Sunday, April 17, 2005

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So did the Bush administration get serious about the dollar?

Well, the meeting of the G-7 finance ministers happened. Did the U.S. and the G-7 ratchet up the pressure on China, as was previously suggested?

This appears to depend on who you ask. In the Washington Post, Paul Blustein says "no":

In its communique, the G-7 pledged "vigorous action" to deal with "global imbalances" -- a reference to the massive U.S. trade deficit and corresponding trade surpluses of other nations, especially the export-driven economies of Asia. But the statement mostly reiterated past calls for countries to take measures that should help shrink the trade gap, including a reduction of the U.S. budget deficit and "structural reforms" in Europe and Japan to help speed growth.

The G-7 conspicuously refrained from commenting directly on one politically charged issue related to the trade deficit -- China's decade-old practice of keeping its currency, the yuan, pegged to the U.S. dollar at a rate of about 8.3 yuan per dollar. That policy has been widely attacked in recent months, especially by members of Congress and U.S. manufacturers, as an artificially low rate that gives Chinese goods an unfair edge in world markets.

Bush administration officials had raised expectations that the G-7 would turn up the heat on China, because they had ratcheted up pressure themselves in recent days by urging that the yuan be allowed to rise now. Previously, they had refrained from putting the Chinese on the spot about timing.

But the G-7 communique included only the language that has been contained in every such statement for the past year. "More flexibility in exchange rates is desirable for major countries or economic areas that lack such flexibility," the statement said.

Andrew Balls and Scheherazade Daneshkhu say "yes" in the Financial Times:

The Group of Seven leading industrialised countries this weekend put China on notice that it must shift to a more flexible currency regime, with finance ministers demanding it take action immediately.

The G7's communique repeated its call for "more flexibility in exchange rates" where it was lacking, to help promote more balanced global growth, and added a demand that "vigorous action is needed to address global imbalances".

Officials said there was no discussion of singling out China because in the statement the language was already clearly aimed at Beijing - and because of the difficulty of getting Japan to agree a formal declaration.

But ministers from all the countries apart from Japan backed a US demand that China should act immediately. (emphasis added)

In this case, both the FT and WaPo are correct. It's clear that the latest G-7 statement doesn't differ much from previous ones, and I have no doubt Japan acted as the brake on any change in the language. However, U.S. Treasury Secretary John Snow also delivered a statement after the communique that was reasonably clear in its intent:

I want to comment specifically on China in this context. China's strong economic growth has made a tremendous contribution to the global economy. China has taken numerous steps over the last few years, including preparing for greater flexibility in their exchange rate, introducing foreign exchange market financial products and strengthening banks and bank supervision. With this groundwork in place, China is ready now to adopt a more flexible exchange rate.

Of course, the U.S. can insist that China is ready all it wants -- whether Beijing will hop to is another question. Until and unless Japan changes its tune, it would appear that China doesn't face a huge incentive to change the status quo.

On the other hand, this Bloomberg report by Tim Kelly suggests that Japan recognizes the political lay of the land:

The U.S. government is under pressure at home to get China to fulfill a pledge to loosen its currency's decade-long peg to the dollar, a Japanese Ministry of Finance official said.

The U.S. administration is under more pressure than governments in Europe or Japan over the yuan, according to the official, who spoke on condition he wouldn't be identified. The official was speaking at a briefing in Washington after a meeting of finance ministers from the Group of Seven.


posted by Dan on 04.17.05 at 09:28 PM


First, would someone PLEASE decide which is the correct term for Chinese currency. Sometimes I see it referred to as the yuan, other times as the renminbi.

More to the point, if China decides to revalue its currency, wouldn't it be prudent for them to first dump their dollar reserves then make an appropriate revaluation based on what the dollar is really worth?

posted by: p.lukasiak on 04.17.05 at 09:28 PM [permalink]

p.lukasiak, RMBY, or Renminbi Yuan, is the full currency name. In Chinese, "yuan" is a generic term for money, whereas "bi" is currency and "Renmin" means People's. Most Chinese simply say "yuan" much as most Americans simply say "dollar" instead of USD.

posted by: Cloud on 04.17.05 at 09:28 PM [permalink]

So, who's going to bell the cat?

posted by: J Thomas on 04.17.05 at 09:28 PM [permalink]

Wouldn't the "appropriate revaluation" be to let the market decide the when/where/how much your currency should be worth? I think that no matter how well formulated, calculated, and designed, when you get to say how much your money is worth, those of us who aren't you would have questions, concerns, and/or risk adversion.

posted by: Gaijin on 04.17.05 at 09:28 PM [permalink]

Gaijin, the chinese are hoarding dollars and driving up the price. Would you say "let the market decide" how much a commodity is worth when someone is cornering the market?

If it was just that the chinese put an inordinate value on dollars and will at some point find they can't sell them and must lose half the money they put into them, then it wouldn't be such a big deal. Caveat emptor. But their market distortion is hurting us too.

I don't see any market solution to this.

posted by: J Thomas on 04.17.05 at 09:28 PM [permalink]

J. Thomas:
Granted market forces didn't start this process, and it certainly didn't continue the process. However, I thought the focus was letting the Yuan float.

p.lukasiak made the comment about dumping the reserves they had to make an "appropriate reevaluation". However, I think that any arbitrary currency value that isn't subject to market forces would keep us where we are--with a varying degree of edge/risk. It may lessen the problems now, but it is still some Chinese men sitting around the table telling the world what their funny money is worth.

Whether it is 8.x Yuan/Dollar or 25 Yuan/Dollar, there isn't any fair amount of reflection of economic/political influence on its value.

posted by: Gaijin on 04.17.05 at 09:28 PM [permalink]

Letting their currency float would mean dumping dollars.

posted by: fling93 on 04.17.05 at 09:28 PM [permalink]

What about the China Currency Act?

posted by: dan on 04.17.05 at 09:28 PM [permalink]

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