Japan Defends Dollar’s Status, China Tears It Down

In the lead-up to next week’s G8 summit, the Chinese have been making yet more noises about setting up a new monetary system without the dollar as its anchor and leading reserve currency. The Chinese, who have maintained a export orientation which has made them the largest holder of U.S. government bonds, are concerned that they are holding depreciating assets. As the U.S. economic and fiscal position deteriorates, the likelihood for a disorderly decline in the U.S. dollar increases. So, China wants a change.

The Japanese, who also have the same export orientation, making them the second largest holder of U.S. treasury assets, have come America’s defense.

Major countries should support the dollar as the key international currency, although emerging nations may discuss a new global reserve currency on the sidelines of the G8 summit next week, a Japanese official said on Friday.

China has asked for debate on a new global reserve currency when leaders from the Group of Eight (G8) meet with the G5 emerging economies next week in Italy, G8 sources told Reuters. News of the Chinese request pushed the dollar down to a three-week low on Wednesday.

But Japan thinks it would be difficult for another currency to replace the dollar as the world’s global reserve currency and it is against any move that would unnecessarily weaken the status of the dollar, said Yoichi Suzuki, director-general of it is against any move that would unnecessarily weaken the status of the dollar, said Yoichi Suzuki, director-general of the Japanese foreign ministry’s economic affairs bureau and one of the country’s main coordinators for the G8 summit.

"Japan’s stance is that major countries should support the dollar," Suzuki told Reuters in an interview.

"It won’t benefit any country to talk about ideas of a new global key currency, which would weaken the dollar," he added.

And Suzuki is right. Yes, I believe the dollar is a weak currency over the long-term due to structural imbalances. But, there is no currency to replace it as a reserve currency right now. The Euro is a new and artificial construct. It is facing its first real test as signs of tension are rising in the Eurozone due to the global downturn. The economies supporting the Yen, the Pound Sterling, and the Swiss Franc are all too small. And the Renminbi is not fully convertible. George Soros has said “the dollar is a very weak currency except all the others.”

So, it makes no sense to talk the dollar down here and now and risk a disorderly fall. It certainly is not in China’s best interest as all their U.S. dollar assets will lose value. But, the Chinese have been talking down the dollar as a reserve currency for months now – and their tone seems ever more shrill on this topic. Perhaps the Chinese see their dollar holdings as a sunk cost. Perhaps the Chinese have moved on and are ready to decouple from an over-indebted America, which cannot continue to run massive deficits now that crisis has hit.

Next week, we will get hints because G-8 members will have every opportunity to make this an issue at the upcoming summit.

Source:

Major nations should back dollar as key currency: Japan – Reuters

Comments

[ozzy43:]

"It certainly is not in China’s best interest as all their U.S. dollar assets will lose value."

This statement would be true if the Chinese were as concerned about short term gain/loss as Americans tend to be. However, China, like Russia, is in this for the long game. If in their view it enhances their long term geopolitical strategy, there is no reason to think they'd balk at losing money in the near term.

It's simply not wise to assume your opponent thinks just like you do, especially in the face of a few millenia of evidence that they do not.

Jul 05 10:44 AM

[Roger Knights:]

Maybe what the Chinese are doing is trying to scare the US gov't. into not running such great deficits.

Jul 05 10:50 AM

[Clive Corcoran:]

You say in the article that - "the Chinese have been talking down the dollar as a reserve currency for months now".

There's a risk here of running two different ideas together. Firstly the Chinese, Russian, Brazilian, and even according to recent reports, the Indian governments are actively talking about setting up a new global unit of account/reserve currency. They would welcome this to provide an alternative to their very large dependence on the US dollar as a store of value for their vast holdings of US Treasuries etc. The fact that they are talking about such a new instrument does not mean that they are talking "down" the dollar - that would not be in their interest either

Jul 05 11:04 AM

[Prudent Man...:]

With China's ownership of large amounts of dollar denominated debt, they are cutting off their nose to spite their face by driving it down. Also, because they have the ability to vary their "peg to the dollar" they also have the ability to either peg to another currency or vary the peg in order to increase their favorable balance of trade. It is my guess that China has moved down the yield curve in order to allow them to let their holdings mature if and/or when they see it necessary rather than selling.

It is pathetic for a country like the U.S. to allow our politicians to put is in such an unenviable trading quandary. While people think of what others are doing we should start thinking about what we are doing. We do not have control of our economic destiny, something I never allowed happen to me and yet my country has let it happen to all of us.

Jul 05 11:08 AM

[CautiousInv...:]

Certainly an interesting topic and one that must be examined through three prisms (1) current Treasury holdings, (2) possible future Treasury holdings and (3) the Chinese FX end game. And these prisms roughly correspond to the present, intermediate future and long-term future.

With respect to current holdings, they are clearly concerned that the combintion of QE and unrestrained treasury borrowing will erode the value of both the dollar and their holdings of Treasuries, which they do not view as a sunk cost. Hence, the strident warnings directed at the US to protect their investments.

Unfortunately for China, as long as they run a current account surplus with the US their dollar holdings will increase; what they do with new dollars is of utmost interest. My bet is that they will be invested in gold, oil and other commodities........and maybe a few Treasuries although there are hints that their holdings of Treasuries fell through the end of May.

It is the end game that is most complicated and possibly at odds with their goal of protecting their existing portfolio of Treasury investments. Clearly they want an international financial order in which the dollar is replaced by a supranational currency with IMF SDR most frequently mentioned. Fraught with practical difficulties, it is still a long-term goal to displace the dolar as a global reserve currency.

Thus, on a given day China may express support for the dollar when it's addressing its concerns over current holdings and on another day express doubts about the dollar when its laying plans for its long-term vision. Sometimes short-term goals will be ay odds with long-term goals.

Jul 05 11:10 AM

[Prudent Man...:]

On Jul 05 10:44 AM ozzy43 wrote:

> "It certainly is not in China’s best interest as all their U.S. dollar
> assets will lose value."
>
> This statement would be true if the Chinese were as concerned about
> short term gain/loss as Americans tend to be. However, China, like
> Russia, is in this for the long game. If in their view it enhances
> their long term geopolitical strategy, there is no reason to think
> they'd balk at losing money in the near term.
>
> It's simply not wise to assume your opponent thinks just like you
> do, especially in the face of a few millenia of evidence that they
> do not.

Good points: Why are we not taking the reins of our own economy? No country does, nor should, be concerned about us at a cost to their citizens.

Jul 05 11:11 AM

[Edward Harr...:]

With regard to talking the dollar down, I am not talking about talking it down in value but rather as a reserve currency. As for short-termism, I would agree that the Chinese are thinking long-term and are leading the BRICs to prepare for a post-dollar world. In the meantime, they are preparing for the worst by investing in natural resources, trying to make non-US trade in Yuan or local currency, and stimulating domestic demand.

Ozzy, In my view, the Chinese dollar asset investments are a sunk cost. They do need to move in a different direction longer term. The question is whether now is the time to do so.

Jul 05 01:29 PM

[nobby73:]

It would be wise to remember the failed deal between Chinalco and Rio Tinto. The Chinese were deeply insulted by the rejection of their proposal and it must impact their decisions on building foreign reserves in any currency, if the Anglo-Saxon economies are unwilling to allow them to buy strategic assets.

As it stands they must feel that Western governments are playing them for fools, as they suspect the Fed, and several other central banks intend to inflate their debt problems away and yet they find themselves blocked from buying the natural resource assets they need for their own economic growth. They may be using the leverage they have with the US to prevent this continuing.

Jul 05 02:32 PM

[Tom E.:]

China is trying to get a stealth devaluation of yuan by talking down the dollar, to which the yuan is pegged. They are trying to bring about a devaluation against the yen, euro and other non-dollar pegged currencies for trade advantage.

Jul 05 03:38 PM

[Edward Harr...:]

I think you hit the mark on that one. The Chinese have been trying to buy natural resource assets for years. The latest salvo is the Repsol YPF overture in Argentina.

But way back, there was the Unocal decision - completely unjustified. It was protectionism plain and simple. Then came the Rio move -another slap in China's face. And I should point out that the Germans have done a number of things which makes clear they don't want Chinese money either. So, it isn't just Anglo-Saxons doing this.

The Chinese are pretty fed up with all of this. It is no wonder they are now viewing their western currency reserves as sunk costs and looking to a new monetary regime.

Remember also that Russia and China will make things ugly at the U.N. for the U.S. on issues like North Korea or Iran unless they get traction on this issue.


On Jul 05 02:32 PM nobby73 wrote:

It would be wise to remember the failed deal between Chinalco and Rio Tinto. The Chinese were deeply insulted by the rejection of their proposal and it must impact their decisions on building foreign reserves in any currency, if the Anglo-Saxon economies are unwilling to allow them to buy strategic assets.

As it stands they must feel that Western governments are playing them for fools, as they suspect the Fed, and several other central banks intend to inflate their debt problems away and yet they find themselves blocked from buying the natural resource assets they need for their own economic growth. They may be using the leverage they have with the US to prevent this continuing.

Jul 05 05:11 PM

[nmelendez:]

China is unconcerned whether the US dollar is the reserve currency or not. Their main concern is maintaining the status quo. The US recession caused a lot of damage in their economy, per no fault of their own. Lots of factories closing, inability to export like before, economy contracting. China has learned, being dependent is not a good thing. They are out to restart their growth on their own terms as are all the BRIC countries, no more dependency on the US. Now comes the real decoupling and expansion in China.
As far as the USD? Why buy from the US if i can get it cheaper elsewhere? Plus i can use the local currency as agreements for currency swaps are established.
Whats the use of the USD as the world reserve currency when 50% (read China, India, UAE, SA and Russia) barely use it anymore?
"Give a man a fish daily and he will die soon after you die, give him a line, a hook and teach him how to fish and he will become a survivor."
China learned to fish.

Jul 05 09:38 PM

[Spook:]

The last thing you want to offend a Chinese when dealing with them is to let them loose face, recent Rio Tinto rejection vote against Chinese foray, then the strong stance in iron ore price reduction will speed up the Chinese move against western currencies.

However, it will be very interesting if there will be a study on which countries will be affected if US dollar will not longer be the supercurrency.


> I think you hit the mark on that one. The Chinese have been trying
> to buy natural resource assets for years. The latest salvo is the
> Repsol YPF overture in Argentina.
>
> But way back, there was the Unocal decision - completely unjustified.
> It was protectionism plain and simple. Then came the Rio move -another
> slap in China's face. And I should point out that the Germans have
> done a number of things which makes clear they don't want Chinese
> money either. So, it isn't just Anglo-Saxons doing this.
>
> The Chinese are pretty fed up with all of this. It is no wonder
> they are now viewing their western currency reserves as sunk costs
> and looking to a new monetary regime.
>
> Remember also that Russia and China will make things ugly at the
> U.N. for the U.S. on issues like North Korea or Iran unless they
> get traction on this issue.
>
> It would be wise to remember the failed deal between Chinalco and
> Rio Tinto. The Chinese were deeply insulted by the rejection of their
> proposal and it must impact their decisions on building foreign reserves
> in any currency, if the Anglo-Saxon economies are unwilling to allow
> them to buy strategic assets.
>
> As it stands they must feel that Western governments are playing
> them for fools, as they suspect the Fed, and several other central
> banks intend to inflate their debt problems away and yet they find
> themselves blocked from buying the natural resource assets they need
> for their own economic growth. They may be using the leverage they
> have with the US to prevent this continuing.

Jul 06 12:06 AM

[Moon Kil Woong:]

China would love to find a way to float its currency in the open market and still find a way to artificvially manipulate it to its own advantage. Thus the talk of another reserve currency by them is talk of how to partially trade its own currency without it actually trading in the open market. If it was openly traded it would appreciate 100% or more thereby lowering China's artificial competitveness and shrink its trade surplus.

Like most things economic, you must ask yourself what their interests are and what game they are playing. Only then can you see clearly what their endgame is. With China it's how to recognize their reserves while keeping their currency low and trade deficit high. Or another way of putting it, they want to devise a way of having their cake and eating it too.

Jul 06 03:54 AM

[Graham and ...:]

America is the only country that stands between China and world domination. That's why China is behaving the way it is.

Jul 06 10:07 AM

[Ryu Mei Co:]

The world is getting flatter by the min, and Japan is completely ill-equipped to the new world order. The problem with Japan is that US and Europe are Japan's only Major trading parters. Without America consumers' huge spending spree, Japan is lost in a world full of competitve players. Young Japanese are spoiled by the fruits of their hardworking parents and are more likely to play Arcade Role PLaying games for more hours than working in a company. Our aging population is not making things any better as more are retiring and dying, thus markets and demand are contracting faster than ever. In addition, current government are still corrupted and incompetent than ever before, putting Japan lack of good leadership.

Yen will become stronger as more and more foreign assets are sold off to finance pension fund and retirement benefits. Thus, reversing the years of accumulated foreign assets.

BOJ can intervene as much as they want to make Japanese companies more competitive with a weaker yen, but the problem is that almost every countries want a weaker currency too. Yikes!

Jul 07 08:36 AM