Francesco Sisci’s effort to put China’s infrastructure bank initiative in context of the failure of Bretton Woods seems like a stretch: Bretton Woods, after all, was a currency stabilization mechanism that collapsed when the US de-linked the dollar from gold in 1971, and the Asian Infrastructure Investment Bank is a development vehicle; it competes with the World Bank, but not the International Monetary Fund. China wants to enhance the international use of its currency, but in the context of the IMF for the time being, for example, by including the yuan in the calculation of the value of Special Drawing Rights. China is cautious about the use of the yuan as a reserve currency, because that would open China’s still-primitive capital markets to global pressures. Currency and investment issues appear to run on separate tracks.
In the broader context, though, I think Francesco’s point worthy of close consideration. Paul Volcker observed years ago (in a seminar I attended at the summer home of Robert Mundell in Siena) that economic factors in rich countries could insulate themselves against currency fluctuations by hedging (rich countries have developed derivative markets and yield curves going out several years). Poor countries without derivatives markets, not to mention the credit quality to make swap agreements practicable, and without multi-year yield curves, can’t hedge. It’s always the poorer countries that get whipsawed by currency fluctuations, e.g., Asia after the mid-1990s dollar depreciation (which pushed hot money flows into their economies and set up the 1997 crash), or most of the emerging markets after the big dollar appreciation of the past eight months.
An alternative lender with a long horizon, such as the new AIIB, would go a long way to ameliorate the effects of monetary policy whipsaw on developing countries. That outcome would of course enhance China’s global influence considerably.
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