Tuesday, 5 October 2010

China and the Global Currency War (Jon Kofas, Greece)

Posted on October 5th, 2010

The US chose to help China develop economically, and of course China was an anxious participant, by integrating it into the world economy after the Kissinger-Nixon visits in 1972, as part of a Cold War strategy to weaken the USSR at a time that the Vietnam War had weakened the US politically and economically. In 2010, the new US strategy is how to slow down China without hurting US or global economic growth.
On 2 October IMF chief Dominique Strauss-Kahn called on the major powers to coordinate their monetary policies and prevent a global competitive currency devaluations that would precipitate trade imbalances and another recession just as the world economy seems to be recovering. Thanks to G-20 coordinated fiscal stimulus (bank bailouts), monetary policies (central banks keeping interest rates low), the world avoided a bigger crisis than the one it actually experienced in the last three years, according to Strauss-Khan. On 4 October 2010, FED chief Bernanke warned about the US budgetary and balance of payments deficits having a negative impact on growth. On 5 October 2010, Japan’s central bank intervenes to cut the interest rate at between 0% and 0.1%, the later being the same since December 2008, and at the same buying government bonds, corporate debt, and exchange-traded funds, thus lowering the yen’s value. Japan is arguing that China maintains a weak currency regime that hurts Japanese exports, which are slowing amid a deflationary climate. This is tangible proof that indeed the currency war is heating up, as the IMF has been warning. Given that China is the world’s second largest economy and second largest IMF contributor, buying $50 billion worth of bonds to strengthen the IMF in 2009, the IMF chief is only in the position to propose monetary coordination, instead of adopting the US-Japan-EU hard line about China’s need to follow a tight monetary policy and stop taking advantage of its trading partners by keeping the yuan undervalued. China is on record opposing the US bill on foreign currency reform, arguing that China is still a “developing economy.” In late July 2010, the IMF agreed with Washington (EU and Japan) that China’s currency was substantially undervalued. As a “producer-export-oriented” economy striving to industrialize rapidly, China recently has started to stimulate domestic consumption as reflected in its the modest reduction of its balance of payments surplus. Some US economists, journalists, politicians, and of course many American producers are calling for China to devalue its currency and to curb dumping trade practices. Delaying stimulating private consumption is the best way for China to ensure that it will continue to capture market share around the world. It has reached very significant trade deals with Russia, its exposure in Africa and Latin America is increasing, and its latest move to invest heavily in Greece as the gateway to EU is an indication that it is not leaving any market untapped. A large Chinese delegation accompanied premier Wen to Athens, where major commercial agreements and a pledge for China to purchase Greek bonds in the open market was made. China is also increasing its role in Turkey as well as Italy. Positioning itself to increase market share in EU and Russia, China is facing continuous diplomatic and business pressures from around the world to raise the value of the yuan. Besides the US, which of course is looking to China to stimulate its trade and lower its balance of payments that have weakened the dollar, Japan, France, South Korea and Brazil are positioned to drive down their currencies to capture a larger market share. Confirming the contention by Brazil that in fact there is a global currency war, in September 2010 Japan central bank sold $20 in yen to drive down the currency, a move that stimulated the financial markets for a single day before reality sank in that such a band-aid move will not fix the economy. Today, Japan adopted further measures as it sees a difficult road to recovery. South Korea, which is running a balance of payments surplus, has also intervened to keep the value of its currency “competitively low” like China and Japan. The question of surplus countries, mostly China of course, stepping in to help deficit countries by devaluing their currencies is at the heart of the IMF suggestions to avoid the ongoing currency war. At the heart of the problem is the over-consumption and wasteful defense spending of the US economy and the gradual erosion of confidence in the dollar amid the skyrocketing price of gold. In 2005, the dollar as a reserve currency dominated at 66% of the world’s official foreign exchange, while only 25% was in euros. As a result of America’s rising current account deficit in the past five years, central banks reduced dollar holdings. In July 2010 dollar holdings amounted to 61.5% of the world’s official foreign exchange, a drop of 4.5% in the last four years and likely to drop much further and faster in the next ten years. China along with most Asian countries have been reducing dollar holdings, while investing more in the yen and the euro. Premier Wen Jiabao assured Angela Merkel in July that China will be buying more European bonds and he repeated the same point recently in Athens. Although the situation today is not nearly as bad as of the 1920s when there was lack of international cooperation on monetary, fiscal, and trade policies, the strategic alliances formed by trading blocs between EU and China, Russia and China, US and Latin America, Australia and China could lead to the kind of intense trading bloc competition that may retard world trade and result in another recession just as the economic growth prospects look very good for the next two years. There is no such thing as ”free market forces,’ especially when it comes to monetary policy, or trade policy for that matter. The G-20, along with various international organizations as instruments of coordination could help end the currency war. However, China has argued that half of the G-20 are developing countries many with surpluses supplying the growth stimulus for the world economy. The advanced capitalist countries (G-7) are in deficit territory, expecting to lift their economies at the expense of the “developing economies.” There is no shortage of political, journalistic and academic articles defending and blaming China, the EU, Japan, and US for the currency war. The propaganda machines that include politicians, journalists and academics are working feverishly as much in the US as in the rest of the world that is looking increasingly at economic nationalism, degrees of it in monetary and trade policy, as a good option amid a global recession.

No comments: