SINGAPORE: What’s an ideal place in Singapore for a S$28,000 (US$22,000)-a-pop retreat for executives on the CEO track? Somewhere they can take five days off from strenuous money-making to have scholars like Peterson Institute economist Arvind Subramanian prepare them for the brave new world? A world in which an ageing hegemon — one that has practically written every rule of today’s commerce — has been unseated by a more vibrant power?

As I entered Capella Singapore to interview Dr Subramanian, my first thought was that there could not be a more apt setting than this Sentosa resort for cogitating on the rise and fall of global powers.

Remnants of a long-forgotten superpower linger here in the restored colonial bungalows, built in the 1880s as officers’ quarters for the Royal Artillery’s coastal defence command, and serving as a reminder today of how quickly Britain became irrelevant after it lost economic dominance to the United States.

But the Raj and its lost glory aren’t the only things you see here. Close at hand is the Universal Studios theme park, an expression of the ‘soft power’ that the US in its role as the reigning superpower wields when it’s not putting boots on the ground in Iraq and Afghanistan.

And then, there is China.

To hear the distant drumbeats of the contender to the throne, the 29 executives gathered here for the annual Singapore Business Leaders Programme needed only to remind themselves that the ocean view that greeted them in their suites and the conference rooms came from South China Sea. Those vistas may be tranquil, but the waters are rumbling with disquiet. The rising superpower is already flexing its muscles, claiming sovereign rights over the Spratly and Paracel islands and, in the process, making its South- east Asian neighbours worried about its intentions.

Dr Subramanian, the author of “Eclipse: Living In The Shadow Of China’s Economic Dominance”, was ranked among the world’s 100 most influential thinkers last year by Foreign Policy magazine. He has previously worked at the International Monetary Fund and at the General Agreement on Tariffs and Trade, the precursor to the World Trade Organisation. He has witnessed first-hand how the US has used its whip hand to shape the rules that govern the movement of goods, services and money from one corner of the world to another.

Using that narrative of political economy — and history — to supplement statistical analysis of output, trade and external financial strength, Dr Subramanian makes a persuasive case. By 2030, he says, China’s economic dominance will rival that of the US in 1970 and of Britain in 1870, and this “will elevate the (yuan) to premier reserve currency status sooner than currently expected”.

Not just any reserve currency, mind you, but the premier one.

That’s a bold claim to make when other scholars, such as economic historian Barry Eichengreen of University of California, Berkeley, believe that any diminution of the dollar’s international role is still a ways off’.

In the interview, Dr Subramanian explained why he has stuck his neck out in forecasting that the yuan will eclipse the US dollar in “about 15 years”. China badly wants the supremacy of the US currency to end. ‘The Chinese chafe under dollar dominance,’ he said.

That may be so. But as much as 85 per cent of the US$4 trillion-a-day global currency trade is about buying or selling of US dollars; in only 1 per cent of the trades does the yuan change hands, Professor Eichengreen says. Will the tables turn so dramatically in 15 years?

Not just that. During periods of financial stress, like we saw after the collapse of Lehman Brothers in 2008 and are witnessing in Europe at present, liquidity is synonymous with the US currency: From Seoul to Tokyo and Singapore, when anxious banks and companies want money, central banks around the world look to the US Federal Reserve to provide it by the truckload.

That’s what hegemons are supposed to do; it is their obligation. Is China able and willing to play this role?

Granted, the Chinese authorities are promoting the use of their currency outside the country. But China uses barriers on capital flow to control the exchange rate of the yuan, which, in Dr Subramanian’s estimates, is still 30 per cent undervalued. As a result of capital controls, the international supply of yuan is small — the yuan deposit market in Hong Kong is a paltry US$100 billion. As a supplier of a reserve currency, China will have to go much further and create a liquid market in yuan-denominated securities that people around the world can tap freely.

Moving in that direction will mean the authorities won’t be able to keep the yuan undervalued. While that may tie in with their plan to move the economy away from exports and towards domestic consumption, an open capital market will also test the stability of the country’s state- dominated banking system, one that is prone to making dubious loans. Weak banks could get overwhelmed by large capital inflows and outflows. Most importantly, China will have to refrain from using the threat of expropriation of international financial capital — or of causing a deliberate “yuan squeeze” — to meet its foreign policy goals.

One is inclined to agree with Dr Subramanian that China doesn’t need to match the financial finesse of the West — which got a bad rep during the 2008 financial crisis — for the yuan to become a reserve currency; reaching South Korea’s level of openness and competence will be a good starting point.

By arrangement with The Straits Times/ANN