Fran O'Sullivan: US brinkmanship handing reins to China

The Chinese renminbi could supplant the greenback as the world's currency.

First it was their banks that were "too big to fail" - now it's the United States Government itself which has been deemed to be so.

The upshot of the dreadful and absurd situation in the United States is that it will simply add fuel to a major shift in global trade already under way where a new international currency - maybe even the Chinese renminbi (RMB) - is poised, (over time) to supplant the US dollar as the world's sole reserve currency.

By the time you read this the political head-kickers on both sides of American politics may have done a deal to avert a major debt default.

The fiscal crisis will be declared over. But you would have to have rocks in your head if you believed the days of knife-edge fiscal brinkmanship in the United States were over. There are just too many politicians with a feral bent to make a long-term accommodation sustainable.

Bill Clinton was the last US President to post a budget surplus.

Since then US Government debt has snowballed - put it down to the tech wreck, the effects of 9/11, bank-rolling the Afghanistan and Iraq wars, the global financial crisis, bailing out US banks with public money - and more.

But the old truism remains - a crisis deferred is simply a deferred crisis.

Put bluntly, by raising the debt ceiling again the US can borrow more to pay the interest bills on its snowballing debt.

Like householders who may also capitalise debt (as long as they can satisfy lenders they can service the interest), there comes a point where those same lenders start to worry about the security of their investments and hedge their bets. It's not really at that point yet.

US politicians can show some spine and start to get their finances in order. The budget deficit is coming down and provided pressure can be exerted on spending the US is well-placed for the long-term.

Since 2009, following the global financial crisis, the Chinese Government has curbed its exposure to US debt.

But it remains the single largest offshore holder of US Treasury paper with about US$1.3 trillion in Treasury bonds. There is more in other US dollar denominated debt.

But the problem the US faces is that its failure to display strong political governance also comes at a time when China is rapidly increasing its influence.

It's no accident that an opinion-editorial by Xinhua's Liu Chang was posted on Monday slamming the US fiscal failure which the writer says "warrants a de-Americanised world".

Xinhua is China's official news agency and when Liu writes its time for the world to consider a new reserve currency to replace the US dollar it is obvious this view is being reflected from the top.

The strength of the writer's pen can be shown by these quotes: "The world is still crawling its way out of an economic disaster thanks to the voracious Wall Street elites.

"Most recently, the cyclical stagnation in Washington for a viable bipartisan solution over a federal budget and an approval for raising [the] debt ceiling has again left many nations' tremendous dollar assets in jeopardy and the international community highly agonised.

"US politicians of both political parties are still shuffling back and forth between the White House and the Capitol Hill without striking a viable deal to bring normality to the body politic they brag about, it is perhaps a good time for the befuddled world to start considering building a de-Americanised world," he wrote.

The writer argues this would enable the international community to "permanently stay away" from the spillover of the intensifying domestic political turmoil in the United States.

The de-Americanised world the Xinhua editorialist has in mind clearly involves a major shift away from the reliance on the US. Right now more than 60 per cent of foreign currency reserves are in US dollars.

But while the US and other Western nations might argue that they do not want to go along with China's push (begun after the GFC) for the US dollar to be replaced by a new international currency developed to be the world's reserve currency, it would seem inevitable that much of the commodity trade will ultimately be priced in RMB.

China is rapidly internationalising the RMB.

A string of central banks ranging from the European Central bank, Australian and New Zealand reserve banks now have large currency swap arrangements with China.

An Asian RMB bloc of seven countries has been established. Global oil sales denominated in RMB are growing.

China and Australia notched a currency convertibility pact this year; New Zealand will follow suit.

There are political concerns over the impact of a move away from the US dollar as the world's reserve currency and what it would mean if China with its own more opaque system had a bigger say.

But you would be hard-pressed to say New Zealand business exporters have done well in recent years from their exposure to the vagaries of an artificially low US dollar.

It may not be at the point where it's time to say, "Get used to trading in RMB - it's the way of the future", China's own system is not sufficiently developed for that.

But the major trend shift is under way.