China must hedge against QE risks

Chinese authorities announced recently that they will launch direct trading between the yuan and the British pound, a development which will substantially broaden the Chinese currency's swap network as officials spur the internationalization of the renminbi.

The world has seen a flurry of currency swap agreements ever since the global financial crisis, a trend sparked by rising demand in the West for US dollars to buffer against tightening liquidity conditions. Things reached a crescendo in October 2013, when the US Federal Reserve and five other major central banks transformed their interim liquidity framework into a permanent currency swap agreement.

Given the dollar's profile, the global monetary base could contract once the Fed brings its quantitative easing (QE) program to a halt. China should take steps to guard against such an outcome. The country should participate in existing currency trading frameworks and build multilateral exchange agreements with other Asian nations.