The US dollar has been volatile and falling again and again in recent decades as well as recent years, and for many observers, it is going to be broken sooner or later. The central importance of the dollar is due to the fact that it is not just a currency for the US. Over half of all dollar bills in circulation are held outside of the US borders, and almost half of the US Treasury bonds are held as reserves by foreign central banks. The US dollar is supposed to be the anchor that stabilizes the global currency market. Instead, today it is a major source of instability. In the back ground, the US fiscal deficits have been running high again under Bush administration, once up to almost 3% of US GDP. And current account deficit is set to about 7% in 2005 and more volatility is widely expected. The situation is very challenging for the central banks of Japan, China, Korea, Taiwan and Singapore which collectively hold about US$2.8 trillion worth of US Treasury bonds as part of their reserves. The moment that they reduce their purchases, the value of the dollar slips. Yet, the more they buy, the more they are exposed to a potential free fall of the US dollar. China has been blamed, not only by US congressmen who are understandably not very familiar with either the complicated currency issues or the domestic politics in any other country, but also many economists or business strategists. It was said that it was all because RMB did not reevaluate, as the source of this "global imbalance" and currency instability. How much revaluation of RMB would remove the US deficits of $700 billions, or at least the US-China trade deficits $200 billions (including Hong Kong)? 500% or 1000%? Of cause no body asked for that kind of magnitude now. Normally smart people say 30-50%, with the unsaid intention to blame-then-suggest again another 30-50% after some initial moves, then the third, the fourth. This seems not really new phenomena at all. It has been all so familiar before and since the Nixon shock in early 70s', and in 80s' when there was the Plaza Accord. The convenient targets to blame were the gold standard, the Dutch Mark, the Japanese Yen. Now it is turn for Chinese reminbi. So the question is what are the real causes of the global imbalance and currency instability? In this short paper, we first take a look at what is really going on with the Chinese economy and trade balance, and then try to identify sources of the current imbalance , and then, as a concluding remark, think again the possibilities to reform the global currency system.
