Forget multilateral coordination; let China do it
Fred Bergsten has long advocated in favor of a bit more exchange rate coordination – both to limit volatility and to try to avoid large misalignments among the major currencies. Right now, the most misaligned major currency is the yen. Even after today's move, the yen remains quite weak, especially v. the euro. Yet Japan’s economy is now relatively strong and its current account surplus is growing.
But the G-7 hasn’t shown much interest in Bergsten’s proposals. The major central banks don’t like exchange rate coordination very much. Not all the finance ministries are on board either.
The G-1 (G-7 slang for the US) has traditionally led the opposition to multilateral exchange rate management. The Fed doesn’t want to subordinate domestic monetary policy to an external target. All those lending to the US take note: that means the Fed feels no obligation to defend the dollar should the dollar start to fall. And there is broad skepticism within the US about the effectiveness of intervention. At least small scale intervention. Right now, it is pretty hard to deny impact of large scale intervention –
But the G-1 isn’t what it is used to be, at least in foreign exchange and bond market. When it comes to those markets, China is the new superpower.
Scratch China. Per Niall Ferguson, call its east Chimerica. Or perhaps “new” Chimerica. The government of “new” Chimerica (headquartered in Beijing, with a regional financial capital in Shanghai) subsidizes low-end consumers and high-end financiers in “old” Chimerica (headquartered in Washington DC, with a regional financial capital in New York), at a growing – but still hidden — cost to itself.
Bergsten thinks the government of "new" Chimerica doesn’t just set the RMB/ dollar exchange rate. The allocation of its reserve portfolio also sets – or at least heavily influences – the euro/ dollar, the dollar/ yen and the yen/ euro.
The fact that the yen hasn’t been a big reserve currency (the euro and pound are the main alternatives to the dollar) is one reason for its weakness. And in a stroke, China could change it. Bergsten:
Chinese diversification of several hundred billion dollars into yen would promote both systemic and Chinese national interests. It is almost universally agreed, including in Japan, that the yen is substantially undervalued against all currencies, except the renminbi itself and perhaps a few other Asian monies, even after its recent modest rise….
Chinese purchases of yen with a significant portion of their dollar hoard, by strengthening the yen against the dollar in an orderly manner over a sustained period, would thus help correct one of the most important currency misalignments now contributing to the global imbalances. As the markets become aware of such official action, they would probably magnify the extent of yen appreciation and thus promote the needed realignment. This particular form of diversification would probably minimise the inevitable capital losses that China will experience in renminbi terms because the yen is one of the few currencies that needs to rise in value almost as much as the renminbi itself.
Yesterday’s trade data suggests “official” China will be adding between $400 and $450b to its foreign assets this year, depending on the scale of private capital inflows – even some bank forecasts, which generally tend to lag a bit, now have China’s current account surplus at $320b and net FDI inflows of over $50b, which puts foreign asset growth as close to $400b. There is a bit of a difference between adding $350b to your dollar portfolio and putting $100b in euros, and say putting $150b in dollars, $100b in euros and $200b in yen. $200b is real money – it is an inflow comparable to Japan’s current account surplus.
And China could buy $200b of yen this year it without even selling any of its existing dollar or euro reserves. Indeed, with a new investment agency, China wouldn’t have to buy yen-denominated bonds with low yields. It could buy a (minority) stake in Toyota instead —
Indeed, I suspect Bergsten thinks China already has, if not set, at least heavily influenced the yen/ dollar and yen/ euro, without really consciously planning to. As the scale of emerging market reserve growth has increased, the low yen weight in the reserve portfolios of most emerging economies (relative to both the dollar and relative to the euro) has contributed to yen weakness …
$1 trillion plus in the bank (1.2 trillion, counting a broad range of official assets, by my calculations) and $400b plus in annual foreign asset growth gives you a certain power. Remember, the global current account surplus, once you net out various European countries, is in the vicinity of a trillion bucks. Official China now intermediates a very large share of that.
Welcome to the new global financial order. Multilateral exchange rate coordination is now superfluous. The world’s new financial superpower can do a lot unilaterally.
I don’t agree with Fast Freddy Bergsten about much (least of all that the dollar has needed to go down in a straight line for the past 15 years, give or take), but I agree that China, et. al. can, if/when they desire, essentially set the “market” rate for not only the RMB, but any free floating currency not subject to domestic intervention.
It’s kind of ironic, when you think about it. Capitalism “won” the Cold (Economic) War…and the endgame is what is (or could easily be) tantamount to a command economy in that most unregulated of financial markets, foreign exchange, perpetrated by….Russia and China!
Macro man is right on target. Capitalism won the cold war by liberating China’s billion labor forces( to less extent Indians) and Russian resources into market, welcome to the new world order
I dont think China will or should buy Yen as suggested by Bergsten as it sounds too fishy to Chinese
Japanese currency manipulation & YEN undervaluation has been the perfect political cover for China to counter G7 political pressure on Rmb. With JPY undervalued by as much as 20%, China wont commit to move aggressively on Rmb. Selling USD YEN, EUR JPY is ridiculous, China will never blow its cover using its own money.
I guess China could as well selling massive amount of JPY in latest market carry trade unwinding, dont worry MOF/BOJ, if Tokyo is too shameful of intervention, PBOC could lend a hand.
another issue, even if Chinese want boost YEN, they have to consider Japanese reaction. Japan has been using Ultra low interest rate and Under valued JPY as key macro policy tools. Unilateral Chinese massive JPY buying will directly pit china in financial confrontation with Japan, it might be interpreted by Japanese as China Launching Pearl Harbor on Tokyo.
Yes, CHINESE dislike Japnese in general, but they wont confront Japan financially as A favor for EU-US. ECB or US treasury could always sell USD YEN, EURO YEN if they wish, but prompted China to do it looked conspiracy to Chinese
My impression is that the Chinese are concerned about the global economic imbalances, but not alarmed enough to prompt dramatic steps. After all, the epicenter of the global economic imbalances has been the destabilizing, credit-driven US Housing bubble that has absolutely flooded the world with excess dollar liquidity. While it was not the Chinese intention to sandbag Paulson on his recent trip to Beijing, Chinese economic policy is based foremost on domestic economic considerations especially providing employment to the millions entering the workforce annually. Perhaps since the revaluation of the yuan by 6 percent over the past year has had little impact on Chinese export growth, the PBoC might agree to a slighly faster revaluation over the coming year.
Q4 US current account improving shows again that BS is exagerating the extent of Yen misalignment. It shows that current trends (a constantly declining dollar more or less in tune with what is implied by forward rates, gently declining oil prices, surging OPEC imports) in major exrate crosses is consistent with long run sustainability of current global imbalances. SO mkts are not so irrational after all? (Yes, China is imbalances.)
According to the chart in the ComInvest article quoted above, Chinese export growth fell in 2005. It went from around 35% growth to 20% growth and seems to have held steady since then. Do you know if the data is reliable and if so, why did it fall?
gheorhius — what are you talking about? the q4 data reflects an expected fall in the trade deficit from lower oil prices (nothing to do with Xrs), a big fall in imports from Canada and a surprise in the income balance (not likely to be sustained). the US is adjusting vis a vis europe and canada, not vis a vis asia (asia pacific trade deficit is still rising — i’ll post the data in a bit). your argument in my view oversimplifies my argument and you don’t offer any real support for your view (i.e. the overall data shows that the major currencies are fairly valued) when the disaggregated data tells a story that suggests east asian currency weakness (and associted intervention) is helping sustain what is still a relatively large trade deficit. Febr. global reserve growth was through the roof, led by asia ex japan, tho all emerging economies contributed.
Yes, let China do it.Here’s something that should work out well: Sell Ford and GM to the Chinese. Ford and GM need the Chinese as much as the Chinese need Ford and GM. Really.