This letter the other day from Barack Obama, Gordon Brown, Nicolas Sarkozy, Lee Myung-Bak and Stephen Harper looks at first sight like the usual bland exhortations for everyone to do better. (Why didn’t Angela Merkel sign, btw? Too busy with Greece?) But the semiotics are a bit more complex. The bit about “We all understand that ongoing trade, fiscal and structural imbalances cannot lead to strong and sustainable growth” looks pretty much like a pointed jab at China.
So does this mean the currency wars are going to break out in the G20? Since the grouping is supposed to work on consensus, it has generally shied away from arguments about exchange rates, which have the potential to blow up any meeting or institution in which they take place. Throwing them into the mix will make G20 meetings a lot livelier, at least. I’m not convinced it’s wise, though, for a joint letter apparently aimed at China to be signed exclusively by a gang of rich countries. If the US wants to use the G20 to put pressure on the Chinese, it will have to get on board emerging market countries also suffering from renminbi undervaluation, Brazil being the obvious example. The last thing the US wants is to replicate the unhelpfully rigid rich-country-vs.-poor-country divisions that have blocked progress in the WTO.
If all goes well in the post-recovery world, the Americans will be saving and the Chinese will be buying, according to Paul Jenkins, Senior Deputy Governor of the Bank of Canada.
In a speech today, Mr Jenkins spelled out Canada’s view of the world’s economic future. He predicts industrial economies have a potential growth rate of between 2 and 2.5 per cent and emerging-market economies have a rate of between 5 and 8 per cent. Emerging markets’ growth will so far outstrip developing countries growth, he says, that by 2020 emerging-market economies will likely account for over 55 per cent of global output, compared with 45 per cent today.
And emerging-markets won’t just be producing more, they’ll be consuming more too. Read more
Americans are again clamouring for a rise in the renminbi. First, the moral argument: keeping the currency pegged at about 6.83 to the dollar lends Chinese exporters an unfair advantage, critics argue, increasing the Chinese trade surplus. Second, the pragmatic argument: China will have to let the yuan appreciate to combat inflation.
Today, the counter-arguments. Read more
It’s not often that the US’s two gaping deficits make the news the same day, so today we’re able to have our fill of gap developments (though, we’re unlikely to be much closer to filling the gaps themselves.)
This morning, in a letter to Tim Geithner, treasury secretary, and Gary Lock, commerce secretary, 130 members of Congress asked for action on “currency manipulation” in China. Read more
Who’s afraid of global growth?
Jürgen Stark, member of the executive board of the ECB, for one. At least, if it’s the wrong kind of growth.
One striking feature of the high global growth rates was the reliance on large and unsustainable global imbalances. In principle, current account imbalances can be desirable, if they channel funds across the world to their most productive use. But in the years prior to the crisis imbalances were a symptom of economic distortions: in some countries asset price bubbles developed and household debt levels rose beyond sustainable levels. Eventually, the rise in the household debt burden resulted in an acceleration of defaults on mortgage and consumer loans, which undermined the stability of the financial system.
In other countries – for example, in emerging Asia – which held the value of their currencies at artificially low levels to support their export-oriented growth strategies, the vast accumulation of foreign exchange reserves had potentially high opportunity costs. These managed exchange rate regimes may also have contributed to hampering necessary domestic adjustments and distorting the allocation of resources towards export-oriented industries.
His solution (in part): Read more
China is carrying out stress tests on labor-intensive industries to gauge the effect a stronger yuan would have on earnings, reports Bloomberg (itself reporting local paper the 21st Century Business Herald). Consequent speculation on the yuan has pushed forward prices up.
The yuan’s value has been kept at about 6.83 per dollar since July 2008, following a 21 per cent advance over three years, as policymakers intervened to help exporters weather a global recession. Read more
I am at a so-so lunch discussing the prospects for long-term economic growth and have just heard the best comment on global imbalances and the worst suggestion for international organisations. Both came from Angel Gurria, secretary general of the OECD.
The words of truth: “I don’t think anything of substance has been done during the crisis to correct global imbalances. It was the crisis itself that reduced imbalances”. Depressing but true. Read more
Competitive devaluations threaten trade wars, says Michael Pettis, citing the Vietnamese devaluation. The theory is that countries unable to devalue will be forced to raise tariffs. This comes as North Korea strikes two zeros off its currency, the won. But the picture is more complex than that. Chris Giles agrees that competitive devaluations could lead to currency trade wars, but argues the devaluation of the dong – still under pressure – is not the trigger. Neither is the won.
Creditors of Dubai World, including hedge funds and banks, have formed a group. It seems that investors in $3.5bn of Nakheel’s bonds will form 25 per cent of the issue, meaning they can block bond restructuring plans. Read more
One global fear is that if China continues to peg the renminbi to the sliding US dollar, other Asian economies will retaliate by devaluing their currencies against both. With this in mind, today’s 5 per cent devaluation of Vietnam’s dong appears an ominous sign, but Vietnam is a special case writes Chris Giles of the Financial Times. Read more
As the IMF joins calls for a stronger yuan, a Xinhua report on Saturday said the Chinese government would not allow the renminbi to appreciate against the dollar in the short term. Just hours before Obama was due to arrive in China, the authorities there warned that the Fed is fuelling speculative investments and endangering the global recovery through loose monetary policy. Read more
Banks face higher refinancing costs as $7,000bn of short-term debt is due to mature in the next three years. The IEA is accused of overstating energy reserves and the chief economist of the World Bank says China should not be forced to allow appreciation of the renminbi Read more
Pity the poor finance ministers and central bank governors of the Group of 20 leading countries. They have to hike up to St Andrews in Scotland on Friday, with ghastly weather predicted, to hold a pretty pointless meeting writes Chris Giles of the Financial Times Read more
How the crisis might have saved the euro: Ralph Atkins reads between the lines of the European Commission’s forecasts and discovers the credit crisis has helped to correct some significant pre-crisis current account imbalances Read more
More than half of all children in the US will use food stamps at some point, predicts new research. Equities fall sharply in the UK and Europe, in spite of strong manufacturing data, amid fresh concerns about mortgage-backed securities and the possibility of a second round of stimulus in the US Read more
Bernanke sounds worried about a resurgence of global imbalances in the quarters ahead, writes Krishna Guha of the Financial Times Read more
Money Supply, a Financial Times blog, rounds up the news for Monday, October 19 Read more
Money Supply, a Financial Times blog, rounds up the news of Friday, October 16 Read more
Money Supply, a Financial Times blog, wraps up the news of the day for Thursday, October 15 Read more
The fall in the US dollar should be welcomed, as it will help correct global imbalances. The recovery
in China’s economy is gaining new impetus, amid concerns about the transition to a more balanced economy. Read more
Money Supply, a Financial Times blog, rounds up the day’s economic news. Read more