The finance ministers’ meetings in Istanbul over the weekend revealed a deep crack in the veneer of harmony over the global financial crisis that the world’s leading economies have been seeking to present to the world. Ministers from the seven largest rich nations urged China to take steps to strengthen the yuan, a move Beijing has resolutely declined to undertake since the crisis broke. Yi Gang, a Peoples Bank of China vice governor, who was also in Istanbul for one of the plethora of finance-related meetings, made it clear that wasn’t going to change anytime soon: Beijing’s policy would continue to emphasize stability for now, for all the intention it says it eventually has to free up the yuan, which its critics now hold is undervalued.
This now sets up an interesting confrontation in the foreign-exchange markets. The U.S. dollar has fallen by 15% on a trade-weighted basis over the past six months. The G7 has as good as said it will not intervene to prevent it continuing to decline. China is not going to let that happen, at least not against its own currency: This commentary on Xinhua about what it calls the “G7’s RMB complex” gives a flavor of its mood.
Beijing can manage holding the line (the dollar/yuan rate has barely budged since the crisis began) but it will have to deal with the consequent hot money and inflation implications even as it faces down the forex traders.
Long-term Washington wants and needs a strong dollar, especially if inflation becomes not just a clear but also a present danger as the economy recovers. For now, at least, it is in the U.S.’s interest, to keep its currency low to shore up exports, particularly those of its beleaguered manufacturers, and to lower the value of the debt that the U.S. Treasury is piling up. Similarly, it is in China’s near-term interest to keep its currency stable (for which read low) to shore up exports, particularly from its beleaguered manufacturers, and to protect the value of the U.S. Treasury debt it is piling up. Though, of course, neither would admit it.
You don’t have to peel back a very thick layer of agreement at this weekend’s prep meeting in London of finance ministers for the G-20 Pittsburgh summit to see how much difference remains between the U.S., Europe and China. Set aside for the moment the more-or-less consensus on regulation of the banking industry (which will get frayed once national regulators start implementing it in detail). It is in the short- and long-term management of the global economy that the true differences lie.
The U.S., as the recovery laggard, wants stimulus programs to continue worldwide. Europe and China see much of that part of the work of economic recovery done, and are much more ready than the U.S. to talk about how to unwind it. The U.S. also needs the two big export-led economies, China and Germany, to reorient towards domestic consumption and to take on the role America has long played of being the export market of last resort. That will happen neither quickly nor easily.
This weekend’s meeting also ducked the thorny question of how to give China and other developing nations, notably its fellow BRICs, Brazil, Russia and India, greater say in the management of the world economy. April’s G-20 meeting set the start of 2011 as the deadline for proposals to this end. Here the U.S. and China can make common cause: to reduce European nations’ voting power at the International Monetary Fund, suggesting 5% and 7% cuts respectively. Somehow typically, even here they disagree.
The three countries that account for three quarters of east Asia’s economy say they must be the engine of growth for the world economy. China, Tokyo and South Korea agreed at their first three way summit to cooperate to counter the global slowdown. They won’t raise new barriers to trade or investment over the next year, and will push domestic demand and infrastructure spending. Details from Xinhua here.
More interestingly, ahead of the meeting, South Korea agreed currency swaps with China and Japan, a move designed to head off a potential foreign exchange crisis as South Korea sees its currency reserves dwindle.
China Law Blog’s Steve Dickinson moderated a panel at the 2008 Maritime Conference in Wuhan that highlighted another industry, ship building and ship repair, that has had the wind taken out of its sails (sorry, irresistible) by the global financial crisis.
The money paragraphs:
Steve: It therefore appears China’s ship building/ship repair industry will be heavily impacted over the next 18 months, with few companies surviving. Answer: The audience did not answer. The presenters agreed that this seems to be a reasonable conclusion.
It is not clear to me whether the Chinese industry will wake up to the situation in time to resolve the critical issues facing the industry. In the interim, however, it appears there will be some very good deals on new vessels from Chinese yards as customers begin to abandon existing contracts. I also think there will be very good deals on Chinese shipyards, many of which are state of the art.
Earlier this month China said it would stop issuing licenses for new ship yards, which sprung up in the easy money boom years like fungi after rain as China’s ravenous appetite for commodity imports boosted demand for ships to carry them. During the first half of 2008, China yards had at least 21 vessels canceled as a glutted market started to cool. As Bloomberg reports, new orders worldwide have collapsed since then, with the onset of the credit crisis drying up financing; Chinese yards’ new orders were down 60% in the first 10 months of this year. China Daily has more detail on the sudden downturn.
China holds more than a third of the global shipbuilding order book. So the fate of its yards is a key question, particularly for the dry bulk shipping market, which found Chinese yards ready to take on the work of building, converting and repairing smaller dry bulk vessels spurned by the larger yards.
All more bad news for China’s hard-pressed steel makers, too.
Prime Minister Wen Jiabao has thrown China’s weight behind European calls for a new global financial regulatory regime. Speaking after the two-day summit of European and Asian leaders in Beijing, Wen said he would back the French-led initiative at the summit of 15 world leaders that U.S. President George W. Bush has called for next month in Washington to discuss the financial crisis. Reuters reports Wen as adding that China would actively participate in the Nov. 15 summit with a “responsible and pragmatic” attitude.
No surprise perhaps that China would favor more rather than less regulation, nor that it would support any multilateral regime that would rein in the U.S. and U.S. financial institutions with global reach, and Wen’s public support for Sarkozy’s proposal may be a quid pro quo for the French president getting him a seat at the table; Bush had first tried to dodge a summit, and then to restrict attendance to G8 leaders. But Wen’s remarks also mark a subtle shift from China’s position that its main role in helping to resolve the financial crisis would be to sustain high growth.
A still semi-closed financial system has isolated China in large degree from the turmoil in global financial markets. But it is not immune from the potential knock-on effects of a serious economic slowdown, or worse, in it key American and European export markets. So it is making a virtue of necessity by saying it will seek to expand its internal market, the main policy outcome of a four-day meeting of the Party’s Central Committee.
Making the economy more oriented to domestic demand is necessary anyway for the long-term development of the economy. Plus the party’s top bosses can twin the policy with a plan to double rural incomes by 2020, a political imperative for a leadership threatened by the widening wealth gap between the cities and the countryside.