China at the G8

About this author:

The origin of the Group of Eight was an invitation

from French President Valery Giscard d'Estaing

in 1975 to six of the major World War Two combatants

to meet at Rambouillet in France.

Leaders from West Germany, Great Britain, Italy,

the United States, Japan and France attended

that first meeting.

The impetus to the summit, if not the sole topic,

was the first post war economic challenge to the west,

the 1973 OPEC oil embargo.

In 1976 Canada was invited to join and

the group stayed at seven until 1997

when Russia formally became a member.

Although formed a generation after the end

of the Second World War,

the G-7 represented the dominant nations of

the defining event of 20th century history.

As with the United Nations for international politics,

the G-7 was an attempt to secure the victory

of the western economic model.

For the first 30 years after the war the only antagonist

for the western capitalists had been the political

and military threat of the Communists

led by the Soviet Union.

Until the oil embargo there had not been

a serious economic challenge

to Western Europe, the United States and Japan.

Why relate this history?

The nations of the Second World War consensus

that have dominated the world for 60 years

are close to bankrupt.

Their foreign bankers are now

calling the shots

; those who pay decide the future.

The abandonment of the climate change issue

at the G-8 meeting is an example.

Though the global warming agenda

is a major part of the domestic political positions

of President Obama, Chancellor Merkel,

Prime Minister Brown and President Sarkozy

the issue was removed from G-8 consideration

because China, India and others would

not go along. T

his is perhaps a foretaste of what will happen

on every topic in which China and

the other BRIC (Brazil, Russia, India, and China)

countries have an interest.

China, Russia and India have been very public

with their concerns for the long term value

of the US Dollar and critical of the effect

of American deficit spending.

In April, China's holding of US Treasuries fell

for the first time in eleven months.

The amount was small, $4 billion and partially

offset by a small gain in Hong Kong.

But in the charged atmosphere of today's international

economics and in light of US funding needs,

the drop was widely noted.

From April 2008 until March 2009 the Chinese government

had been steadily acquiring Treasuries; its holding

had increased from $502.0 to $767.9,

a jump of 53%.

China has also moved to increase the supply and

demand for the yuan as an alternative

to the dollar by starting limited trade settlement

in its currency.

On July 6th some firms in five Chinese cities

were allowed to begin settling transactions in yuan

with companies from Hong Kong, Macau

and the ASEAN countries.

Non-Chinese banks will be able to obtain yuan

from mainland institutions to finance trade.

The Peoples Bank of China (PBOC) has also

formulated currency swap agreements

with Argentina, Belarus, Hong Kong, Indonesia,

Malaysia and South Korea.

The PBOC will render yuan to their central banks

as needed to pay for imports

if these countries are short of the currency.

These moves by the Chinese authorities

will not establish the yuan as an international

reserve currency.

But they will shift some of the trade demand

for dollars to yuan.

Offered the choice what Asian trading partner

of China would not want to remove the volatile

and increasingly questioned dollar

from their financial equation?

The logic is simple and efficient.

Why hold reserves in dollars for your China trade

and bear the currency risk?

Yuan reserves reduce the need for dollars

and reduce dollar currency risk.

China has emerged as the engine of growth

in Asia and Asian countries are looking to China

for the health of their own economies.

If yuan settlement becomes the policy

of the Chinese Government what trading partner

will want to go against Beijing's wishes

and opt for dollar settlement?

Considering the size of China's foreign trade

the potential drop in dollar demand

could be substantial.

Until now it has been in China's interest to keep

the yuan undervalued for trade competition.

Since last summer China has effectively re-pegged

the yuan to the dollar after three years

of gradual appreciation.

But that is likely to be a temporary expedient.

If China is serious about using the yuan in trade

and in permitting outside players,

non Chinese players, to hold and

store value in yuan,

an essential component of a reserve currency,

what better way than to resume

a gradual appreciation of the currency?

For an exporter in Vietnam or Thailand

or even Australia, Japan or New Zealand

would not an appreciating yuan be

a far better option for your

China trade capital than the dollar?

Chinese national interest will determine

Beijing's economic policy.

But the time is fast approaching when

safeguarding her economic development

will be far better served by a strong

and convertible currency than by

a weak yuan priced for export.

A strong dollar has been one of Washington's most

effective foreign policy tools

for more than 50 years

; that fact is not unknown in the Chinese capital.

             J-L K.
Procurement Consultant
Gsm:    (250) (0) 78-847-0205 (Mtn Rwanda)
Gsm:    (250) (0) 75-079-9819 (Rwandatel)
Home:  (250) (0) 25-510-4140
    P.O. Box 3867
  Kigali - RWANDA
    East AFRICA
Blog: http://cepgl.blogspot.com
Skype ID: kayisa66

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