Preface

When I submitted the manuscript to the Wiley team, China and the rest of the world were battling against the COVID-19 pandemic. To prevent the virus from spreading, the Chinese government imposed a lockdown policy unprecedentedly. Economic activity was weighed down acutely. Supply chains were interrupted. The global situation was also alarming as the virus cases soared in other countries, including the US. In response to the negative economic impact, the Federal Reserve reduced policy interest rate to zero and restarted quantitative easing. Other central banks also followed the Fed and eased their monetary policy.

The virus shock represented an unpredictable "Black Swan" event in a fashion similar to Trump's initiated trade war. When the 45th US president took over the White House in early 2017, not too many people treated his "America First" claim seriously. His tweets, his tariff, and his "friendship" with president Xi Jinping stirred up market volatility. When he started the trade war in 2018 shortly after hosting Xi in Florida, exporters were caught off guard. Many people in the financial markets regarded the trade war as the "black swan" of the year.

In this book, however, I argue that this US-China trade war is not a black swan. Unlike coronavirus, the trade tension is predictable. When the trade war was looming in July 2017, a high-profile editorial in People's Daily warned that China should be on guard against not only the black swan but also the "grey rhino." The Chinese government was pointing the latter to the lingering concern of a financial bubble, equivalent to a national security issue as I interpreted in a Bloomberg interview on July 19, 2017.

"Grey rhino," a concept coined by Michele Wucker in light of the Global Financial Crisis (GFC), refers to event risks that are impactful, obvious, and predictable. To Wucker, the US housing bubble in 2008 should have been foreseeable. The crisis was due to policymakers' lack of guts to right the wrong. When the GFC broke out, the market thought it was random and unpredictable. In hindsight, the policymakers should have noticed the danger and fixed it.

Likewise, the tension between the US and China was so obvious. The trade war was a "grey rhino." Three years prior to the GFC, Ben Bernanke agreed that the rising US current account deficit stemmed from a global saving glut. What he did not admit was that the only way to stop it was to take away the "exorbitant privilege" of the dollar. The then chairman of the US Fed printed money seemingly unlimitedly to save the US financial markets. China stocked up the US government debts and funded the ever-widening US-China trade gap. Trade imbalance was actually a monetary phenomenon. People said the trade war was a "black swan." Beneath the swan's feathers was actually a "grey rhino."

This book proposes a way to break the tie between the China-US trade imbalance and the global addiction to the US dollar, i.e. an outcome of the Triffin Dilemma. As the trade war is the onset of deglobalization, de-dollarization inevitably becomes a natural consequence. Cryptocurrency signals the need to reform the global monetary system. Just when China and the US are competing in the technological realm, Blockchain provides a perfect alternative to the current system of global foreign reserve. In 2009, Zhou Xiaochuan requested a reform of the dollar-based regime. In 2019, Mark Carney responded to his question and agreed to develop a "synthetic hegemonic currency."

In the first chapter, I review the causes, the impact, and the outlook of the trade war. On the surface, the US was frustrated with China's track record of intellectual property rights and forced technology transfer, offering an excuse for the US to act. However, behind the conflict seemed to be the crash between the ideologies of "China Dream" and "America First." Import tariff is just smoke and mirrors. The US administration decided to attack the global supply chains. Prohibiting US companies from business transactions with some Chinese companies could paralyze their production line. It was an alternative way to drag China's exports to the US. This trade war is unconventional.

In Chapter 2, I argue that, no matter how unconventional they are, the trade measures and even trade agreements cannot reduce US current account deficits. Due to the "exorbitant privilege" of the US dollar, the US lacks an incentive to manage its fiscal and external balances. China, a country having USD 3 trillion of savings in foreign currency, has recycled its export surplus into US dollar assets. This loop, I call it "factory dollar recycling," resembles what oil-exporting countries have been doing after the Nixon shock. Even without gold backing, the US dollar continues to secure the advantage of network externalities. The problem of trade imbalance is chronic. Neither import tariff nor currency revaluation can fix it.

Is the leading position of the US dollar unshakable? Chapter 3 searches for an answer from history. The interchanging position between pound sterling and the dollar in the Interwar Period offered many important insights. In my discussion, I stress that globalization, financial integration, and dollarization are interlinked. When deglobalization begins, as the trade war is signaling, populism and protectionism also question the role of financial integration, especially after a financial crisis. As the global market is divided, the dollar's monopolistic position is not invincible.

Naturally, the protagonist in the trade war is the one eager to de-dollarize, as I explain in Chapter 4. In 2005, China began to unpeg the renminbi from the greenback. In 2009, the authorities kicked off a high-profile campaign of currency internationalization. By Mundell's impossible trinity, a more flexible exchange rate regime will allow China to hold less foreign reserve. Using the yuan as a trade currency also allows China to distance itself from the US dollar. This policy preference may also be revealed by the currency allocation of China's sovereign wealth funds. Contrary to the topic of RMB internationalization, China's reserve management has not received much coverage in the existing literature. But it is a critical part of reforming the global monetary regime.

After the Nixon shock, the US secured the fate of its currency through semi-pegging with Saudi Arabia's oil reserve. In the twenty-first century, what kind of tie should the Chinese yuan develop? In Chapter 5, I argue that technological development is the only way for the country to beat the middle-income trap. "Go digital" is a development strategy many countries have adopted in order to stay competitive. China has already held a leading position in e-commerce and internet connectivity. Belt and Road (supposedly) has become an opportunity to extend this connectivity globally. In the last few decades, petroleum was backing the global influence of the US dollar. In digital times, 5G will very likely support China's total factor productivity. In this century, China's position in the digital economy defines the value of the renminbi.

Can the Chinese yuan replace the US dollar in the digital economy? The answer is "possibly." ?The pound lost its global position after a series of shocks during the Interwar Period. Similarly, another shock is required to trigger a reform in the international monetary system. In my view, blockchain is the trigger. In Chapter 6, I offer my two cents on cryptocurrency from an outsider's point of view. My wish is for the readers to appreciate that, based on blockchain, cryptocurrency is technically capable of being a secured form of payment. My discussion in this chapter focuses on the micro foundation of cryptocurrency. In contrast to our money-and-banking system, distributed ledger technology is disintermediating. The architecture is completely different from sovereign money, be it the yuan or the US dollar. However, distributing the trust across participating members does not disqualify its legitimacy as a form of money.

In Chapter 7, I lift the discussion of cryptocurrency to the macro level. The international monetary system is sovereign-based. The system is rule-based, as the Balance of Payment Manual states the foreign reserves have to be denominated in currency of the legal tender. Well, gold is exceptional. But, in my view, there is no reason not to expand the list of exceptions. Facebook's introduction of Libra has prompted regulators to quicken the development of central bank digital currency. Zhou's request was met with a cold shoulder. Satoshi Nakamoto's invention was regarded as a cult. Eventually, Carney's call for going digital will likely receive a red-carpet treatment.

In the final chapter, I propose a practical solution that takes Carney's idea one step forward. The digital currencies issued by different central banks are largely an electronic version of M0. They are still fiat money. To preserve the spirit of blockchain, global policymakers should develop an official cryptocurrency that can also overcome some operational issues of private coins, such as governance of reserve or AML/CTF. I name this coin the World Crypto Currency (WCC). Given its official status, the WCC could also be a reserve currency for China to consider. Don't be afraid, China. The new system will facilitate your...