China is claiming that it’s not devaluing the renminbi to gain competitive advantage, it’s adding flexibility to prepare for the yuan as an international reserve currency, becoming part of the basket in the IMF’s SDRs and all that. That’s highly implausible as a story about what’s happening right now; but it may be true that China’s urge to loosen capital controls is driven in part by its global-currency ambitions.
But why, exactly, should China be eager to manage an international reserve currency?
I mentioned one of Charlie Kindleberger’s aphorisms earlier today, about taking the first bite of the cherry; another was that “Anyone who spends too much time thinking about international money goes a bit mad.” What he meant by that is that there’s something about the subject of reserve currencies that makes people want to believe that it’s a really important issue — that the dollar’s special role is an important part of American power. So you have spectacles like John Kerry and Barack Obama declaring that one big risk from rejecting an Iran deal (which I very much support) would be a threat to the role of the dollar. Um, no — it wouldn’t, and anyway who cares?
What does America gain from the dollar’s special role? You often find people declaring that it’s only thanks to the special role of the dollar that the United States has been able to run persistent trade deficits — you see, people have to take our money. But even a quick glance at international balance of payments statistics shows you that countries whose currencies play no special role whatever are perfectly capable of running deficits over a long time; all that matters is that they be perceived as reliable debtors who offer good investment opportunities. Look at Australia, which is a much more consistent large-deficit country than we are:
So what are the advantages of owning a reserve currency? You do get to borrow in your own currency — but then, so do others; again, it’s about reliability rather than a special role. There’s nothing in the data suggesting that you can borrow more cheaply than other safe borrowers.
What you’re left with, basically, is seigniorage: the fact that some people outside your country hold your currency, which means that in effect America gets a zero-interest loan corresponding to the stash of dollar bills — or, mainly $100 bills — held in the hoards of tax evaders, drug dealers, and other friends around the world. In normal times this privilege is worth something like $20-30 billion a year; that’s not a tiny number, but it’s only a small fraction of one percent of GDP.
The point is that while reserve-currency status may have political symbolism attached, it’s essentially irrelevant as an economic goal — and definitely not worth distorting policy to achieve. Someone needs to tell the Chinese, you shall not crucify this country on a cross of SDRs.