trade and investment with China, and "is necessary to enhance the international importance of the nation's currency."

China maintains a broad range of controls on the currency, limiting its convertibility for investment-related transactions on the capital account. Analysts say the country is likely to move gradually towards greater convertibility over the next five years, but Chinese officials haven't given a specific timeline for reaching full convertibility...

The B-20 was assembled by the Mouvement des Entreprises de France, an association of French employers, with assistance by the World Economic Forum and the International Chamber of Commerce.
Fairly mainstream research indicates that more financial crises are occurring in the post-Bretton Woods era (1973 and onwards) than during the Bretton Woods era of the dollar-gold standard. When one country has a practically unlimited ability to abuse the international monetary system, you end up with...well, the world economy circa 2011. To paraphrase Winston Churchill, Americans will %^&* it up if the world has exhausted all other alternatives and the US is left to its devices. As portfolio theory suggests, the impacts of shocks is mitigated if folks collectively hold less of the same sort of thing.

In an increasingly multipolar world where economic activity is less concentrated in Western metropoles, it makes more sense if we had another vehicle currency (or two). Although China is understandably cautious in making the RMB take up that role given the lasting success of its current growth model, it admits that capital account openness and currency convertibility are among its medium- to long-term goals. It's just good to know that even the movers and shakers of the world economy back the idea of such an eventuality. Don't forget who called for and eventually got the creation of the World Trade Organization. When big firms move in unison, they have tremendous political clout.

Being all for a multipolar, superpowerless world--not simply another unipolar one with China in charge, for instance--I fully endorse this idea. Take that, America #1 cheerleaders--the business community is fully fed up with your dollar detritus.

UPDATE: Searching around a bit, I found the lengthier earlier version of the document ultimately given to Sarkozy. Among the signatories are many heads of MNCs; indeed, including several American ones. If anything else, the version described above is even more downcast on the dollar. On p. 51 are the bits concerning the "key policy message" about reserve currency arrangements...

On the other hand, there is a broader debate about the gradual shift of the global monetary system from a dollar-based system towards a multi-currency monetary system...

As regards the latter, the development of the reserve currency regime will ultimately depend on the choices of economic actors and thus be the result of a market-led (and presumably lengthy) process[:]
  • A global monetary system in which the role of the reserve currency is based more broadly than is the case in the present system is a logical corollary of the shifts in the economic weight amongst national economies. It also reflects a geographically more balanced structure of trade, production and investment at the regional level which creates incentives for countries to re-balance their currency reserves in light of these interlinkages.
  • A multi-polar reserve currency regime will be possible only if financial markets in those currencies currently used less become deeper and more liquid. Hence, the development of financial markets (indeed, in some cases the transition to full convertibility) will be a pre-condition for this process. Indeed, we would note that the share of the USD in international currency reserves has already started to decline; this, in our view, is a reflection of the greater attractiveness of non-dollar capital markets.
  • Compared to the dollar-standard, the transition towards as well as the existence of a multi-polar currency regime can, theoretically, be marked by greater instability, as major shifts in reserve currency allocation – and ensuing capital flows – can occur. Consequently, in a multi-polar currency regime, predictability, sustainability and transparency of economic policies by reserve currency countries (areas) become even more important.