The Great Debate UK
The communiqué from last week’s IMF G20 finance minister’s meeting was the first step in trying to resolve the so-called global currency war. The ministers released a joint statement on October 23 which pledged that all countries would “move towards more market determined exchange rate systems that reflect underlying economic fundamentals and refrain from competitive devaluation of currencies.”
Even fears that the U.S. and China could have a bust-up over the U.S.’s charge that the renminibi is undervalued relative to the U.S. dollar were put to bed when it was reported that Treasury Secretary Geithner popped in to China on his way back from the G20 in South Korea to meet Chinese Vice Premier Wang Qishan.
While there was hope that a full-blown war could be avoided, reports were soon hitting the wires that South Korea (the host of this year’s G20 meetings) was back intervening in the FX markets to weaken the won, which has strengthened more than 10 percent against the U.S. dollar since June. Later in the week South Africa joined Brazil, Indonesia and Thailand by announcing measures to stem the value of its currency by loosening domestic capital controls to get money flowing out of the country rather than pumping up the value of the rand, which has appreciated by 12.5 percent against the dollar in five months. So beggar thy neighbour policies are still alive-and-well even after the G20 finance ministers’ show of unity over exchange rates.
If you boil down the currency war to its crudest form then you’ll get emerging market countries with positive financial positions and strong growth trajectories lamenting the weakness of the dollar, which has been falling in value since making a high in June. They are concerned that further quantitative easing from the Federal Reserve will only cause the dollar to fall even further. In contrast, authorities in the U.S. are unlikely to talk up the dollar until they see some meaningful commitment from Beijing to allow the renminbi to appreciate.
Competitive devaluation is no longer a possible danger – it is already here. Many people are worried that, after global stock market crashes and a collapse of most of the world’s banking system, a war over exchange rates completes a sequence of events that looks awfully like a rerun of the 1930’s. There is however one crucial difference. The Chinese role certainly makes matters more complicated, though it is as yet unclear whether it makes the outlook better or worse.
The key point to understand about the belligerents is this. In the context of purely self-interested beggar-my-neighbour economic policy, devaluation makes good sense for the Eurozone countries as a whole, the British, the Japanese, Swiss, Koreans… for everyone except the Americans. Whether they are deficit countries, like Britain, or surplus countries, like Switzerland, Korea or Japan, devaluation will increase demand for their exports and make their imports more expensive, giving a boost to their output and employment. And if other countries retaliate by counter-devaluation, they can tell themselves that their situation would have been worse if they had not taken the initiative and got their retaliation in first.
A top think tank has advised Washington to declare a currency war on China. The proposal from the Peterson Institute to force up the value of the yuan sounds fascinating, but a direct attack may be hard to pull off in practice. Beijing is likely to respond better to multi-lateral persuasion.
Peterson has called for a U.S. raid on the forwards market for the yuan, which it believes has to rise at least 25 percent against the dollar. The timing is good. U.S. lawmakers are already threatening to slap tariffs on Chinese imports, and the 1.5 percent rise of the yuan in the past two weeks hardly looks enough.
By John Foley and Wei Gu
China's plans to make its currency global could change the world -- if they get off the ground. More international use of the yuan might increase China's trade clout, unseat the mighty U.S. dollar and make a lot of financiers very rich in the process. But it can be hard to separate the facts from the fable. Here are some questions answered.
Why are people talking about an international yuan?
China is the world's second-biggest economy. But its currency doesn't nearly match its size. For most international dealings, China relies on the dollar, which leaves it beholden to the United States. Beijing wants more influence on the global stage, so it has been taking baby-steps to turn the yuan into an internationally used currency.
from The Great Debate:
-- Peter Morici is a Professor at the Smith School of Business, University of Maryland, and former chief economist at the United States International Trade Commission. The views expressed are his own. --
From Berlin to Bangkok, governments are screaming about the falling dollar, because they can no longer rely on reckless American consumers to power their economies.
from The Great Debate:
Twenty-four years ago, major nations called for depreciation of the dollar to rebalance the global economy. Now, as another effort at rebalancing looms, the dollar will again bear the brunt -- though officials will try to ensure its fall is less dramatic this time.
from The Great Debate:
China investors should care about three major numbers this year: 8 percent economic growth, its 4 trillion yuan ($586 billion) stimulus package, and the 10 industries revitalization plan.
The first is the government's economic growth target and the second is a spending plan to shield the economy from the global financial crisis.