G-20 is over but the acrimony is
not. Bloomberg reports China
Assails Monetary Easing, Citing Inflation, Bubble Risks
renewed an attack on quantitative easing, citing the
risk of increased prices in emerging economies, a day after the Group of 20
nations said the markets can adopt regulatory steps to cope.
China “doesn’t support” the monetary easing that causes
“imported” inflation in developing countries, Commerce Minister
Chen Deming told a forum today in Macau, a Chinese special autonomous region.
The capital inflows increase the risk of “asset bubbles,” Jin Zhongxia, deputy director general of the international
department at the People’s Bank of China, said at the same forum.
“Major reserve-currency issuing countries excessively print money to
get out of their own economic difficulties, posing a policy dilemma for
emerging economies,” Jin said in Macau today, without naming any
countries. “That will impose greater pressure on capital inflows,
bigger bubbles in asset markets and inflationary pressure.”
Capital flows into emerging markets are running at $575 billion a year, 20
percent higher than before the world financial crisis, Goldman Sachs Group Inc.
said in September. The U.S. dollar has weakened over the past three months
against all 16 major market currencies tracked by Bloomberg.
Steps to impose restrictions on capital have increased as emerging-market
currencies strengthened, with Brazil’s real climbing 21 percent against
the dollar in the past 18 months, Chile’s peso up 18 percent,
Thailand’s baht rising 16 percent and South Korea’s won
appreciating 10 percent.
China plans to boost cross-border yuan-denominated
trade with other countries 10-fold to 20 percent of total trade, or more than
2.5 trillion yuan, to reduce reliance on a few
reserve currencies, Jin said, without specifying a target date.
More Regional Yuan Trading Proposed
Echoing the sentiment of Jin Zhongxia, Thailand
calls on Asia to use yuan in trade.
Prime Minister Abhisit
Vejjajiva, fearful of the effects of the soaring
baht due to massive capital inflows, has proposed the use of the Chinese yuan as a major regional trading currency.
"The G20 did not make any progress on the matter and it is difficult to
get the United States and China to express their clear stances on the issue.
But what we can do is try to cooperate in the region and reduce the impact
from currency volatility," Mr Abhisit said before leaving for the Asian Games in China
and an Asia-Pacific Economic Cooperation (Apec)
leaders' meeting in Yokohama, Japan, this weekend.
Only vague "indicative guidelines" were set for measuring
imbalances between their multi-speed economies. Leaders called a timeout to
let tempers cool and left details to be discussed in the first half of next
Mr Abhisit echoed a call
made by the Asian Development Bank (ADB) to use China's yuan
as a major trading currency in the region to reduce the impact of currency
volatility, especially linked to the weakening of the US dollar. He said he
was the one who proposed the idea to the ADB.
Donald Tsang, chief executive of the Hong Kong Special Administrative Region,
said the regional private sector should brace for high volatility in the
currency and securities markets as economies were increasingly linked.
The most pronounced problem to result from capital inflows, stemming from US
funds seeking returns in Asia, would be an unsustainable rise in asset
prices, Mr Tsang said.
"The imbalance is unique. I have never seen it in my working life,"
An Attack on US$ Hegemony?
Is this the start of a the Yuan as a reserve
currency? China may want that, but it hard to take China serious unless and
until it is willing to float the Yuan.
The irony in the proposal by Jin and Abhisit is
they are proposing a reserve currency that is still tied to the dollar.
Moreover, there are other several constraints, but first consider this UN
UN Proposes to Scrap Dollar as Sole Reserve Currency
A UN Report says Scrap dollar as sole
A new United Nations report
released on Tuesday calls for abandoning the U.S. dollar as the main global
reserve currency, saying it has been unable to safeguard value.
But several European officials attending a high-level meeting of the U.N.
Economic and Social Council countered by saying that the market, not
politicians, would determine what currencies countries would keep on hand for
"The dollar has proved not to be a stable store of value, which is a
requisite for a stable reserve currency," the U.N. World Economic and
Social Survey 2010 said.
The report says that developing countries have been hit by the U.S. dollar's
loss of value in recent years.
"Motivated in part by needs for self-insurance against volatility in
commodity markets and capital flows, many developing countries accumulated
vast amounts of such (U.S. dollar) reserves during the 2000s," it said.
The report supports replacing the dollar with the International Monetary
Fund's special drawing rights (SDRs), an international reserve asset that is
used as a unit of payment on IMF loans and is made up of a basket of
"A new global reserve system could be created, one that no longer relies
on the United States dollar as the single major reserve currency," the
U.N. report said.
Russia and China have also supported the idea.
But Paavo Vayrynen,
Finland's Foreign Trade and Development Minister, told reporters that he
doubted it was possible "to make any political or administrative
decisions how to formulate the currency system in the world."
The Market Dictates Reserve Currencies
Short of reestablishing gold as a mechanism for forcing trade balances to be
kept in sync, the whole idea of establishing new reserve currencies by decree
or agreement is potty.
How can you dictate what currencies a country should hold, or if they hold
any at all? Does one size fit all? Look at the acrimony out of G-20. Think
there is going to be an agreement on using SDRs?
Reserve currencies cannot be set by decree or even by agreement. There are
market constraints and mathematical constraints.
Function of Math
Some maintain that commodities are priced in dollars so dollars must be held.
Nonsense. To the extent that countries trade with each other and not the US,
there is no need to hold dollars at all. The Yen is freely convertible to
dollars so is the Euro. One does not need dollars to buy oil or copper.
Currencies are fungible.
With a couple mathematical caveats, any country is free to hold whatever it
One mathematical constraint is there are not enough New Zealand dollars (or
Australian dollars or Canadian dollars, etc) to go around for everyone to
expect to buy oil in any of those currencies.
However, there are enough New Zealand dollars to go around to
support all existing trade with New Zealand.
Why Are Countries Piling Up US$?
The second mathematical constraint relates to trade imbalances. The US runs a
trade deficit as well as a budget deficit partially financed by foreigners. Our
dollars go overseas, month after month, year after year. The reserves pile up
over time as a function of basic math.
To the extent Asian countries trade with China, then sure, a buildup of Yuan
reserves is possible. However, given the US trade deficit dwarfs the trade
deficit of every other country, it will be tough mathematically to make a
dent in the buildup of US dollar reserves relative to other reserves.
Sure there will be periods of fluctuations in reserves are there are now, but
the trend towards higher reserve levels is essentially mathematically forced
by trade imbalances.
In addition to trade imbalances, one must also factor in hot money inflows of
US$ into China, Brazil, and other places. Those countries hold reserves to
accommodate an eventual exodus of hot dollar inflows. That is the third
Note that Bernanke's QE has had such an impact that countries are resorting
to capital constraints to stop the inflight of
Mathematically, whoever has the biggest trade deficit and hot
money outflows on a sustained basis will see the biggest amount of reserves
pile up elsewhere. It's as simple as that. Thus, all this talk about SDRs and
using the Yuan or the Yen as major reserve currencies is complete silliness.
As it stands now, any reserve currency changes will be dictated by math, not
Want to cure global trade imbalances? It's quite easy. Go back to the gold
standard and have the political will to balance the budget. Nothing else will work.
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