Brad Setser

Follow the Money

Cross border flows, with a bit of macroeconomics

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Et tu, Indonesia

by Brad Setser
November 29, 2004

First, Russia decides it wants to hold more Euros and fewer dollars. And now Indonesia?

“Indonesia’s Aslim Tadjuddin, deputy governor for monetary policy at the central bank, said on Nov. 26 that the country may trim its U.S. holdings should the dollar keep dropping.”

While Korea has not said — to my knowledge — that it wants to hold more Euros, its central bank clearly would prefer not to be accumulating quite so many dollars. But it seems to be having a hard time getting out of the Bretton Woods two cartel; Korea intervened again on Monday. The consequences of truly floating, at least when China is still pegged to the dollar, seem to be a bit too dire … given the state of Korea’s own economy.

An argument could be made that Japan was the first to defect from the Bretton Woods two dollar financing cartel: it stopped intervening to support the dollar back in the spring, and while it has not diversified its existing reserves, it has not been adding to them. That could be considered a form of defection. Full membership in the cartel requires two things: a) holding on to your existing stock of dollar assets, and b) buying more dollar assets to keep your currency from appreciating, and in the process provide the ongoing vendor financing the US needs to consume more than it produces.

It is hard to say that Japan is really out of the cartel, though, when there is such a strong expectation that they will step back in should the yen rise above a certain threshold …


  • Posted by anne

    Chinese Premier Signs Trade Pact at Southeast Asian Summit

    VIENTIANE, Laos – China moved a step closer to cementing its economic and diplomatic relationships with Southeast Asia on Monday when Prime Minister Wen Jiabao signed a trade accord at a regional summit meeting that calls for eliminating tariffs on a range of agricultural and manufactured goods by 2010.

    He also signed a strategic declaration that commits China to good behavior in the Southeast Asian region, including the contentious area of the South China Sea.

    Mr. Wen’s presence at the annual meeting of the Association of Southeast Asian Nations has come to dominate the event as the 10 member nations wrestle with how to adjust their varying and often heavily protected economies with a surging China.

    In his speech, Mr. Wen outlined his grand concept for an East Asian community that he said China wanted to play a leading role in developing. Deeper cooperation among the nations that would culminate in such a community is a “strategic choice made in the interests of China’s own development and in the common interests of the region,” he said.

    China is not a formal member of Asean, but in his speech, Mr. Wen was far bolder in his vision for an East Asian community that incorporated China than any of the Southeast Asian leaders, who have tended to tiptoe around the idea. China, along with Japan and South Korea, is invited to attend the annual meeting. India, eager to show that it is part of the wider community beyond South Asia, also attends.

    The new trade agreement was the first concrete step toward a China-Asean free trade area by 2010, an idea China broached two years ago.

    The strategic declaration highlighted the dramatic turnaround in relations that until several years ago were marked by fear, and in some instances, hostility. In the declaration, China reaffirmed its support for the treaty on a zone free of nuclear weapons that is a hallmark of Asean.

    China’s weight was also evident in a decision by the summit leaders on Monday to push forward by three years, to 2007, the date when tariffs on intra-Asean trade would be abolished in 11 major groups of products, including textiles but excluding automobiles. M. C. Abad, the spokesman for the Asean secretary general, said the 11 groups constituted more than 50 percent of intra-Asean trade.

    In a more indirect way, China won a victory when the 10 leaders announced that in addition to their regular summit meeting next year, they would hold an East Asia summit meeting outside the formal auspices of Asean. That configuration would bring China closer into the eventual formation of an East Asia community, officials said Monday.

  • Posted by IJ

    “Prime Minister Wen Jiabao . . . also signed a strategic declaration that commits China to good behavior in the Southeast Asian region, including the contentious area of the South China Sea.” NYT, November 30.

    This compares with a report in Businessweek a fortnight ago: “[China has] a very muscular petrodiplomacy. Look at what’s happening to the Chunxiao natural gas field, which lies largely in Chinese territorial waters on a continental shelf in the East China Sea. Japan says part of the shelf juts into its maritime border extending from the southern island of Okinawa, so Tokyo — also eager for energy — wants its share of the bounty. Too bad: Beijing argues it controls the whole thing.”

    Friction between China and Japan is especially high. Moreover China is cultivating much of the rest of Asia, including Indonesia.

    “the [Chinese] military has published a book, called Liberating Taiwan, that imagines Chinese warships seizing sea routes to the Persian Gulf and imposing an oil embargo on Taipei, Tokyo, and Washington.”

    “With the Russian pipeline far from a sure thing, China is looking elsewhere. Chinese companies have signed oil or natural gas exploration deals in Australia, Indonesia, Iran, Kazakhstan, Nigeria, Papua New Guinea, and Sudan. So far, these deals represent just 10% of China’s oil imports. Even so, China says they’re important.”

    The UK wants climate change to be on the agenda when it chairs the G8 in 2005; and climate change is closely related to the geopolitics of oil. Looking on the bright side, at the bottom of Pandora’s box was hope.

  • Posted by boz

    Now both Russia and Indonesia have said they are cutting back on dollar holdings. They are both major oil exporters. What I don’t understand is, since oil is auctioned in dollars, doesn’t a weakening dollar hurt them? It seems like their inventories get less valuable with every downtick of the dollar. Wouldn’t they rather be selling oil in Euros, so that their holding got more valuable with time?

    In other words, who or what is it that keeps the oil states trading in dollars?