The currency wars have become the current-account truce. G-20 finance ministers and central bankers meeting in South Korea last weekend took the high road on global imbalances in preference to the low road of competitive devaluations that leads nowhere good. Action point six of six mainly mom-and-Apple-Pie commitments listed in the communiqué issued after the meeting said the finance ministers would:
Strengthen multilateral cooperation to promote external sustainability and pursue the full range of policies conducive to reducing excessive imbalances and maintaining current account imbalances at sustainable levels. Persistently large imbalances, assessed against indicative guidelines to be agreed, would warrant an assessment of their nature and the root causes of impediments to adjustment as part of the Mutual Assessment Process, recognizing the need to take into account national or regional circumstances, including large commodity producers. To support our efforts toward meeting these commitments, we call on the [International Monetary Fund] to provide an assessment as part of the MAP on the progress toward external sustainability and the consistency of fiscal, monetary, financial sector, structural, exchange rate and other policies.
In other words, the U.S. will cut its deficits and China will increase domestic demand to reduce its surpluses allowing the yuan continue to appreciate against the dollar. Which is actually what needs to happen and both countries would like to happen, just not their part yet. By making the IMF the cop on this particular beat and not setting any specific targets for it to police to, it is a fair bet that none of this will happen anytime soon. G-20 leaders meeting next month in Seoul might change that, but we doubt it.
Meanwhile, the U.S. will be able to continue its dollar devaluation against currencies that move freely through a second round of quantitative easing (we expect the U.S. Federal Reserve to launch its QE2 next week) while China will let the yuan appreciate only gradually against the dollar and keep racking up its surpluses while it resolves its internal political differences over making the reforms necessary to make the economy more domestic-demand driven, a project that will require multiple five-year plans.
We never said the high road goes anywhere, at least for a long while.
As this Bystander expected, prospects for the G-20 calling a truce in the currency wars seem remote. Reuters news agency is reporting that China, India and Germany are rejecting out of hand a U.S. proposal to set numerical targets for trade surpluses and deficits at the G-20 finance ministers meeting in Seoul this weekend.
The American proposal would put far too much flesh for the taste of the surplus nations on the bone of a mom-and-apple-pie agreement among the G20 a year ago that big surplus countries like China would aim to shift growth away from being export led while the big deficit economies like the U.S. would seek to boost domestic savings. We expect the communiqué to be issued after this weekend’s meeting will be long on good intentions but short on any agreed measures — let alone commitments — to make good on them, not the ideal preparation for the G-20 leaders’ summit next month.
This post was first published on Market Bystander.
Cheng Siwei, vice-chairman of the National People’s Congress and thus an economist who carries more political clout than most, forecasts that China’s surplus will shrink this year as the yuan is allowed to appreciate against the U.S. dollar and continue its (very) long march towards convertibility.
That prediction brought more than one raised eyebrow from an audience gathered at the annual meeting of the World Economic Forum at Davos in Switzerland, where Cheng was on a panel discussing the degree to which the slowdown in the U.S. economy would affect the rest of the world.
It also brought the retort from one of Cheng’s fellow panelists, C. Fred Bergsten, an economist who runs the Institute for International Economics in Washington, D.C., that on a trade-weighted basis, the yuan hadn’t appreciated at all, nullifying the trade impact of the 15% appreciation against the dollar since Beijing loosened its peg with the greenback in July 2005.
Cheng also forecast that China’s economic growth will slow a tad this year, but still be as near as 10% as makes no difference.
The Bystander’s man among the good and the great tells us that there was a lively discussion on whether China’s and India’s growth in 2008 would be vigorous enough to prevent the U.S. falling into recession. Bergsten argued that it would be, and so all the doom and gloom about the U.S. drawing the world economy down with it, was both overdone and misplaced. He also offered a contrarian view that fears of protectionism taking greater hold on the U.S. congress were misplaced.
Those are brave words in a U.S. presidential election year — almost as brave a predicting China’s surplus will shrink this year, though Cheng did say Beijing plans a crack down on the hot money flooding into the country which has helped swell its foreign exchange reserves, so he might know something we don’t.