Wednesday, March 17, 2010

Yuan to Replace Dollar in World Trade?

A series of Chinese government policy changes are enabling Asian companies to settle trades with their Chinese counterparts in renminbi, according to Risk.net website. And increased intra-Asian trading volume may lead Beijing to also consider allowing other trade-related insurance and derivatives denominated in renminbi to be done offshore, according to bankers and regulators in Hong Kong.

Although it is still very early, the Chinese move aims for its currency to join the US dollar and EU's Euro as a major trade and reserve currency. A key hurdle that the Chinese need to cross is the full convertibility of the yuan into other major currencies. Beijing is beginning to get around the convertibility issues by signing currency swap agreements with several of its trading partners, including Argentina, Indonesia, India, Japan, Pakistan, Russia and South Korea. The agreement requires that the central banks of the partner countries have adequate deposits of each others’ currencies. These countries will eventually be able to use the Chinese currency for deals between each other.

It has long been recognized that the US dominance in global affairs is at least partly attributable to the US dollar as the world's biggest reserve and trading currency. Nearly two-thirds of the world's central-bank reserves are denominated in US dollars, according to data from the International Monetary Fund. The euro accounts for about a quarter -- up from 18% when it was introduced in 1999, but less than its predecessor currencies' share in 1995. Because the U.S. is such a huge trading partner for so many countries, the reserve buildup isn't easily unwound.



According to the Wall Street Journal, the dollar is also deeply entrenched in world trade. Businesses lower their transaction costs by dealing in a common currency. More than 80% of exports from Indonesia, Thailand and Pakistan are invoiced in dollars, for instance, according to the latest figures available in research by the European Central Bank, although less than a quarter of their exports go to the U.S.

Taking a page from the history of US rise in the last century, the Chinese efforts on currency appear to be only the first part of its larger push to assert its status as a new superpower of the twenty-first century. In a piece interestingly titled "It’s China’s World. We’re Just Living in It" in the latest issue of Newsweek, the authors argue that the Chinese are looking to reshape the world with China at its center. The larger plan includes the creation of a new framework with a new set of international institutions through which the Chinese can exercise their power.

While many nations want to change at least part of their reserve holdings from US dollars to euros or other alternatives, they know if they sell a significant share of their dollar reserves, it would weaken the dollar's value. That would potentially hurt their own trade competitiveness, and push down the value of their remaining dollar reserves. If they keep the dollars, a buildup of unwanted assets would only mount.

Beijing holds $2 trillion in dollar assets, accumulated through years of exports to America and massive purchases of Treasuries by the Chinese government, according to Businessweek. One way they can reduce their exposure to dollar assets over time is to shift their reserves from long-term Treasuries into shorter-term U.S. bonds. That shift would give the Chinese more flexibility in easing away from the dollar. The New York Times reported recently that the Chinese seem to be maintaining dollar-asset ownership levels, but shifting their holdings into maturities of a year or less—something they have not previously done.

"There is no alternative to the dollar as a trading currency in Asia," Andy Xie, a Hong Kong-based economist told the Wall Street Journal last year. "Eventually, the renminbi [yuan] will replace the dollar in Asia, perhaps in our lifetime. But it will take at least 30 to 40 years."

Here's a similar opinion issued recently by Moody's Investor Service on the status of US dollar as global reserve currency:

Recent speculation about the future of the dollar as the world's reserve currency is, in Moody's view, unfounded. Despite the US's external deficits and dollar depreciation, we believe that the likelihood of the dollar losing its prominent role as a reserve currency remains very low for at least the next three to five years: Regardless of the current state of US public finances, the economic and political factors underpinning the dollar's reserve currency status are still aligned in favour of the dollar and are likely to remain so for some time. There are no plausible alternative currencies that are ready to take the US dollar's place as the global reserve currency. We do not consider the Chinese renminbi and the IMF's Special Drawing Right (SDR) to be credible alternatives. Inertia and the interconnectedness of financial markets, not to mention the size of the global market for dollar-denominated debt, highlight the difficulties of a global switch from the dollar to another currency...



As China begins to surpass America as a major trading partner of many of the largest economies, it has growing economic clout in the world. But the key question is: Can the Chinese come up with their version of Bretton Woods—a system of political and economic public goods that have benefited not only the United States, but the key US allies as well? Only time will tell.

When the 20th century began, the U.S. was already the world's biggest economy, but the British pound still accounted for nearly two-thirds of official foreign-exchange reserves held by the world's central banks. The dollar didn't become the dominant currency until after World War II. Even then, some commodities still traded in pounds: The London sugar market didn't jettison sterling for a dollar-denominated trading contract until around 1980. The history lesson here is that, while the reserve and trade currencies can and do change, it takes a significant re-architecture of the world economy and trade and significant amount of time for it to happen.

The signing of currency swap agreements with several of its trading partners, including Argentina, Indonesia, India, Japan, Pakistan, Russia and South Korea, is a good start for China. But it will take many decades for yuan to displace US dollar after China becomes the world's largest economy around 2040.

Here's a video clip of NYU's Professor Nouriel Rubini's prediction on yuan:



Related Links:

China's Checkbook Power

Godfather's Vito Corleone: A Metaphor For Uncle Sam?

The Future of US Dollar as Reserve Currency

Bretton Woods

China's Growing Role in Afghanistan and Kashmir

China Sees Opportunities Where Others See Risk

Chinese Do Good and Do Well in Developing World

Can Chimerica Rescue the World Economy?

27 comments:

Anonymous said...

it seems evident from history that the emergence of Dollar as the dominant currency coincided with the emergence of the US as the dominant political power. Do you think that will be the case with China as well? Is it important for China to exert some over political pressure to ensure that renminbi becomes the dominant currency? What are your thoughts on that....

Riaz Haq said...

Anon: "Is it important for China to exert some over political pressure to ensure that renminbi becomes the dominant currency? What are your thoughts on that...."

The US political and military power grew out of its economic clout during WW II when most of Europe and East Asia (Japan, China, etc) were destroyed and the US came out as the winner.

It was then followed by the US political leadership in creating international political, military and economic institutions (UN and its agencies, OECD, IMF, World Bank, regional development banks like ADB, Bretton Woods, WTO, NATO, etc) which favor the US and its key allies. These institutions give US a lot of ingrained power that others lack, since the US wrote the rules that everyone has to comply with.

Unless China shows some significant political leadership and finds willing partners like the US did after WW II, it will be difficult for it to re-architect the world as we know it.

Will currency swaps, Shanghai Cooperation Org, be enough? Can China leverage its economic clout? Will China become more involved in world affairs, and begin to lead? Only time will tell. But that's what is required for it to reshape the world.

Riaz Haq said...

Here's a Chinese report about the US pressure on Beijing to allow yuan exchange rate to float up against the US dollar:

The United Nations Conference on Trade and Development, a think tank, said in a report which was published on Tuesday that exposing the yuan to the fluctuating money markets would pose grave global risks.

"Expecting that China will leave its exchange rate to the mercy of totally unreliable markets and risk a Japan-like appreciation shock ignores the importance of its domestic and external stability for the region and for the globe," said the report.

Most economists believe that stability of exchange rates among the major world currencies is good for global revival from a deep recession.

Some Chinese analysts believe that if Beijing allows the yuan to rise in value by a margin the same as Japan did in appreciating the yen in the 1980s, China would be shocked by a suddenly precipitating export and a subsequent stagnation of its economy, just like Japan's "lost decade" in the 1990s, which is very likely to wreck the boat of global economic growth.

China's Premier Wen Jibao told world press on Sunday in Beijing that he did not think the yuan is undervalued, and his government will continue to push for currency exchange rate formation system reform that fits well with market demands.

Wen rejected outside interference in China's exchange rate policy decisions, and said that a stable yuan had helped not just China, but also the world, emerge from the worst global recession since the Great Depression.

The premier indicated that China is not to appreciate its currency under any pressure. He said: "We are opposed to the practice of engaging in mutual finger-pointing among countries or taking strong measures to force other countries to appreciate currencies."

Pressures Build up

A group of 14 American senators unveiled legislation on Tuesday that seeks to increase pressure on Beijing to let the yuan to rise in value against the dollar, alleging Chinese "currency manipulation" is hurting the US.economy.

The bill calls for stiff trade sanctions if China does not act.

US Treasury Secretary Timothy Geithner says the legislation is a sign of how strongly China's trading partners feel about the issue. In an interview on Fox Business Network, Geithner said that he believes Chinese officials "ultimately will decide it is in their interests to move."

Geithner declined to respond directly to a question of whether the Obama administration would support the bill backed by Senators Charles Schumer, Lindsey Graham, Debbie Stabenow, and 11 other senators.

"We are sending a message to the Chinese government," Schumer said in a statement. "If you refuse to play by the same rules as everyone else, we will force you to."

But Chinese Commerce Ministry spokesman Yao Jian said Tuesday the low rate of the yuan was not the reason for China's trade surplus.

"The United States... cannot ask others to (raise) their currency for the sake of its own export expansion -- that would be an egotistical practice," the spokesman added.

"Politicizing the exchange rate issue will not help the world to tackle the crisis," he said, adding that China hoped Washington would be "an advocate of free trade, not an obstructer."

Riaz Haq said...

Here's an excerpt from Wall Street Journal opinion titled "The Yuan Scapegoat":

At the core of .. argument is a basic misunderstanding of monetary policy. There is no free market in currencies, as there is in wheat or bananas. Currencies trade in global markets, but their supply is controlled by a cartel of central banks, which have a monopoly on money creation. The Federal Reserve controls the global supply of dollars and thus has far more influence over the greenback's value than any other single actor.

A fixed exchange rate is also not some nefarious economic practice rare in human affairs. From the end of World War II through the early 1970s, most global currency rates were fixed under the Bretton-Woods monetary system created by Lord Keynes and Harry Dexter White. That system fell apart with the U.S.-inspired inflation of the 1970s, and much of the world moved to "floating rates."

But numerous countries continue to peg their currencies to the dollar, and with the establishment of the euro most of Europe decided to move to a fixed-rate system. The reason isn't to get some trade advantage against their neighbors but to gain the economic benefits of stable exchange rates—and in some cases a more stable monetary policy. A stable exchange rate eliminates a major source of uncertainty for investment decisions and trade and capital flows.

The catch is that under a fixed-rate system a country yields some or all of its monetary independence. In the case of euro-bloc countries this means yielding to the European Central Bank, and for dollar-bloc countries to the U.S. Federal Reserve.

This is what China has done with its yuan peg to the dollar. By maintaining a fixed yuan-dollar rate, China has subcontracted much of its monetary discretion to the Fed in return for the benefits of exchange-rate stability. For more than a decade, this has served the world economy well, leading to an explosion of trade, cheaper goods for Americans that have raised U.S. living standards, and new prosperity for tens of millions of Chinese.

For years, the U.S. establishment has nonetheless been pressing China to "revalue" the yuan in the name of reducing the U.S. trade deficit. Never mind that much of this deficit is intra-company trade, with U.S. companies outsourcing production to China to stay globally competitive (and their U.S. workers and shareholders profiting). Beijing bent for a while in the middle of the last decade and adopted a crawling peg that revalued the yuan by about 18%, but that had little impact on the trade deficit. China re-fixed the peg amid the financial panic of 2008, and now the American "revalue" clamor is rising again.

China is right to resist these calls, not least because a large revaluation could damage China's growth. China has learned from the experience of Japan, which bowed to similar U.S. currency pressure in the 1980s and 1990s, revaluing the yen from 360 to the dollar to as high as 80 in 1995. As Stanford economist Ron McKinnon has shown, one result was domestic deflation in Japan and its lost decades of growth. Meanwhile, Japan continued to run a trade surplus, as imports fell with slower internal growth and cross-border prices adjusted. China has helped to lead the global economy out of this recession, and the world needs that to continue.

One proposed alternative is for China to once again move to a crawling peg, with a modest revaluation. But that would only invite more pressure on the yuan, as global "hot money" and currency speculators anticipate a further yuan rise. This is especially true with the Fed keeping dollar interest rates at zero, which also encourages more hot money into China in anticipation of a rising yuan.

Anonymous said...

Why is chinese yuan great suddenly ? It is because it has 2 trillion usd reserve. So where is the question of it replacing dollar.

Further usd maintains its superiority by economic, political and military power. It has crownies in the democracy and capitalist countries. Whereas nobody is comfortable with the autocractic china. Things might go for a toss when slowly american companies move out of china.

China has not done anything on r&d but for cheap production by having bonded labours.

Anonymous said...

Here is an interesting calculation of the US trade balance, taking into account the US companies "importing" from offshore plants:

The U.S. trade deficit figure for 2008 was $695 Billion (Exports minus Imports, $1.8 Trillion minus $2.5 Trillion). However 34% of the imports were from U.S. multinationals abroad (some put this figure at 39%). When these multinationals send their product to the US it gets counted as "import". ...Adjusting the $2.5 trillion for such "imports" reduces the import figure to a little over $1.5 Trillion, converting the actual trade deficit into a TRADE SURPLUS!!.

The trade deficit goes into calculating the GDP, which as it stands with the official figures places the U.S. at the top with a GDP of $ 14.8 Trillion. U.S. occupied Japan is second with a GDP of $ 5 trillion. The largest economy in Europe is Germany (also US occupied) with a $3.4 Trillion GDP. Adjusting for this fictitious trade deficit, US GDP gets bumped up by almost another trillion dollars.

Riaz Haq said...

Here's an excerpt from a BBC story about India's worries over "string of pearls" which describes ports China is building in Bangladesh and the Indian Ocean:

The various forms of Chinese assistance to Bangladesh have caused jitters in India - the huge country next door which some Bangladeshis still call "Big Brother."

India is concerned because a similar story is unfolding in Pakistan, Sri Lanka and in Burma - where China is also building roads and deep sea ports.

Indian defence experts fear that China is surrounding India with ports. They call it China's "string of pearls".

"This is not a fear, this is a fact," says Professor Shrikant Kondapalli of Jawaharlal Nehru University in Delhi.

He believes China is "setting up shop" in smaller countries around the Indian Ocean because of oil. An estimated 80% of oil for China's resource-hungry economy comes from the Middle East and Africa, via the Indian Ocean.

Rapidly-growing India also needs oil, and it stands directly in the middle of China's supply route.

The Indians fear that although these deep sea ports will be for trade, China could call them in for military or strategic purposes if oil becomes scarce.

"When you put together all these jigsaw puzzles it becomes clear that Chinese focus in Indian Ocean is not just for trade," says Professor Kondapalli. "It is a grand design for the 21st Century."

'Indian paranoia'

In Beijing, India's fears are given short shrift. "During peace time, these kinds of facilities are only for commercial purposes," says Hu Sisheng, head of South Asia policy at the China Institute for Contemporary International Relations.

“ About 20 years ago, China was also a very poor country - but now it is developing ”
Chinese engineer Shar Wei

It's a tightly guarded government-run facility in Beijing which analyses foreign affairs and directly advises China's leaders.

China is keen to reassure the world that it has no hostile intent. Mr Hu says the Indians are being paranoid when they talk of a "string of pearls".

"It was minted by a young Pentagon guy," he points out.

The phrase "string of pearls" to describe China's strategy for building ports was originally used by analysts working for the US Department of Defense.

Mr Hu believes Washington is playing games and trying to cosy up to India, as it becomes increasingly concerned about China's rise.

Bangladesh is also adamant that there is nothing in its plans to concern India. "I don't believe if China helps us build this sea port, that China will be able to use it for other purposes," I'm told by Dr Dipu Moni, Bangladesh's foreign minister.

Bangladesh wants to be seen as a "bridge" from China to India, and is careful not to offend either of its giant neighbours.

"Bangladesh will never let any part of its territory be used for any kind of attacks or anything like that," she says.

Impoverished Bangladesh is hoping to capitalise on its location between China and India to develop its economy. I see the remarkable impact for myself on the outskirts of Chittagong.

I am stunned when a single track road surrounded by slums suddenly turns into a four-lane motorway. It then crosses a suspension bridge built of gleaming white concrete.

The funds for this bridge came from a Gulf country, and a Chinese firm has done the work.

Riaz Haq said...

In Silicon valley recently, the US federal government has pumped in about $500 million each into two green tech startups..Solyndra pv solar and Tesla all-electric cars. Obama was here this week to promote green tech and spoke to Solyndra employees.

In addition, there is $1 billion in federal grants being offered to biotech firms under the new healthcare bill.

The reason for US supremacy is partly explained by how much of its public funds it spends on higher education. A 2006 report from the London-based Center for European Reform, "The Future of European Universities" points out that the United States invests 2.6 percent of its GDP in higher education, compared with 1.2 percent in Europe and 1.1 percent in Japan.

Riaz Haq said...

"America’s economy is set to shift away from consumption and debt and towards exports and saving", says a story in the Economist magazine. Here are some excerpts:

STEVE HILTON remembers months of despair after the collapse of Lehman Brothers in 2008. Customers rushed to the sales offices of Meritage Homes, the property firm Mr Hilton runs, not to buy houses but to cancel contracts they had already signed. “I thought for a moment the world was coming to an end,” he recalls.

In the following months Mr Hilton stepped up efforts to save his company. He gave up options to buy thousands of lots that the firm had snapped up across Arizona, Florida, Nevada and California during the boom, taking massive losses. He eventually laid off three-quarters of its 2,300 employees. He also had its houses completely redesigned to cut construction cost almost in half: simpler roofs, standardised window sizes, fewer options. Gone were the 12-foot ceilings, sweeping staircases and granite countertops everyone wanted when money was free. Meritage is now catering to the only customers able to get credit: first-time buyers with federally guaranteed loans. It is clawing its way back to health as a leaner, humbler company.

The same could be said for America. Virtually every industry has shed jobs in the past two years, but those that cater mostly to consumers have suffered most. Employment in residential construction and carmaking is down by almost a third, in retailing and banking by 8%. As the economy recovers, some of those jobs will come back, but many of them will not, because this was no ordinary recession. The bubbly asset prices, ever easier credit and cheap oil that fuelled America’s age of consumerism are not about to return.

America’s economy will undergo one of its biggest transformations in decades. This macroeconomic shift from debt and consumption to saving and exports will bring microeconomic changes too: different lifestyles, and different jobs in different places. This special report will describe that transformation, and explain why it will be tricky.

The crisis and then the recession put an abrupt end to the old economic model. Despite a small rebound recently, house prices have fallen by 29% and share prices by a similar amount since their peak. Households’ wealth has shrunk by $12 trillion, or 18%, since 2007. As a share of disposable income it is back to its level in 1995. And if consumers feel less rich, they are less inclined to spend. Banks are also less willing to lend: they have tightened loan standards, with a push from regulators who now wish they had taken a dimmer view of exotic mortgages and lax lending during the boom.

Riaz Haq said...

Here's an excerpt from a WSJ report on Malaysian Muslims pushing gold as medium of exchange in trade rather than US dollar:

KOTA BHARU, Malaysia—Umar Vadillo bounds into a hotel room here in northern Malaysia with several stacks of gold and silver coins in his hands and slaps them down on a coffee table. "This," Mr. Vadillo says, "is what it means to be free."

A quarter century ago, this Spanish-born Muslim convert set to work with other European Muslims to find a substitute for the U.S. dollar and other paper currencies.

Pricing goods in greenbacks, they argued, was unfair. Many countries earn their income from finite resources like oil and other minerals, they said, while the U.S. and other countries can crank up their printing presses to pay for them—especially after Richard Nixon helped break the Western world's historical dependence on gold as a measure of value by taking America off the gold standard in 1971.

Last month, Mr. Vadillo's solution took shape when the local Muslim-led government in Malaysia's Kelantan state joined forces with Mr. Vadillo to introduce Islamic-style gold dinar coins as alternative currency.

Mr. Vadillo and the Kelantan government have persuaded more than a thousand businesses here in the state capital, Kota Bharu, to paste stickers in store windows saying they accept the coins.

Ordinary people can also pay taxes and water bills in gold and silver instead of paper money.
----
Plenty of people have their doubts about the dollar, as well as other currencies that aren't backed by gold or silver.

American libertarians such as Ron Paul frequently call for the reintroduction of a gold-backed currency, arguing that the Federal Reserve's ability to print money causes inflation and destroys savings.

Gold bulls have developed a cult following among investors who worry that precious metals are the only reliable store of value during rocky economic times.

If there's a utopia being formed for the globe's gold bugs, though, it's happening in a few unexpected outposts in the Muslim world like Kelantan.

Mostly that is because some Islamic thinkers teach that using currencies whose value is declared by governments is a form of usury. A piece of paper, they say, is just an IOU.

But with the global economy showing fresh signs of faltering, some believers think there's also a strong financial incentive to switch to gold dinars or the silver coins, known as dirhams.

Riaz Haq said...

Here are excerpts from a review of "Why The West Rules – For Now", by Ian Morris, published in Daily Mail:

I grew up in a golden age – I just didn’t know it. Things didn’t always feel golden in the Midlands during the Sixties.

And yet the West – a handful of nations clustered around the North Atlantic, plus their colonists on other continents – bestrode the world like a colossus. Westerners, on average, earned ten times as much as Asians or Africans and lived 25 years longer.

‘You’ve never had it so good,’ Prime Minister Harold Macmillan told us in 1957, and we hadn’t.


Westerners had televisions, cars and clean drinking water; unlike most of the rest of the world. European and American armed forces dominated the land, sea, and sky; Americans had even walked on the Moon. The West’s wealth and global domination had no parallels in history.

My oldest family Christmas photos, taken by my dad with a little Instamatic at our home in Stoke-on-Trent in the early Sixties, are crowded with this bounty – overflowing with toys, Cadbury’s selection boxes and bicycles.

But behind the beaming boy and the plastic Daleks, a shadow was already falling. Each passing year, more and more of the things we bought came not from the West but from the factories of the East.

First came Japan, which made the toys I loved; and as Japan, with bewildering speed, moved up the ladder to transistor radios and cars, new Asian manufacturers – South Korea, Taiwan and then China – filled the rungs it vacated. Japan’s economy outgrew Britain’s in 1963, and by 1967 was second only to America. Japan stayed in that spot until this summer, when China displaced it.

How did things change so much?
---------

In the 20th Century the American-dominated global economy drew in the resources of Asia just as Britain had once drawn in those of America.

Japan cashed in first, doubling its share of world production between 1960 and 1980. Next came the so-called Asian Tigers: the economies of Hong Kong, Singapore, South Korea and Taiwan.

And then, most spectacular of all, the People’s Republic of China. Its share of world production tripled in the 30 years after Mao’s death in 1976; rare indeed is the Westerner who does not now put on at least one piece of made-in-China clothing every morning.

Chinese industry has sucked 150 million countryfolk into cities – the biggest migration in history. According to Businessweek magazine, ‘the China price’ now represents ‘the three scariest words in the English language’.

So, whatever the analysts may think, the West’s global dominance and ongoing crisis have precious little to do with flukes, great men, or bungling idiots – and nothing at all to do with racial or cultural superiority.

Rather, they are the entirely predictable outcomes of the complicated interaction of geography and social development across the last 15,000 years – an interaction which, in just the past 200 years, has given the West unprecedented wealth and power. And which, within our own lifetimes, has begun tilting the playing field in China’s favour.

Things will never be the same again.



Read more: http://www.dailymail.co.uk/news/article-1323200/Western-society-rules-longer.html#ixzz13K5CZqSm

Riaz Haq said...

Here's a WSJ report on G20 meeting in Seoul and concerns about the effect of the planned $600 billion puschase of teasuries by Fed on the value of the US dollar:

As originally conceived, at least by the U.S., this G-20 gathering was a chance to push China to allow its currency to rise more quickly. U.S. officials want countries with large surpluses, such as China, to consume more domestically and export less, which would help America save more domestically and export more.

But Germany and China turned the tables, in effect accusing the Fed of driving down the value of the dollar, particularly through its plan to buy $600 billion of government bonds and other assets in coming months. U.S. officials replied that stimulating U.S. growth is in everyone's interest and that a weaker dollar is a byproduct of their efforts, not the objective.

Although China led the criticism, it isn't pushing to have the Seoul communiqué single out the Fed, a Chinese official said.

Officials in emerging markets say the capital inflows they are seeing mean they can't wait for international accords. With economies in the U.S., Japan and Europe feeble and their interest rates low, faster-growing nations like Brazil are attracting a frenzy of investment.

The capital inflows can create asset bubbles and overvalued currencies or stock markets, primed to plunge the moment investors decide to move their money elsewhere. Overvalued currencies also mean exporters lose their edge because their goods are costlier abroad.

Some emerging nations are embracing once-taboo policy prescriptions to restrict inflows, the latest example of the tensions generating by economic imbalances between rich and developing economies.

The IMF, which once criticized capital controls, now gives its blessing to measures like taxing foreign bond investments, and cites the success of such measures during the Asian financial crisis of the late '90s. The IMF and other keepers of the economic orthodoxy still emphasize the benefits of foreign direct investments, however.

Brazil, which floated its exchange rate in 1999, is a prime example of the predicament. With 7% growth rates, Brazil was already attracting foreign investment. Its 10.75% overnight interest rates have made it a target of investors who borrow where interest rates are near zero, such as the U.S. and Japan, and deposit it where rates are high. This "carry trade" helps explain why Brazil's real has risen around 35% against the U.S. dollar since the start of last year.

Riaz Haq said...

Here is an interesting analysis by Eric Margolis of the consequenes of weak US economy:

One day, the king of ancient Babylon summoned his treasury overseer and exclaimed, “I need more money to wage war on those Hittite terrorists! “I looked in the great treasure chest and it’s nearly empty. There are hardly any gold coins left,” he thundered.
“Oh Light of the Euphrates,” groveled his terrified minister, “we are out of gold. Your wars have become too expensive.”

“But I have a solution, your celestial greatness. We will quietly trim the amount of gold in our imperial gold coins to make them go further. No one will notice.”

Fast forward to Washington, 2010. It’s no longer called “clipping coins.” Today, the name for debauching a nation’s currency is called “quantitative easing(QE),” but it’s still the same old fraud committed by financial flim-flam men.

Washington is flooding financial markets with $600 billion of worthless dollars, hoping a rising tide of Monopoly money will somehow lift America out of recession. The Fed’s first QE effort was a fizzle.

The US government is stoking worldwide inflation in order to lower its outstanding debt by repaying creditors with depreciated dollars. The rest of the world is boiling angry at Washington.

Just before last week’s G20 economic summit in South Korea, China’s state credit agency publicly downgraded America’s credit rating and questioned US leadership of the world’s economy.

In an unprecedented, stinging rebuke, China scolded Washington for “deteriorating debt repayment capability,” and predicted quantitative easing would lead to “fundamentally lowering the national solvency.”

Wow! This was a real slap in the face heard around the globe. China is the largest holder of US government debt. I remember the day when New York financiers used to sneer at iffy stock or bond issues as, “Chinese paper.” Now, it’s “American paper.” How the world has turned.

Washington has been blasting China for manipulating its currency to keep the value low – which is quite true. Embarrassingly, Germany and Brazil just accused the US of being as big a currency manipulator as China – which is also quite true.

A depreciated dollar boosts US exports and hurts nations exporting to the US. Economists call it, “beggar thy neighbor,” a destructive trade practice that played a key role in the 1930’s world depression.

This money flood is eroding the value of the dollar, the world’s premier medium of exchange. In the past two months, the US dollar has dropped 6% against other major currencies. Frightened investors are piling into gold, now up 17% in 60 days.

The Obama administration, just “shellacked” by voters in mid-term elections, and desperate to lower unemployment, is gambling more debt shock therapy will spark the economy back to life. But massive, unsustainable debt caused the US financial meltdown in 2008.....

Masadi said...

Riaz Sahib what do you make of these numbers, they are quite baffling:

According to CIA World Factbook, tiny Hong Kong has $873 billion FDI stock abroad while China has $279 Billion and India $90 Billion, while the U.S. has $3597 Billion invested abroad (in owned corporations and securities abroad), and yet we hear about the China power house that will bring the U.S. to its knees!

Riaz Haq said...

Msasadi:"Riaz Sahib what do you make of these numbers, they are quite baffling"

As long as the US dollar is the world's reserve and trade currency and the US treasury can print as many as it wants, the US position is secured.

The key question is how long does the rest of world accept the status quo.

Masadi said...

Riaz sahib do you have some data on what % of global trade is accounted for by the U.S. and what % of that is between the U.S and its Euro(Japan etc, so called developed) counterparts? Please provide with source if you can.

Thank you sir.

Riaz Haq said...

Here's some WTO data on world trade:

The value of world merchandise exports fell 23% to $12.15 trillion in 2009, while world commercial services exports declined 13% to $3.31 trillion (Table 3). This marked the first time since 1983 that trade in commercial services declined year on year.

Transport services recorded the largest drop among service categories, followed by travel and other commercial services (Table 4). The drop in transport services is unsurprising as this category is closely linked to trade in goods. (For more detailed information on trade by country and region, including leading exporters and imports of merchandise and commercial services, see the appendix tables below.)

Appendix Table 3 confirms that China has now overtaken Germany as the world’s leading merchandise exporter, accounting for almost 10% of world exports, and is second to the United States on the import side. The US share in world merchandise imports is 13% compared to China’s 8%.



Here's an excerpt from a Forbes issue last year:

"But trade volumes were still 7.0% below their 2008 peak as of early 2010, according to the CPB Netherlands Bureau for Economic Policy Analysis. Global trade recovery has lagged that of global GDP and industrial production due to feeble demand in the U.S. and E.U. (27), which account for about 50% of global imports. This in turn has affected intra-E.U. trade, which accounts for two-thirds of total E.U. trade, as well as intra-Asia trade, 40-50% of which is re-exported to the U.S. and Europe."

US exports last year were $1.8 trillion, and its imports added up to $2.3 trillion, with an annual trade deficit of $500 billion, according to the Wall Street Journal.

Riaz Haq said...

Here's a report of a Swiss journalist forecasting doomsday for US dollar:

The United States greenback has become the biggest speculative bubble in history and will soon go the way of the dinosaurs, warns Swiss financial journalist Myret Zaki.

In her latest book, Zaki says that the euro’s future is much brighter and that attacks against the currency are just a smokescreen aimed at hiding the collapse of the American economy.

“The collapse of the American dollar… is inevitable. The world’s biggest economy is nothing but an illusion. To produce $14,000 billion of nation income, the United States has created over $50,000 billion of debt that costs it $4,000 billion in interest payments each year.”

There can be little doubt about Myret Zaki’s opinion of the American dollar and economy, which she considers technically bankrupt, an opinion she backs up in her new book, La fin du dollar (The end of the dollar).

Over the past few years, she has become one of Switzerland’s best known business journalists, with a book about the UBS debacle in the US and another about tax evasion.

swissinfo.ch: You say in your book that the end of the dollar will be the major event of the 21st century. Aren’t you painting the situation more catastrophic than it really is?

Myret Zaki: I realise that predicting such a huge event when there are no tangible warning signs of a violent crisis may seem all doom and gloom. But I reached those conclusions based on extremely rational and factual criteria.

More and more American authors believe that their country’s monetary policy will lead to such a situation. It is simply impossible that it will happen any other way.

swissinfo.ch: It’s not the first time the end of the dollar has been foreseen. What makes the situation different in 2011?

M.Z.: It’s true that it has been announced since the 1970s. But never have so many different factors come together, letting us fear the worst. American debt has reached a record level, the dollar is at a historic low against the Swiss franc and most new American bond issues are being bought by the US Federal Reserve. Other central banks have also been criticising the US, creating a hostile front against American monetary policy.

swissinfo.ch: Besides the end of the dollar, you are also announcing the end of the US as an economic superpower. Isn’t America simply too big to fail?

M.Z.: Everybody has an interest in the US economy staying afloat, so everyone is in denial for the time being. But it won’t last forever. No one will be able to save the Americans. They will have to carry the burden of their bankruptcy alone.

They can expect a very long period of austerity, which has already begun. Forty-five million Americans have already lost their homes, 20 per cent of the population is out of the economic system and is not spending, while a third of states are bankrupt. No-one is investing their money in the country any more. Everything is built on debt.
-----------
swissinfo.ch: What will happen if the dollar collapses as predicted?

M.Z.: Europe is the planet’s biggest economic power and it has a strong reference currency. Unlike the United States, it is also expanding. In Asia, the Chinese yuan will become the reference and China is Europe’s biggest ally.

It has an interest in supporting a strong euro so it can diversify its investments. China also needs an ally within the World Trade Organization and the G20 so it can avoid a re-evaluation of its currency. Today, Europe and China are two gravitational forces that are attracting two former US allies, Britain and Japan....

Riaz Haq said...

Pakistan and China on Friday signed a currency swap arrangement to promote bilateral trade and investment and strengthen financial cooperation, according to an Express Tribune report:

State Bank of Pakistan (SBP) and People’s Bank of China (PBC) signed the currency swap arrangement in Islamabad, announced the central bank. The agreement was signed by SBP Governor Yaseen Anwar and PBC Deputy Governor DU Jinfu.

This is the second currency swap agreement that the government has signed with any country. Earlier, Pakistan and Turkey inked a similar arrangement with an option to trade in each other’s currencies equivalent to $1 billion.

An official handout said the bilateral currency swap arrangement has been concluded in 10 billion Chinese yuan and 140 billion Pakistani rupees. The programme will expire in three years, but can be extended with mutual consent. Pakistani importers can pay for Chinese goods in local currency.

“We expect that bilateral trade and investment will grow between Pakistan and China as a result of this agreement, further augmenting economic ties between the two countries,” it added. This agreement will contribute significantly to further strengthening close and special relationship between the two countries.

The currency swap agreement will give a positive signal to the market on availability of the other country’s currency on the onshore market, said the central bank, adding as a result it will promote bilateral trade denominated in Chinese yuan and Pakistani rupee.

Arrangement raises questions

However, industry insiders suspect that China will later convert the arrangement into a loan as it has expressed little interest in trading in Pakistani currency. On the loan, it can charge mark-up at a rate more than the Shanghai interbank market rate.

The insiders said when Pakistan proposed Beijing to sign the currency swap agreement China refused to deal in Pakistani currency. They said Pakistan had also proposed China to buy its treasury bills with the swap money, but Beijing refused.

They said Pakistani importers may still have to pay in Chinese currency despite signing of the swap arrangement.

Despite repeated attempts, State Bank officials were not available for comment.

Total volume of bilateral trade was $7.4 billion last year, tilted in favour of China. Pakistan’s exports to China stood at $1.6 billion compared to imports worth $5.8 billion, showing a deficit of $4.2 billion, said the commerce ministry.

http://tribune.com.pk/story/311206/pakistan-china-sign-currency-swap-agreement/

Riaz Haq said...

Here's Washington on Pak-China currency swap deal:

China announced a currency swap with Pakistan on Saturday in a new step to gradually expand use of its tightly controlled yuan abroad.

Beijing has begun allowing limited use of yuan in trade with Hong Kong and Southeast Asia in a move that could help to boost exports. It has signed swap currency deals with central banks in Thailand, Argentina and some other countries.

The Chinese central bank said it agreed Friday with its Pakistani counterpart to swap 10 billion yuan ($1.6 billion) for 140 billion Pakistani rupees. It said the money would promote investment and trade but gave no details of how it would be used.

Such agreements give central banks access to each other’s currency but commercial banks still need to create systems to issue letters of credit and handle other transactions in those currencies before companies can use them.

The United States and other trading partners complain Beijing’s controls on the yuan keep it undervalued, giving its exporters an unfair price advantage and hurting foreign competitors at a time when the global economy is struggling.

Some American lawmakers are demanding punitive tariffs on Chinese goods if Beijing fails to move more quickly in easing its controls.

Expanded use of the yuan abroad would reduce costs for Chinese traders who do most of their business in dollars and euros. It also might increase the appeal of Chinese goods for foreign buyers who have yuan to spend.

Beijing also has created a market for yuan-denominated bonds in Hong Kong. It said last week that some foreign investors who obtain yuan abroad would be allowed to invest them in China’s stock markets.

The Chinese central bank announced a currency swap agreement with Thailand this week and has carried out swaps with Argentina and Kazakhstan. It has pledged to lend yuan to some other countries’ central banks in case of emergencies.

Chinese leaders say they plan eventually to allow the yuan to trade freely abroad but analysts say it might be decades before that is completed.


http://www.washingtonpost.com/business/china-announces-currency-swap-with-pakistan-in-new-move-to-expand-yuans-use-abroad/2011/12/23/gIQAJ8HlEP_story.html

Riaz Haq said...

The UK Treasury has announced plans to make London the leading international centre for trading China's currency, the yuan, also known as the renminbi, according to BBC:

"London is perfectly placed to act as a gateway for Asian banking and investment in Europe," said UK Chancellor George Osborne.

Bankers say the plans could bring billions of pounds into the City.

China has been gradually relaxing strict controls on the value of its currency and on flows of capital.

Mr Osborne, who arrived in Hong Kong on Monday at the start of a visit to Asia, said he would be holding talks "on establishing London as the new hub for the renminbi market as a complement to Hong Kong".

The City, he said, as the world's largest centre for foreign exchange, was "uniquely placed to assist in the development of this exciting market".
Major currency

According to Treasury officials, the new partnership with Hong Kong puts London in pole position to be the major centre for trading the Chinese currency outside China and Hong Kong.

An intergovernmental agreement that London and Hong Kong would work together on yuan trading was reached last summer.

Following the relaxation of strict state controls, the yuan is set to become a major, globally-traded currency, in keeping with China's status as the world's second biggest economy.

A recent report by the Chatham House think tank forecast that trade transactions settled in the currency would reach around a trillion dollars (£650bn) by 2020.


http://www.bbc.co.uk/news/business-16571765

Riaz Haq said...

Here's an Asia Times piece on the importance of GCC Arabs to US power and US dollar:

There's no way to understand the larger-than-life United States-Iran psychodrama, the Western push for regime change in both Syria and Iran, and the trials and tribulations of the Arab Spring(s) - now mired in perpetual winter - without a close look at the fatal attraction between Washington and the GCC. [1]

GCC stands for Gulf Cooperation Council, the club of six wealthy Persian Gulf monarchies (Saudi Arabia, Qatar, Oman, Kuwait, Bahrain and the United Arab Emirates - UAE), founded in 1981 and which in no time configured as the prime strategic US backyard for the invasions of Afghanistan in 2001 and Iraq in 2003, for the long-drawn battle in the New Great Game in Eurasia, and also as the headquarters for "containing" Iran.

The US Fifth Fleet is stationed in Bahrain and Central Command's forward headquarters is based in Qatar; Centcom polices no less than 27 countries from the Horn of Africa to Central Asia - what the Pentagon until recently defined as "the arc of instability". In sum: the GCC is like a US aircraft carrier in the Gulf magnified to Star Trek proportions.

I prefer to refer to the GCC as the Gulf Counter-revolution Club - due to its sterling performance in suppressing democracy in the Arab world, even before Mohammed Bouazizi set himself on fire in Tunisia over a year ago.

Cueing to Orson Welles in Citizen Kane, the Rosebud inside the GCC is that the House of Saud sells its oil only in US dollars - thus the pre-eminence of the petrodollar - and in exchange benefits from massive, unconditional US military and political support. Moreover the Saudis prevent the Organization of Petroleum Exporting Countries (OPEC) - after all they're the world's largest oil producer - to price and sell oil in a basket of currencies. These rivers of petrodollars then flow into US equities and Treasury bonds.

For decades virtually the whole planet has been held hostage to this fatal attraction. Until now.

Gimme all your toys
-----------------
It's true that whoever dominates the GCC - with weapons and political support - projects power globally. The GCC has been absolutely key for US hegemony within what Immanuel Wallerstein defines as the world system.

Yet let's take a look at the numbers. Since last year Saudi Arabia is exporting more oil to China than to the US. This is part of an inexorable process of GCC energy and commodity exports moving to Asia.

By next year foreign assets held by the GCC could reach $3.8 trillion with oil at $70 a barrel. With all that non-stop "tension" in the Persian Gulf, there's no reason to believe oil will be below $100 in the foreseeable future. In this case GCC foreign assets could reach a staggering $5.7 trillion - that's 160% more than in pre-crisis 2008, and over $1 trillion more than China's foreign assets.

At the same time, China will be increasingly doing more business with the GCC. The GCC is increasingly importing more from Asia - although the top source of imports is still the European Union. Meanwhile, US-GCC trade is dropping. By 2025, China will be importing three times more oil from the GCC than the US. No wonder the House of Saud - to put it mildly - is terribly excited about Beijing.

So for the moment we have the pre-eminence of NATOGCC military, and USGCC geopolitically. But sooner rather than later Beijing may approach the House of Saud and quietly whisper, "Why don't you sell me your oil in yuan?" Just like China buying Iranian oil and gas with yuan. Petroyuan, anyone? Now that's an entirely new Star Trek.


http://www.atimes.com/atimes/Middle_East/NA20Ak02.html

Riaz Haq said...

Here's a NY Times blog post on BRICS summit in Delhi:

The leaders of Brazil, Russia, India, China and South Africa announced on Thursday that they would investigate establishing a system that would allow them to bypass the dollar and other global currencies when trading among themselves.

The leaders of the BRICS group of nations also announced that they would explore setting up an alternative to the IMF and the World Bank that would loan to developing countries and bypass the U.S.-European axis of power that has dominated global economic affairs since World War II.

In a story on the stakes and the obstacles before the BRICS nations, our colleague Jim Yardley explained that the group had not accomplished very much before this, their fourth summit meeting, in New Delhi. But Jim wrote that they were expected to come away with at least one concrete product this time:

They are expected to announce agreements that would enable the nations to extend each other credit in local currencies while conducting trade, sidestepping the dollar, a substantive move if not yet the kind of game-changing action once expected from BRICS.

But that raises the questions:

Do you expect the BRICS to change the global game? What is their potential as a bloc or an alliance? Indeed, are they a bloc at all, or just a list of countries whose growing economic might symbolizes the rise of a world where the United States is no longer solely dominant?

The five countries have very different agendas and forms of government. Does this make forming any kind of unified policy or outlook unlikely? Are they really just a smart catchphrase from a Goldman Sachs economist to encapsulate changing global economics, as Walter Ladwig, a visiting fellow at the Royal United Services Institute, argued in the Opinion pages of the IHT?

The French daily Le Figaro believes that “little by little, the BRICS are asserting themselves.” To what end, it does not say.

In its analysis of the summit meeting, the Times of India concentrates on the group’s political statements urging negotiated resolutions of the conflict in Syria and the West’s nuclear standoff with Iran.

Reuters concentrates on the lecturing and hectoring that BRICS leaders delivered to the profligate West, quoting the customary end-of-summit joint declaration: “It is critical for advanced economies to adopt responsible macroeconomic and financial policies, avoid creating excessive global liquidity and undertake structural reforms to lift growth that create jobs.”


http://rendezvous.blogs.nytimes.com/2012/03/29/what-do-you-think-the-brics-can-build/?scp=1&sq=BRICS&st=cse

Riaz Haq said...

Here's a Reuters' report on Pakistani central bank buying Chinese government bonds:

Pakistan will join a growing list of central banks that will invest in China's interbank market as the world's second-largest economy opens its capital markets.

The People's Bank of China announced on Monday that it had signed an agreement with the State Bank of Pakistan to help Pakistan invest in its local debt market, without providing details about the size of the investment programme.

China has allowed foreign central banks to invest in its domestic interbank bond market since 2010 as part of efforts to widen investment avenues for foreign yuan asset holders and promote the international use of the Chinese currency.

China and Pakistan signed a three-year currency swap deal worth 10 billion yuan ($1.60 billion) in December 2011 and companies in the two countries are encouraged to accept export and import bills in Chinese yuan.

The central banks of Japan, South Korea, Singapore, Thailand, Hong Kong and Indonesia are among those who invest in China's bonds onshore.

Besides central banks, China also allows yuan clearing banks in Hong Kong and Macau and foreign banks that help settle cross-boarder trade in yuan to invest in its interbank bond markets.

($1 = 6.2538 Chinese yuan)


http://uk.reuters.com/article/2012/10/22/uk-china-pakistan-bonds-idUKBRE89L0A620121022

HopeWins Junior said...

RH: "Yuan to replace USD in world trade"

---

Here are some simple explanations of why that will never happen anytime in the forseeable future.

http://alturl.com/r66xv

http://alturl.com/d23pn

Riaz Haq said...

China is the biggest trading partner of more nations than the US, reports AP:

In just five years, China has surpassed the United States as a trading partner for much of the world, including U.S. allies such as South Korea and Australia, according to an Associated Press analysis of trade data. As recently as 2006, the U.S. was the larger trading partner for 127 countries, versus just 70 for China. By last year the two had clearly traded places: 124 countries for China, 76 for the U.S.



In the most abrupt global shift of its kind since World War II, the trend is changing the way people live and do business from Africa to Arizona, as farmers plant more soybeans to sell to China and students sign up to learn Mandarin.

The findings show how fast China has ascended to challenge America’s century-old status as the globe’s dominant trader, a change that is gradually translating into political influence. They highlight how pervasive China’s impact has been, spreading from neighboring Asia to Africa and now emerging in Latin America, the traditional U.S. backyard.

Despite China’s now-slowing economy, its share of world output and trade is expected to keep rising, with growth forecast at up to 8 percent a year over the next decade, far above U.S. and European levels. This growth could strengthen the hand of a new generation of just-named Chinese leaders, even as it fuels strain with other nations.
-----------


The United States is still the world’s biggest importer, but China is gaining. It was a bigger market than the United States for 77 countries in 2011, up from 20 in 2000, according to the AP analysis.

The AP is using International Monetary Fund data to measure the importance of trade with China for some 180 countries and track how it changes over time. The analysis divides a nation’s trade with China by its gross domestic product.

The story that emerges is of China’s breakneck rise, rather than of a U.S. decline. In 2002, trade with China was 3 percent of a country’s GDP on average, compared with 8.7 percent with the U.S. But China caught up, and surged ahead in 2008. Last year, trade with China averaged 12.4 percent of GDP for other countries, higher than that with America at any time in the last 30 years.

Of course, not all trade is equal. China’s trade is mostly low-end goods and commodities, while the U.S. competes at the upper end of the market


http://www.boston.com/news/world/asia/2012/12/02/impact-china-surpasses-top-global-trader/gwI1PLvAcDPSo90KjJgTUM/story.html

Riaz Haq said...

Few emerging nations in modern times have made the leap from assembler to inventor, copycat to innovator. For China, this would mean an overhaul of its economy. Many of the products China manufactures today aren't really very Chinese at all. Apple iPads might be exported from assembly lines based in China, but the Chinese themselves do little more than piece them together. The core technologies come from elsewhere, and even the factories are run by foreign firms (like Taiwan's Foxconn). For Chinese companies to compete with the world's best, they have to create products of their own that have a similar impact as the iPad. That requires a set of skills and know-how they don't yet possess and a level of managerial expertise they haven't yet developed. Economist William Janeway, author of the book Doing Capitalism in the Innovation Economy, says what has gotten China thus far won't be enough for the next step: "It is hard to start the process of pushing the frontier with [such] practices and policies." http://content.time.com/time/magazine/article/0,9171,2156209,00.html