China at the G8 (Or, What Happens When
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
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.
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