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Song Hongbing

The Currency Wars – How Can Taiwan Prevail?


In an exclusive interview, top Chinese financial expert Song Hongbing, author of the controversial book Currency Wars, declares the decline of the dollar, and speculates on the chaos to come.



The Currency Wars – How Can Taiwan Prevail?

By Fuyuan Hsiao
From CommonWealth Magazine (vol. 419 )

Three years ago while a top consultant for U.S. government-backed subprime mortgage giants Fannie Mae and Freddie Mac, Song Hongbing forecast a future decline in the U.S. currency that would touch off a global currency war. What Song did not foresee, however, was the pace at which that currency war would commence and the manner in which the relative positions of China and the U.S. would reverse. In an exclusive interview, Song told CommonWealth Magazine the first salvos of the currency wars have already been fired. Caught in the middle of two great powers, what are Taiwan's geopolitical advantages? Following are excerpts from that interview:

This supranational currency mechanism that People's Bank of China governor Zhou Xiaochuan recently proposed has been favorably greeted in many quarters, including the so-called BRIC (Brazil, Russia, India and China) bloc and some EU nations. Even some American economists are warming to the idea. From this we can see that there are already widespread doubts about the U.S. currency around the world, something that has not been seen before. Regardless of whether China's global currency proposal eventually becomes reality, the punditry and popular opinion are becoming inclined to believe that the singular tethering of global economic development to the U.S. currency is undesirable.  

This of course poses a serious challenge to the continuation of six-plus decades of the primacy of the U.S. dollar, which I believe is a new form of currency war. With everybody now increasingly looking for some kind of more reasonable alternative to replace the U.S. dollar as a reserve currency, within the global financial system and the international clearing and settlement structure, the battle has been joined.

I've always believed the renminbi would eventually be a player, but I just didn't think it would happen this fast. Right now there are several key forces at work, chiefly those that benefit from the dominance of U.S. dollars and those that are seeking to challenge the greenback as an international reserve currency, including the euro zone nations and China. Then there's Japan, South Korea, Taiwan and the rest of the BRIC bloc watching from the sidelines. Aware their currencies could never replace the U.S. dollar, they must ultimately play a waiting game before deciding where to place their support and cooperation. These forces are now undergoing rapid transformation and have yet to reach a state of equilibrium.

I think the best strategy for China would be to "build a stout wall, stock up on provisions and hold off on crowning yourself king." It should not immediately step forward to supplant the U.S. currency, because China does not currently possess that kind of power. Standing out too tall could make it the target of attack. He who crowns himself first will be the biggest loser. In these turbulent times it's best to quietly go about your business, expanding your scope of power and influence, waiting for issues to emerge with the other powers-that-be before moving in to clean up the mess.

China's Strategy: Stock Up on Provisions, Postpone Coronation

If China wishes to stand as equals with the American and European powers, the most fundamental precondition would be some form of Asian economic union, including in the currency and financial markets. The biggest obstacles impeding China from integrating with the rest of Asia are political – for example, the longstanding animosity with Japan, which has used up a lot of China's resources and energy. If China is to achieve parity for the renminbi with the euro and the greenback, the most important thing is for it to achieve a real political and strategic breakthrough with Japan, to set aside the old baggage, to emphasize mutual interest and to play down mutual conflicts. Only by binding the power of Asia closely together will China be able to deal with Europe and America.

[People's Bank of China] Governor Zhou's thinking on the faltering U.S. dollar is a kind of political strategy. He doesn't necessarily think the primacy of the greenback can be overturned; he's merely strategically using this as a means to force the U.S. currency into a defensive position.

In previous Sino-U.S. talks, China has always been caught in a passive position. The U.S. has always railed at China about exchange rate issues, manipulating the renminbi, and so forth. And that is why China is being pressured to provide funds to bail out the European and U.S. markets. This is kind of vexing for China, because China also has its own problems to solve that will also need money. The whole world is now looking to China for money. If China is reluctant to play along, it will be branded irresponsible. It's a bit like sailing against the wind.

[Governor] Zhou's proposal is proactive, a pre-emptive strike to reach a public consensus on the inconsistency of such a heavy weighting of the greenback, putting the dollar on trial so that everyone may discuss the various relevant issues.

As we see from world history, when a great power begins to decline there is an inevitable period of instability from which another great power emerges and fills the subsequent power vacuum. During this process the two sides will engage in fierce clashes.

The most dangerous periods in history are not normally those where a great power is in its ascendancy, but rather when the power of a great nation begins to fade. As the situation spins out of control, the great power seeks to continue to exercise the control it once had, resulting in sharp clashes and conflicts with other nations. But there is no going back for the great power, because the world economic map has undergone a sea change.

At the end of World War II, the United States accounted for half of global gross domestic product. The U.S. share of global GDP has since steadily declined and today accounts for less than 24 percent, while the greenback, however, accounts for between 64 and 70 percent of global foreign exchange reserves and foreign currency transactions. This is like saying that the U.S., with one-quarter of global capacity, must shoulder 70 percent of the responsibility. It is a burden the U.S. cannot bear as a nation. To get a handle on the situation, they have expended much national power, [but] in the future they will have no way to avoid the inescapable shakeup. A lot of folks will miss the good old days of stability in the 90s. The U.S. dollar was unchallenged, development was at breakneck speeds, and the world was balanced. But those days are over.

I believe the world will slide into a long-term recession. Demographic studies have shown that the peak consumption period for the citizens of any country is between the ages of 45 and 55 years. After 55 years of age, consumption gradually begins to decline. There are 77 million Baby Boomers in the U.S. who will pass their peak consumption period by the latter half of 2009. These 77 million Boomers account for one-third of the U.S. workforce and comprise the driving force behind the once flourishing export trade to the U.S. Those days will soon be at an end.

Over the next decade, as the Boomers retire and age, America will reach a critical crossroads where there will be no turning back, and they will have no strength to pull themselves up. Perhaps the days of America as the locomotive of global economic growth are already at an end. This isn't something that [U.S. president Barack] Obama can fix, no matter how many stimulus packages he proposes. It doesn't matter how much you spend. From this perspective, the decline of the dollar is inevitable.

Taiwan, South Korea, Japan Take Sides?

Faced with this situation, Taiwan, South Korea and Japan must now decide which way to go. If they fail to integrate with a rising continental Asia, they will be marginalized, while integration will still leave them their own competitive advantages.

For instance, Taiwan has a shared culture and ethnicity with China, and a deep historical relationship with Japan. It also serves as a special link between East and West. Europeans, Japanese and Americans wary of China may be much less guarded toward Taiwan. Taiwan has more weight when it talks. It sounds less shrill. It has a warmer, more neutral effect.

Taiwan possesses many advantages, in geopolitical and human resource terms. In the midst of the current chaos, Taiwan must find its own way, bringing to bear its full spectrum of capability, magnifying its relative power, focusing its energies on stabilization, and becoming a fulcrum for stability as it establishes its niche.

Sino-U.S. Balance of Terror

It's still too early to tell who will be the winner and who will be the loser in the currency war. All will be decided by how the two sides elect to meet the challenge. The U.S. is currently paying little heed to the issue, believing China to be all talk. If China really decides to push things to the limit, they could provoke a fierce reaction from the U.S. You could see things heat up considerably in the South China Sea, the dispute with Japan over the Diaoyutai Islands come to a boiling point, North Korea launching missiles and possibly war breaking out.

The U.S. doesn't believe that China will act in that way. They think it's just a bargaining tactic. I don't think China will really take such steps either. It's merely seeking to remind the U.S., "I'm your biggest creditor – you shouldn't be lashing out at me all day long. I can strike you too." The two sides have reached a sort of balance of terror.

Translated from the Chinese by Brian Kennedy

Chinese Version: 貨幣大戰 台灣如何不敗?