Sunday, September 17, 2006

Gentle Tug of War

At this weekend's G7 meeting in Singapore, China and Japan are politely telling the rest of the world where to get off, when it comes to currency exchange rates, trade imbalances, and internal monetary policy.

Tug of war
[Thanks to for the photo.]

Zhou Ziaochuan, China's head of the central bank, resists US pressure to allow their currency to float, and says:

"We will keep the renminbi's exchange rate relatively stable at a rational and balanced level." Translation: Maybe we will allow it to float, but when we wish, and at the rate we wish. No one dictates to the Chinese.

On the other hand, they must perceive three looming dangers: (1) the danger of holding US instruments based on a dollar that is not fixed to any standard and the exchange value of which is determined by supply and demand; (2) the danger of hoarding a portion of the world's supply of dollars, throwing off the balance between supply and demand, artificially maintaining a higher dollar price, and helping to foster the huge US trade imbalance; and (3) the danger of ignoring the rattling of trade tariff swords in Congress.

See the full Reuters article here. It says, "The United States, with a record trade deficit, is particularly anxious to see a stronger yuan." I would remark that this depends on who you mean by "the United States." (See my earlier post.) US manufacturing would love it; but US importers like Wal-Mart would hate it. Congressmen attached to manufacturing lobbyists would love it, but the Fed is probably on the fence: Their mind says China should de-peg. Their gut may be saying, "De-peg, yes, you should from a theoretical point of view; but be careful not to do it too fast. We don't want a dollar crash on our hands."

Also this: "The [Chinese] central bank has raised lending rates twice since April and also increased banks' reserve requirements twice to brake the economy, which grew 11.3 percent in the year to June, the fastest pace in a decade." I suppose that's one way of absorbing all of those US dollars in their coffers; sure, just stick 'em in the bank vaults.

Then, on the Japanese front, you have the Bank of Japan Governor Toshihiko stating:

"The IMF board should discuss this issue from the viewpoint of securing a consistency between exchange rate policies and other domestic economic policies, and not in the narrow context of attributing the global imbalance to a specific country's or region's exchange rate policies." Translation: Stop ganging up on a few countries before (a) you get your own respective houses in order; and (2) we all agree on a global monetary policy.

That article is here.

I say good luck on those last two. Central bank economists are already operating on thin theoretical ice inside their own country, never mind agreeing with their international colleagues; and the IMF as global economic policy police? I don't think so.


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4:12 AM  

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