Foreign exchange traders are buzzing with talk of a new “Plaza Accord”, following the marked change in the behaviour of the major currencies after the Shanghai G20 meetings in late February.
Since then, the dollar has weakened, just as it did after the Plaza meetings on 22 September 1985. The Chinese renminbi has been falling against its basket, in direct contrast with the “stable basket” exchange rate policy that was publicly emphasised by PBOC Governor Zhou just before Shanghai. The euro and, especially, the yen have strengthened, in defiance of monetary policy easing by the ECB and the Bank of Japan.
Following Shanghai, the markets have become loathe to push the dollar higher, believing that the G20 may now have come to a co-ordinated agreement, as they did at the Plaza, to reverse the direction of the US currency. Does this comparison make any economic sense?
The Shanghai communique did place increased emphasis on an agreement among the major economies to avoid “competitive devaluations”. The main suspects here were Japan, the Eurozone and (sometimes) China, all of whom have good reasons to push their currencies down. The fact that the communique eschewed this course of action is therefore a reason to believe that the dollar might be subjected to less upward pressure. But that does not make it a new Plaza. Read more
Zhou Xiaochuan, PBoC governor © Getty Images
The long and detailed interview given by the People’s Bank of China governor, Zhou Xiaochuan, to Caixin Weekly on Tuesday is in one sense very un-Chinese. It provides a much more fulsome statement of foreign exchange policy, as viewed from the central bank, than anything available in the past. After months in which the governor has been conspicuously absent from the public fray, he has now chosen to go on the attack.
Mr Zhou sees the recent exchange rate crisis as out of line with economic fundamentals in China, and for that reason essentially temporary. He describes a new currency regime that is best characterised as a dirty floating regime, measured against the renminbi basket, not the dollar. “Speculative” attacks on that regime will be opposed and defeated by the central bank. In the longer term, the peg against the basket can be adjusted if fundamentals change, and the links between the two will be explained in more detail in the future.
This statement will further reduce the risk of a competitive devaluation of the renminbi in the near term. But does that mean that the China currency crisis is over? Read more
At the National People’s Congress in Beijing on Thursday, Premier Li set a target of about 7 per cent for GDP growth in 2015, and around 3 per cent for inflation. At present, both targets look hard to attain, especially on inflation. Economic reform remains paramount for the government, but China’s premier made clear that this could only succeed in the context of adequate growth. This will probably necessitate a progressive easing in fiscal, monetary and exchange rate policy – something that is already under way.
The Chinese renminbi’s exchange rate has weakened noticeably against the dollar in the past few weeks, raising concern that Beijing is joining the “currency wars” that are (allegedly) being waged by other major nations.
A big change in China’s exchange rate strategy would certainly be something to worry about. Not only would it mean that the deflationary forces evident in the country’s manufacturing sector would be exported to the rest of the world, it would also disrupt the uneasy truce on trade and exchange rate policy that has emerged between the US and China since mid-2014.
Fortunately, on the evidence available to date, it seems that China has changed its currency strategy in a relatively limited way, and in a manner that is difficult to criticise in view of exchange rate turbulence elsewhere in the world. Read more
The sterling exchange rate has now declined by about 7 per cent this year, thus eliminating all of the rise which occurred when the euro crisis was in full flood in 2011-12. Investors are asking three main questions about the drop in sterling. When will it end? Will it succeed in boosting UK economic growth? And could it, conceivably, lead to a full blown sterling crisis? Read more
US Treasury Secretary Tim Geithner has written to his G20 colleagues suggesting that they should adopt a new approach to managing external trade imbalances. Specifically, he wants the G20 to agree to a limit on their current account surpluses and deficits over a period of years, and also to correct these imbalances if they seem likely to drift away from the agreed targets. This is a good idea, because multilateral action on global imbalances would be vastly preferable to a disorderly bilateral dispute between the US and China. But the Geithner plan, as currently drafted, is fraught with difficulties. Read more