The Dollars and Cents of China's Superpower Fortunes

Can Beijing's geopolitical rise overcome the "dollar trap"?

China’s rise has spurred a cottage industry of books proclaiming the superiority of the Chinese economic model and the concomitant decline of the West. The most notable example is Martin Jacques’ 2010 best seller When China Rules the World: The End of the Western World and the Birth of a New Global Order. Johns Hopkins sociology professor Ho-fang Hung provides another welcome corrective to such exaggerated narratives in The China Boom: Why China Will Not Rule the World (Columbia University Press, 2016), joining other recent works such as David Shambaugh’s China Goes Global: The Partial Power and Jonathan Fenby’s Will China Rule the 21st Century?

Hung, in particular, focuses on four commonly held conceptions about China’s trajectory: that China will seek to challenge America’s dominant position in world politics, that China—by virtue of its superior economic model—has emerged as the primary driver of global growth following the 2008 global financial crisis, that China is challenging the neoliberal economic order promoted by the United States and that China’s explosive development is reversing global inequality. In short, Hung argues that the first three conceptions are not grounded in reality while the last one rings true.

Hung’s argument for why China will not challenge America’s geopolitical dominance rests, rather simply, on the U.S. dollar’s hegemonic role in the world economy. As he indicates, the dollar is by far the world’s most widely held reserve currency and the most widely used currency for international trade and financial transactions. This “dollar standard” affords the United States the privilege to borrow at low interest rates internationally and to print money to help repay its debt. This has also allowed the U.S. government to finance the world’s most powerful (and expensive) military despite running huge deficits year after year, all without fear of a debt crisis.

Ironically, China has perpetuated the dollar’s global dominance through its purchases of U.S. Treasury bonds and its use of dollars in settling most of its foreign trade. According to the U.S. Treasury Department, China held $1.264 trillion of America’s debt as of November 2015. Hung notes that fears over China’s role as “America’s banker” are unfounded since China’s purchases of U.S. debt are a natural outgrowth of its export-oriented, high-savings economy. For Chinese economic policy makers, the U.S. debt market is a safe option with liquidity deep enough to absorb China’s enormous reserves of excess capital. Moreover, China has used its purchases of U.S. debt to keep the value of its currency low relative to the dollar, thereby boosting the competitiveness of its exports. For these reasons, Hung argues that it would be “unthinkable” that China would dump, en masse, its holdings of U.S. Treasury bonds because of growing geopolitical rivalry with the United States.

It will be very difficult for Beijing to reduce its dependence on U.S. Treasury bonds, not to mention the realization of its lofty aim to make the yuan a major international currency capable of rivaling the dollar. Hung flatly asserts that China can only reduce its “addiction” to U.S. debt if it shifts away from its export-driven model of growth—a phenomenon he judges unlikely in the near and medium terms. In addition, notwithstanding the Chinese government’s ongoing efforts to internationalize its currency, the prospect of the renminbi becoming a major international reserve currency will remain dim until it achieves full convertibility. This will require the opening of China’s banking sector to the world economy—a very difficult step for the Chinese party-state, which maintains tight control over the nation’s financial sector.

Hung essentially argues that China cannot escape this so-called “dollar trap” given its equities in the current system, and thus will not seek to challenge the United States geopolitically. This argument explains, from one angle, why it would be irrational for Beijing to seek to change the status quo, but it goes too far in saying that China could not challenge America’s preponderant role in world politics. To make that case, Hung would need to provide a more comprehensive assessment of China’s limitations in the diplomatic, military and global governance realms. Hung’s exclusive focus on the dollar standard appears to stem from his belief that it is the “single most important foundation of U.S. global power.” Other observers, however, may view it as merely one element of U.S. global power, and not necessarily the most important.