China Wants More Talk About the U.S. Dollar

News wires report that China has announced it wants to talk about reform of the international monetary order at next week's G8 meeting in Italy. The dollar has been hit in a knee-jerk reaction to the news headlines, but we are skeptical of the merits.

First, China is not a member of G8 and is hardly in a position to determine the agenda. Second, China's views are well known since the April G20 meeting. Third, what ever reform takes place, it is a multiyear process. Fourth, we are struck by the gap between China's declaratory policy--what they say--and their operational policy--what they do. What they say sounds like they want to end the dollar's role as the numeraire. What they do is accumulate dollars and Treasuries, with some officials acknowledging they have no choice. Fifth, any changes in the international monetary order requires US approval. It cannot be foisted on the US. Sixth, the G8 is not the key forum for this kind of discussion. The IMF is. Moreover, central bankers do not attend G8 meetings and that alone may limit such discussions.

The dollar was under pressure yesterday and we expect additional near-term dollar weakness. However, the China story appears to be an excuse to do what many were inclined to do in the first place.

Comments

[Graham and ...:]

China is overplaying its (good) hand.

Jul 02 09:51 AM

[Dr. O:]

I keep thinking about different countries and their currencies as a place to seek refuge, but, for the most part, we're all in the depression together.

I'm inclined to the Aussie and the Loonie based on the relative fiscal stability of their banking systems and natural resource economies. But, their currencies trade off of natural resource prices, which is bad in a depression.

If I could get some Yuan I would, but the Chinese currency is not freely exchangeable, although there are some ETFs available. Some people like the Yen but Japan's not looking so hot economically or fiscally either. And, when the market trades down so does heavy metal, so its unclear gold or silver are short term hedges.

Ugh.

Jul 02 12:00 PM

[Esol Esek:]

US tech companies (Cisco) need to be forced by the govt to stop selling big brother gear to this country of endangered species poachers and rhino horn viagra users...maybe then the people will have a chance against the world's largest dictatorship..

Jul 03 01:19 PM

[Crocodilian:]

author writes:
"Fourth, we are struck by the gap between China's declaratory policy--what they say--and their operational policy--what they do. What they say sounds like they want to end the dollar's role as the numeraire. What they do is accumulate dollars and Treasuries, with some officials acknowledging they have no choice."
----------------------...

And how. The Chinese want to keep their currency cheap, so that they can dominate export markets, and at the same time, don't want to accept the financial consequences of their exchange rate preference.

If one "lets the chips fall where they may", China's currency would appreciate, US would export more, China would export less. Chinese leaders are quite comfortable with US unemployment, but are less cheerful about the prospect of Chinese unemployment.

They can't have it both ways. The price of full employment in China is to sit on a pile of dollars.

Jul 03 07:37 PM