As China’s Currency Becomes Increasingly Global, Will Collectors Of Chinese Art Benefit?
In recent months, a number of high-profile Chinese and world economists have increased their calls for the creation of a truly “global currency,” which would diminish the US dollar’s role as the de facto international currency sooner rather than later. Although this concept is still far off, as these economists concede, definitely within the next 10-20 years the dollar’s primacy will be challenged, if not completely nonexistent.
Although this is not some kind of dollar apocalypse, but rather a readjustment of the global economy based more on a realistic global picture. In the post-Cold War, post-BRIC-growth world, we are seeing the world economy pluralize rapidly. So a global currency will require an accurate portrayal of this multipolarity — thus, it is unlikely that the next global currency will be “from” one country. Rather, it is likely to be a multi-currency basket, or “supracurrency” — as the governor of the People’s Bank of China, Zhou Xiaochuan, himself called for in March.
Today’s New York Times features a post by economist Nouriel Roubini, who recently took a trip to China, writing on China’s emergence as a global economic center. Although Roubini points out that China will continue to be hampered as a global economic destination as long as the Chinese Communist Party maintains relatively strict foreign exchange rules — particularly for private individuals — he provides a clear picture of what the US must do now in order to maintain its important global role, even if the dominance of the US dollar in world economics loses some or much of its clout to the RMB or an as-yet-invented supracurrency. As Roubini writes,
Traditionally, empires that hold the global reserve currency are also net foreign creditors and net lenders. The British Empire declined — and the pound lost its status as the main global reserve currency — when Britain became a net debtor and a net borrower in World War II. Today, the United States is in a similar position. It is running huge budget and trade deficits, and is relying on the kindness of restless foreign creditors who are starting to feel uneasy about accumulating even more dollar assets. The resulting downfall of the dollar may be only a matter of time.
But what could replace it? The British pound, the Japanese yen and the Swiss franc remain minor reserve currencies, as those countries are not major powers. Gold is still a barbaric relic whose value rises only when inflation is high. The euro is hobbled by concerns about the long-term viability of the European Monetary Union. That leaves the renminbi.
China is a creditor country with large current account surpluses, a small budget deficit, much lower public debt as a share of G.D.P. than the United States, and solid growth. And it is already taking steps toward challenging the supremacy of the dollar. Beijing has called for a new international reserve currency in the form of the International Monetary Fund’s special drawing rights (a basket of dollars, euros, pounds and yen). China will soon want to see its own currency included in the basket, as well as the renminbi used as a means of payment in bilateral trade.
At the moment, though, the renminbi is far from ready to achieve reserve currency status. China would first have to ease restrictions on money entering and leaving the country, make its currency fully convertible for such transactions, continue its domestic financial reforms and make its bond markets more liquid. It would take a long time for the renminbi to become a reserve currency, but it could happen. China has already flexed its muscle by setting up currency swaps with several countries (including Argentina, Belarus and Indonesia) and by letting institutions in Hong Kong issue bonds denominated in renminbi, a first step toward creating a deep domestic and international market for its currency.
Now, imagine a world in which China could borrow and lend internationally in its own currency. The renminbi, rather than the dollar, could eventually become a means of payment in trade and a unit of account in pricing imports and exports, as well as a store of value for wealth by international investors. Americans would pay the price. We would have to shell out more for imported goods, and interest rates on both private and public debt would rise. The higher private cost of borrowing could lead to weaker consumption and investment, and slower growth.
So what could a more global RMB, and more Chinese influence on the global economy have for investors in Chinese assets? We often hear about Chinese investment in the US, and Hu Jintao’s concern about China’s US-based assets amid the current crisis, but these issues center on the potential fallout if the US economy remains soft. But for holders of Chinese hard assets, such as real estate or antiques or artwork, what does an appreciating yuan mean for them?
While I can’t say much about real estate, because it’s not my field and that realm seems to be suffering a bit from the same problems plaguing the US housing market, the art market seems to be a good place to be, asset-wise, for two reasons. One, art is easy to move around, unlike a house or bricks of gold. So it’s China, in portable form. And second, as Chinese buyers increasingly covet Chinese assets of all types — including antiques and modern or contemporary Chinese artwork — you, as a holder of Chinese art, can later easily convert these holdings to RMB (e.g. you bought it with a strong dollar, and you sell it in 10-20 years in exchange for a strong RMB).
So, as the RMB gains both value in relation to other global currencies, holders of Chinese assets (particularly the portable ones) stand to gain from measures currently starting out, from China’s call for a more flexible world currency, to China’s early experiments with currency swaps, to the growing Chinese buyer base for assets of all kinds. Although individual markets may look like a rollercoaster sometimes — and art is no exception — macro-level issues existing outside of the art world, taking place in the meeting rooms of the IMF and in economic negotiations between two countries’ finance ministries, will inevitably affect the price of all types of assets in coming years — Art is no exception.
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