China and the G-8 or What to do When Your Banker Says No
The origin of the Group of Eight was an invitation from
French President Valery Giscard dâ€™Estaing in 1975 to six of the major World War
Two combatants to meet at Rambouillet in France. Leaders from West Germany, Great
the United States, Japan and France attended that first meeting.
The impetus to the summit, if not the sole topic, was the first post war
economic challenge to the west, the 1973 OPEC oil embargo. In 1976 Canada was invited to join and the group stayed
at seven until 1997 when Russia
formally became a member.
Although formed a generation after the end of the Second
World War, the G-7 represented the dominant nations of the defining event of
20th century history. As with the United Nations for international politics, the
G-7 was an attempt to secure the victory of the western economic model.For the first 30 years after the war the only
antagonist for the western capitalists had been the political and military
threat of the Communists led by the Soviet Union.
Until the oil embargo there had not been a serious economic challenge to Western
Europe, the United States
Why relate this history? The nations of the Second World War consensus
that have dominated the world for 60 years are close to bankrupt.Their foreign bankers are now calling the
shots; those who pay decide the future.
The abandonment of the climate change issue at the G-8
meeting is an example. Though the global warming agenda is a major part of the
domestic political positions of President Obama, Chancellor Merkel, Prime
Minister Brown and President Sarkozy the issue was removed from G-8
consideration because China,
and others would not go along. This is perhaps a foretaste of what will happen
on every topic in which China
and the other BRIC (Brazil, Russia, India,
countries have an interest.
China, Russia and India have been very public with
their concerns for the long term value of the US Dollar and critical of the
effect of American deficit spending. In April, Chinaâ€™s holding of US Treasuries
fell for the first time in eleven months.The amount was small, $4 billion and partially offset by a small gain in
Hong Kong. But in the charged atmosphere of
todayâ€™s international economics and in light of US funding needs, the drop was
widely noted.From April 2008 until
March 2009 the Chinese Government had been steadily acquiring Treasuries; its
holding had increased from $502.0 to $767.9, a jump of 53%.
has also moved to increase the supply and demand for the yuan as an alternative
to the dollar by starting limited trade settlement in its currency. On July 6th
some firms in five Chinese cities were allowed to begin settling transactions in
yuan with companies from Hong Kong, Macau and
the ASEAN countries. Non-Chinese banks will be able to obtain yuan from
mainland institutions to finance trade.
The Peoples Bank of China (PBOC) has also formulated
currency swap agreements with Argentina,
Malaysia and South Korea.
The PBOC will render yuan to their central banks as needed to pay for imports
if these countries are short of the currency.
These moves by the Chinese authorities will not establish
the yuan as an international reserve currency. But they will shift some of the trade
demand for dollars to yuan. Offered the choice what Asian trading partner of China would not
want to remove the volatile and increasingly questioned dollar from their
financial equation? The logic is simple and efficient. Why hold reserves in dollars
for your China
trade and bear the currency risk? Yuan reserves reduce the need for dollars and
reduce dollar currency risk.
emerged as the engine of growth in Asia and Asian countries are looking to China
for the health of their own economies. If yuan settlement becomes the policy of
the Chinese Government what trading partner will want to go against Beijingâ€™s wishes and opt
for dollar settlement? Considering the size of Chinaâ€™s foreign trade the potential
drop in dollar demand could be substantial.
Until now it has been in China's interest to keep the yuan
undervalued for trade competition. Since last summer China has effectively re-pegged the
yuan to the dollar after three years of gradual appreciation. But that is likely
to be a temporary expedient.If China is
serious about using the yuan in trade and in permitting outside players, non
Chinese players, to hold and store value in yuan, an essential component of a
reserve currency, what better way than to resume a gradual appreciation of the
currency?For an exporter in Vietnam or Thailand
or even Australia, Japan or New
Zealand would not an appreciating yuan be a far better
option for your China
trade capital than the dollar?
Chinese national interest will determine Beijingâ€™s economic policy. But the time is
fast approaching when safeguarding her economic development will be far better
served by a strong and convertible currency than by a weak yuan priced for
export.A strong dollar has been one of Washingtonâ€™s most
effective foreign policy tools for more than 50 years; that fact is not unknown
in the Chinese capital.
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