The Dollar’s Future as a Reserve Currency

This chapter analyzes the relationship between Chinese and U.S. monetary policy. It specifically looks into the nations' partnership during the global financial crisis when both nations were at an impasse. The monetary policy of the U.S. Federal Reserve is supported by the saving inflows from China, who invested the country's dollar earnings (from export surpluses) in U.S. Treasury bonds. However, due to the crisis, the U.S. was left with an unsustainable housing bubble, leading to the renminbi, the Chinese currency, to depreciate due to burgeoning export surpluses. Chinese authorities were therefore left to decide on whether or not to appreciate the renminbi. Appreciating it would serve U.S. interests as China would send fewer exports to the U.S. and deprive fewer Americans of their jobs. On the other hand, the Chinese commerce ministry, which is in charge of exports and imports, disapproves of the motion as it would impair the export and domestic import-substituting sectors of the nation.