We have seen reports on various China-focused blogs and even in the US media that China is increasingly chafing over the US dominance in financial affairs, and is particularly unhappy about the role of the dollar. Consider this quote from an August New York Times article:
Victor Shih, a specialist in Chinese central banking at Northwestern University, said that when he visited the People’s Bank of China for a series of meetings this summer, he was surprised by how many officials resented the institution’s losses [on dollar assets].
He said the officials blamed the United States and believed the controversial assertions set forth in the book “Currency War,” a Chinese best seller published a year ago. The book suggests that the United States deliberately lured China into buying its securities knowing that they would later plunge in value.
“A lot of policy makers in China, at least midlevel policy makers, believe this,” Mr. Shih said.
This is one reason I am perplexed at Bush having a financial summit that includes China and India next month. It is guaranteed that the role of the dollar and the US’s abuse of its sovereign privilege will be a major topic. Do we really want to provide a forum and mechanism that could accelerate a move away from the dollar as reserve currency? If you doubt such a move is underway, consider: international shippers are increasing their use of other currencies for invoicing (see here and here).
Today, Reuters reports that the Chinese have launched a frontal attack (hat tip Ed Harrison):
The United States has plundered global wealth by exploiting the dollar’s dominance, and the world urgently needs other currencies to take its place, a leading Chinese state newspaper said on Friday.
The front-page commentary in the overseas edition of the People’s Daily said that Asian and European countries should banish the U.S. dollar from their direct trade relations for a start, relying only on their own currencies.
A meeting between Asian and European leaders, starting on Friday in Beijing, presented the perfect opportunity to begin building a new international financial order, the newspaper said.
The People’s Daily is the official newspaper of China’s ruling Communist Party. The Chinese-language overseas edition is a small circulation offshoot of the main paper.
Its pronouncements do not necessarily directly voice leadership views. But the commentary, as well as recent comments, amount to a growing chorus of Chinese disdain for Washington’s economic policies and global financial dominance in the wake of the credit crisis.
“The grim reality has led people, amidst the panic, to realise that the United States has used the U.S. dollar’s hegemony to plunder the world’s wealth,” said the commentator, Shi Jianxun, a professor at Shanghai’s Tongji University.
Shi, who has before been strident in his criticism of the U.S., said other countries had lost vast amounts of wealth because of the financial crisis, while Washington’s sole concern had been protecting its own interests.
“The U.S. dollar is losing people’s confidence. The world, acting democratically and lawfully through a global financial organisation, urgently needs to change the international monetary system based on U.S. global economic leadership and U.S. dollar dominance,” he wrote.
Shi suggested that all trade between Europe and Asia should be settled in euros, pounds, yen and yuan, though he did not explain how the Chinese currency could play such a role since it is not convertible on the capital account.
A two-day Asia-Europe Meeting (ASEM) of 27 EU member states and 16 Asian countries was set to open on Friday. Though few analysts expect much in the way of concrete agreements, Shi said it could prove momentous.
“How can Europe and Asia grasp each other’s hands and together confront the once-in-a-century global financial crisis sparked by the U.S.; how can they construct a new equitable and safe international financial order?” he said.
“The world is waiting for this Asian-European meeting to achieve big results in financial cooperation.”
While this is clearly not an official statement, the fact that the commentary was given such prominent placement suggests that is a sanctioned view.
The obvious impediment to any serious action being taken at this meeting is the massive plunge in the markets on Friday. As much as the Chinese may want to take a dramatic move, it is highly unlikely that any other participants will want to take action to undermine the dollar now, with international markets in a panic. Any news that might worsen stability, and putting the dollar in question, is not going to get much traction. The US temporarily (and we stress temporarily) has the upper hand via providing unlimited dollar swap lines to stressed advanced economy central banks and bailing out AIG, which was providing guarantees to European banks that helped them circumvent minimum capital requirements (in other words, if AIG collapses, a whole slew of Eurobanks would be below minimum capital levels, which would have worsened the conditions in interbank markets. Yes, the equity is basically phony, but stripping that away would still have made matters worse).
The Chinese will now be able to have a second go at the US in November, and they seem determined to push their agenda, even thought there could not possibly be a worse time to rattle the international financial framework.
Update 11:20 PM: Reader Chris sent us a link to a report from Jiji which put a different spin on the dollars. Note the emphasis on dollar decline. The dollar fell 3% versus the yen yesterday, and only 0.1% against the RMB.
Leaders of Japan and China agreed Friday that the two countries will cooperate to stem the dollar’s further plunge and overcome the U.S.-originated global financial crisis.
Japanese Prime Minister Taro Aso, in separate meetings with Chinese President Hu Jintao and Chinese Premier Wen Jiabao, confirmed that the two nations will strive to maintain the current monetary system with the U.S. dollar playing the role of the world’s key currency.
Aso told Hu that the further deepening of the current financial crisis would undermine national interests of the two countries. Aso stressed that world countries must take their respective measures to stabilize their financial systems.
Hu replied that countries must cooperate in dealing with the current crisis including in an emergency summit of the Group of 20 countries in Washington next month, which will be joined by the two countries.
After meeting with Hu and Wen, Aso told reporters that Japan and China are not hoping for a further plunge in the dollar and a meltdown of the dollar-based currency regime, adding the two countries should contribute to maintaining the currency regime.
The dollar, which dived to a 13-year low below 91 yen in London Friday, made China and Japan nervous because they are the world’s top two holders of foreign exchange reserves. The nations are believed to have invested massively in dollar-denominated securities.
In a move to beef up the mutually beneficial strategic relationship, Aso and Hu agreed that they will hold telephone talks frequently. They confirmed that Japan and China are permanent neighbors and are in mutually beneficial ties.
In the meeting with Wen, Aso stressed the importance that China pay attention to consumers’ worries about and distrust in Chinese food products and wipe them out, referring to a string of problems caused by Chinese foods, including those tainted with melamine, a toxic chemical.
Our big creditors are now developing a joint strategy. Stay tuned.
Update 1:00 AM: According to the Wall Street Journal, currencies are not on the agenda for the November international meeting:
Persuading China to change its currency policy would be a worthy goal for a new Bretton Woods conference. But currency reform is low on the agenda of the summit that the Bush administration plans to host on Nov. 15. (The administration styles this gathering a “G-20 meeting,” ignoring the European talk of a Bretton Woods II.) The British and French leaders who pushed for the meeting want instead to talk about financial regulation — how to fix rating agencies, how to boost transparency at banks and so on. But many of these tasks require minimal multilateral coordination.