Arrogance and fear drives currency policy
SCMP Sunday November 22 2009
What drives China's currency policy? Is it arrogance, fear or a mix
of the two? At present, China is behaving like a rogue state, the only
significant trading country to insist on its right to peg its currency
to the US dollar and to maintain controls on most movements of capital.
The net result is not merely to help sustain the imbalances in global
trade, which is at the root of financial instability, but to force
the adjustment process not so much on the US itself but on to almost
every other country. The pressure on some, such as Brazil, has become
so great that they have had to impose short-term capital controls.
For now, other countries have been very polite, awed by China's size
and success. But, for hypocrisy, it is hard to beat the chairman of
the China Banking Regulatory Commission, Liu Mingkang , blaming the
US for blowing new asset bubbles as it seeks to counter recession with
ultra low-cost money and a weak dollar. For sure, that is happening.
But look at Liu's own contribution - a bubble in China's property market
driven by Beijing's extraordinary combination of low interest rates,
mammoth oversupply of credit and a currency policy that, by definition,
imports all the evils of US policy that so infuriate Liu. A weak dollar
is not just a consequence of low interest rates but of a trade deficit
that, though still half its peak, needs to fall further. Meanwhile,
the yuan peg is re-igniting inflation in China, according to unofficial
but unmassaged data.
Liu claims that a dollar peg is for stability. What hypocrisy - criticising
the US, on the one hand, while demanding the right to a dollar peg
on the other. Of course, the biggest reason for China's policy is a
beggar-thy-neighbour effort to gain market share at the expense of
the rest of the world.
Not since the Great Depression has the world witnessed such behaviour
by a major player. Other countries could be justified in imposing surcharges
of 10-15 per cent on all imports from China until it adopts a market-driven
currency policy to match the market-driven trade access it has been
So much for the arrogance factor. Next is the fear factor. Surely
a nation of more than a billion people cannot rely on marginal additional
global demand provided by a rigged currency to sustain employment.
If it does, then maybe its leaders have reason to fear their compatriots'
wrath if promises of fast-growing wealth for all cannot be so easily
delivered. Or, they will be outraged by the fact that a revaluation
would mean the government had lost trillions of yuan by buying US dollars.
Perhaps the media clamp on an innocuous 'town hall' appearance by US
President Barack Obama in Shanghai illustrates the mix of fear and
contempt with which the leadership views its people.
Maybe the leadership is also terrified of the consequences of a currency
liberated from controls. The fear here is not really the trade consequences
of an appreciation of, say, 20 per cent in the yuan's value against
the dollar, and perhaps more against other currencies. That would most
likely be the short-term result.
But longer term, dare the leadership contemplate a situation in which
any citizen can have the same rights as a citizen of, say, Indonesia
and invest overseas? Of course, it is easy for the well-connected to
get some of their money out to safe havens. But, millions might want
to hedge their bets, too. Currency outflows and yuan value might become
a gauge of sentiment about the quality of government. What future,
then, for a self-perpetuating party leadership?
China wants to have its cake and eat it. It wants to be acknowledged
as the power that it is by having its currency used internationally.
But it is unwilling to make that happen out of a mix of arrogance and
fear. The currency is a defining issue for China. So far, a nervous
leadership has shown that domestic considerations trump international
ones.If it carries on in this way China should expect the retaliation
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