It was only natural for Beijing to partner with time-tested allies to float the yuan as a possible international reserve currency. But it’s not the smartest idea to posture towards pricing international trade away from the dollar, especially if your country is on Washington’s list of perspective importers of democracy. Yet few, especially among emerging economies, will find fault with a medium to long term work plan of moving away from the greenback. The reserve currency has been under immense pressure of late, especially after Bernanke and Co flooded the market with quantitative easing dollars to sooth choked credit markets. The dollar is at its weakest, its only bouts of strength of late owing to safe haven trading because Europe seems bent upon being the more-inferior economy.
Pakistan’s currency swap agreement with China will bring benefits – not the least being favourable investment opportunities from Beijing – but it will also test Islamabad’s resolve. Already, the equation with Washington is not at its best. In addition to Afghanistan/nato specific problems, there is pressure to abandon the Iran-Pakistan gas pipeline project in favour of the non-starter TAPI (Turkmenistan-Afghanistan-Pakistan-India) project. Fortunately, though, the chance of the Pakistani government caving into American pressure this time around is negligible.
Interestingly, the Chinese move is sure to rekindle the bitter argument within opec with regard to the ultimate dollar denominated trade – oil. Proposals to price oil out of the dollar are not new, though Washington’s reaction to proponents of such change (Saddam, Gaddafi) is not very reassuring. While such developments are far in the future, the Chinese novelty is sure to find suitable imitation elsewhere, in similar trading blocs. Pakistan, having already signed a similar deal with Turkey, seems at the centre of a profound market shift. These alliances should be worked at with the specific aim of attracting as much friendly investment as possible for partaking in such ventures.
