G8 Meeting: In the End, No Big Surprises

The G8 meeting is wrapping up and there have been no surprises to speak of. The global economies and financial systems appear too fragile to begin reversing the emergency measures. There were the usual platitudes about completing the Doha trade round and promises to avoid protectionism. Of note, especially in light of the various comments in recent weeks from assorted officials warning that currency appreciation would jeopardize their economic recoveries or in other ways underscored the benefits of soft currencies,the G8 encouraged countries to refrain from competitive currency devaluations.

After rejecting initiatives by the Chinese and Russians (according to news reports) to formally discuss reform of the international monetary order to reduce the role of the dollar, the G8 draft indicates support for a "stable" and "well-functioning" international monetary system.

From the sidelines of the meeting, a spokesperson for the Foreign Ministry reaffirmed that China supports creating a diversified international reserve currency. This is hardly news. Numerous officials, even in countries like China, Russia and Brazil recognize that what they want is not reasonable or possible in the short run.

Going forward, the talk is likely to persist, as the political benefits are positive for China. We are not talking about how the yuan has essentially been re-pegged against the dollar, or how Chinese consumption as a percentage of GDP has fallen, or how incredible growth loans (doubled in June from May have already surpassed the full year goal) may be fueling over-investment and an asset bubble of their own.

That said, this week's developments in China, especially the social unrest that led to President Hu's early departure from the international gathering in Italy and the detention of several Rio Tinto (RTP) employees on "espionage" charges illustrates that the yuan itself and China are not in a particularly strong position to challenge the role of the dollar or the US in the world economy any time soon.

Comments

[ScottEX:]

I spent two years living in an economic zone in mainland China. The area I lived was empty of people, a metropolis of business towers and empty condos, waiting for people to move in. Endless building, a giant scheme run by communists and bankers in this area.

They've been in some kind of asset bubble for a few years, but it is controlled quite tightly as you can imagine. It really was living in the twilight zone. I wonder if anybody has moved in, but I doubt it, the scale of it is truly hard to imagine. Expropriate and build things that serve no purpose, that's how it was going when I was there...

You really can't trust what communists do or say, I don't think that's a new deal.

Jul 09 09:14 PM

[Old Trader:]

Scott,

I always enjoy reading comments from people who're in a position to provide a "worm's eye" view. Its all well and good to read/watch/listen to media for the "big picture" stuff, but perspective is equally helpful.


On Jul 09 09:14 PM ScottEX wrote:

> I spent two years living in an economic zone in mainland China. The
> area I lived was empty of people, a metropolis of business towers
> and empty condos, waiting for people to move in. Endless building,
> a giant scheme run by communists and bankers in this area.
>
> They've been in some kind of asset bubble for a few years, but it
> is controlled quite tightly as you can imagine. It really was living
> in the twilight zone. I wonder if anybody has moved in, but I doubt
> it, the scale of it is truly hard to imagine. Expropriate and build
> things that serve no purpose, that's how it was going when I was
> there...
>
> You really can't trust what communists do or say, I don't think that's
> a new deal.

Jul 09 09:55 PM

[ScottEX:]

Indeed, and China is a big picture kind of story although that doesn't really start to describe it. I was living in the communist heartland where the party originated and maintains its powerbase today. Tianjin was an extreme view. We'll never understand it so don't read too much into my comments. Economic stability in China is controlled by the party and the barrells of a hundred million red army guns, make no mistake about it.

It's an apartheid system with the potential to explode into some kind of violence like the world has not seen in a hundred years or more. Both sides of the system there being aware of the potential for disaster look for Chinese harmony, a very different tune from what we know here. Mao's cultural revolution and some billion people living in an area the size of the eastern US seaboard kind of makes the paradigm impossible for people here to comprehend. No doubt, China has the capacity to change the world forever. My main concern is not economic and price bubbles, rather it is self-destruction by environmental implosion. The water table is dropping by a meter per year but takes hundreds to replace. The desert is encroaching on the eastern seaboard. And with the black skies they bearly have air to breath. Price bubbles and all that won't mean much as long as the peasants have rice in their bowls and things seem to get a bit richer all the time, which just means more meat and beer. With two trillion in reservers now, they can buy a lot of beef, so I think the party can manage that 1 billion second class, many of whom still believe Mao is alive and well.

But I don't know how they are going to keep the peace when the little sliver of habitable land they are on turns to waste, which I think will coincide with the peak of the current boom, 10-20 years down the road, maybe less if something drastic isn't done, but then the new rich won't be satisfied, and so it goes....


On Jul 09 09:55 PM Old Trader wrote:

> Scott,
>
> I always enjoy reading comments from people who're in a position
> to provide a "worm's eye" view. Its all well and good to read/watch/listen
> to media for the "big picture" stuff, but perspective is equally
> helpful.

Jul 10 07:49 AM