Interdependence and decision-making in investment of foreign exchange reserve

Every country likes using the power which comes from the interdependent net among the nations to affect other’s policy-making and to gain advantages in the international interactions. However, the power nations use is too difficult to be controlled in the interdependent relations by a single or group of countries.

Robert Keohane and Joseph Nye criticized the former interdependence theory which claimed all countries were interdependent with each other. The frequent the international trade, the international cooperation have gotten daily global activities, the lesser the conflicts among nations of the world has become the norm today.

They argued interdependence among countries is much more complex which often could cause more conflicts rather than possibilities of cooperation. For countries with more powers and resources than others who do not would not usually want to work with “junior” partners on equal terms.

Hegemonic powers had not been easily defeated or disappeared from the history, as expected or predicted. They often stayed on the much same power track for a while. This historical trend seems to continue in this 21st Century, too.

Today hegemonic powers’ influences won’t also easily disappear from ongoing global affairs, simply because of their financial crises. Instead, further emboldened by the sort of deadly-interlocked interdependence among great powers, any prospective costs which may occur during any major transitions in global power (both geopolitical, economic and military) relations can be dumped onto others in that unavoidable interdependent net relations.

The present China-US relation is one of the best examples. Caught in the mire of American debt issues, China will be compelled/forced to bear the consequences of that soon-to-be changing fate of foreign exchange reserve. It seems the most urgent matter China’s decision-makers should deal with is how to reduce that probable cost as a loss as soon and best as possible, while making sure not to fall onto that same trap again in the future.

The evermore growing foreign exchange reserve derives from trade surplus of China and majority of the world trades are still paid in dollars. This dead-locked structure is where America can still wield its decisive blow not only to China but also to the rest of the world.

The United States unilaterally terminated the convertibility of dollar to gold when Breton Woods system officially ended in 1971. This is when the dollar became the “fiat currency” which is backed up by nothing but words, so-called the promise or the “credit” of the US Federal Government.

While lacking the most fundamental rights and capabilities in matters of global trade relations or without having any right to the negotiating power of financial system such as the issue of global reserve currency, China’s economic development has been conducted for more than 30 years.

Lately it seems the central decision-makers in the government are eager to consult with scholars, professionals and experts to make sure their decisions not to be failed again.

The dead-locked interdependence between China and US has become a dilemma for China’s future. The national leadership should be able to figure out how not be further vulnerable or deadly-trapped into this system of mutually-assured-destructive (MAD) interdependence any more.

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