How China’s Currency Will Float

David Barboza has an interesting piece in the NYT about tentative steps the Chinese government is taking to encourage international use of the Yuan and “erode the dollar’s dominance” as the currency used for reserves and international settlements.

In some ways, I think this saga is a fascinating case study in agenda setting and issue construction. There are basically two parallel discourses happening on both sides of the Pacific. One is a discourse about exchange rates. In this discourse “force China to stop unfair currency manipulation” is a tough-minded nationalist thing to do while “give in to American pressure to revalue” is a puny policy. The other is a discourse about global reserve currencies. In this discourse “erode the dollar’s dominance” is a tough-minded nationalist thing to do while, “let the Yuan play a bigger international role” is a puny policy. And yet these parallel discourses are about the same thing.

The measures that would be required for the Yuan to play a larger international role—the creation of large, deep, and liquid markets in RMB-denominated financial instruments—would necessarily require the People’s Bank of China to stop manipulating the exchange rate. By the same token, were the People’s Bank of China to let the exchange rate float as the US government is demanding, that would necessarily lead to a steady erosion of the dollar’s dominance as China’s economy continues to grow.