The Future of International Liquidity and the Role of China
This paper analyzes the consequences of the internationalization of the Chinese renminbi for the global monetary system and its possible ascension to reserve currency status. In an unstable and financially integrated world, governments' precautionary demand for reserve assets is likely to increase. But the world then risks a third crisis of the global reserve system, another re-run of the Triffin paradox, with an ever-growing emerging-world insurance demand loaded onto a small group of ever more strained net debt suppliers. Two ways to avoid this outcome would entail either expanding the supply of credible reserve liquidity to include some large emerging-market providers, or finding ways to manage emerging-market risks so as to moderate the perceived need for insurance, and China would have to loom large in both solutions.
This paper was presented at the Council on Foreign Relations symposium Future of the International Monetary System and the Role of RMB, held in Beijing on October 31 and November 1, 2011. I thank Sebastian Mallaby, Robert Rubin, Martin Feldstein, and all the participants for helpful comments. Don Chew has given superb editorial guidance. All errors are mine. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
Alan M. Taylor, 2013. "The Future of International Liquidity and the Role of China," Journal of Applied Corporate Finance, Morgan Stanley, vol. 25(2), pages 86-94, 06. citation courtesy of