The recent jousting between the US and China had the look of a full on row. And the spectacle at last weekend’s G20 seemed to offer further confirmation, with Geithner proposing a cap on current account surpluses that was aimed at China above all.
But now the Financial Times tells us that relations are already on the mend:
China and the US have the basis for an agreement at the summit of the Group of 20 leading nations next month on setting targets to cut trade imbalances, according to an adviser to the Chinese central bank.
Li Daokui, a member of the central bank’s monetary policy committee and professor at Tsinghua University, said on Tuesday there had been “good progress” at the weekend meeting of G20 finance ministers in South Korea which had moved debate from the “surface issue” of nominal exchange rates to “talking about the substance of rebalancing world trade”.
“China should not be afraid of numerical targets for reducing its trade surplus,” said Mr Li in an interview. “China is well positioned politically and economically to make this adjustment.”
The Financial Times does point out that Li is not a government official, but the article contend that his remarks point to a real movement.
Or do they? The US was never going to push China hard. Not that it couldn’t; various analysts have suggested the US holds the better cards were things to get ugly. But it’s well known Team Obama blinks in any staredown. China was bound to prevail if it talked tough enough. And it isn’t clear Treasury had its heart in this fight. Geithner has consistently upped his rhetoric in response to Congressional pressure and dialed it back down as soon as possible. It seemed obvious that he intended to push the timetable of the war of words with China past the Congressional midterms, since the legislative saber-rattling would presumably abate.
However, in past serious financial crises, it is creditor nations like China that face a more difficult adjustment than debtor countries that the US. The debtors just need at worst to default on or restructure their debts or depreciate their currencies. The creditors, by contrast, actually have to restructure their economies in a major way. The US and China have both pushed back the day of reckoning with big liquidity injections, and in China’s case, a pretty hefty fiscal deficit. But China’s growth is becoming harder to sustain, with each $1 in growth requiring $7 to $8 in debt.
But if Li is right, and the US and China are about to see if they can agree on a timetable for China to reduce its surplus, what does that really mean? It appears China is trading getting out of immediate pressure on its to let the renminbi rise for committing to future action. Ah, but will these commitments be specific, and even if so, will China live up to them? Look how its widely touted June announcement, that its was moving to a more market oriented currency policy, turned out to be a PR ploy that the press lapped up. Is this to be more of the same?
In fact, if anything China wants to depreciate its renminbi. It has already increased interest rates to try to cool off its economy. Wen Jinbao has stressed that exporters can’t take a currency increase of even as much as 5%; many would go bankrupt. A 5% differential with US inflation, say the US at 1.5% and China at 6.5%, achieves the same result even with a fixed peg. It’s particularly hard to get a good reading on Inflation in China. There is reason to think that China has no intention of letting the renminbi rise and would lower it if could (one offset is that with the dollar having fallen versus the euro and other currencies, China has a little more wriggle room when you look across all its trade partners).
So it shouldn’t be surprising that after letting the renminbi increase 2% over the last month plus, presumably to avoid being branded as a currency manipulator, China pegged it lower by almost a half a percent overnight. From Clusterstock:
We don’t know if this is a glitch or a middle finger or what. It’s certainly odd.
The talks at the G20 were supposedly productive and all about ending currency wars and then China sets the Yuan above 6.69 after a close yesterday just above 6.66.
Elsewhere on the currency front, the dollar continues to make progress against the yen after hitting all-time lows on Monday.