Sunday, 14 November 2010
The Currency Issue - G20 aftermath
I promise this time not to make any typo which irritated so much one of my friend faculties ( sorry about that).
The hottest issue discussed during the summit was the apparent currency war between China and USA. One might actually think that it is some new issue suddenly on the global media agenda.
It is not. Indeed it roots from the very times of Deng Xiao- Ping as China's head of state. It was him who told to the nation "Socialism does not mean being poor. Get rich by all means you can. It is not important if a cat is black or white, the important part is that he hunts for mice". With more or less these words Deng "encouraged" the nation with centralized carefully planned vision of economic growth. He started from getting hands on Hong Kong area and it's finnacial businesses and opening it's shores to foreign investment in simple-assembly electronic sector.
USA with raising wages in it's blue collar sector was very happy with this solution. Together with another stage of multilateral talks in WTO rounds, that was a strategy which supposed to be both successful for american businesses relocating their factories and for long-term democratization agenda which USA had actually never given up.
As I often say, West plans for 4 years term in office, East, including Korea, Japan, and especially China, plans on tens of years ahead. This is one of the factors totally ignored during any sort of economic actions and negotiations done by the Western powers.
China gradually accumulated and invested capital inflow since the very 80's. Hong Kong street educated financial tycoons advised and still do advise central government on what to do when and how to get richer and to checkmate USA on the global political and economic map.
Weak renminbi means long term exports of goods which conquer 25%-30% of the Western customers pockets with their affordable price. This as such has been a long term basis of Chinese growth. Only recently China invests in own R&D and focuses on own high-tech era in development.
So China secured lots of $ simply buying them off the forex market, investing in US treasury bonds or securing them out of trade. The first crisis encountered in 1998 when USA woke up and started insisting on Beijing to make the Yuan more real in value so the Chinese goods would no longer be that cheap.
The second crisis encountered in 2007 when during subprime mess $ got dramatically weaker and some China critics in Congress started advocating that stronger Yuan will bring blue-collar jobs back to USA and so on.
Third one is happening just now and is related to current $ situation in general.
By common sense economically it's nonsense to say that stronger yuan will change anything. China is no longer cheap labor market. And although manufactured good are decreasing as % of USGDP the high-skill and talent added value ones are still it's comparative advantage.
Current situation is a strong effect of superficially liberal full of mess lacking working transparent regulations American economy. And the American attitude to prosperity - if I can no longer afford Cherokkee 4x4 each year it means there is a crisis.
Finally in terms of politics Washington realized that it cannot insist on Beijing about anything, whether this be freedom press, transparency, human rights, etc., simply because it's time to be afraid of what actually China can do with $ and it can do a lot.
As in 2007 one of the Chinese scholars had put it very clear:" If Yuan gets appreciated dramatically we will be forced to sell our $ assets into the market. As long as the exchange rate is stable it's ok."
In both countries politics plays a major role and now it's the middle of struggle for dominance in the world between an emerging Asian dragon and mature, slow, but neverthelessly still strong American grizzly.
Maybe after all Deutsche Welle journalist was right on Friday when he said: "regarding currency issue, is it an advance in process if they talk?"
From my point of view, maybe it is. But the conversation can be pictured as above on the illustration.
Have a nice day or night, wherever you are.
Even if you are worried about the economy or politics or future of the world as such, don't forget to show love, appreciate your friends and folks. After all that is what makes it all fuzz worth living.
Illustration comes from safeheaven.com