Chimerica vs. EUSmerica

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Includes: CNY, CYB
by: Dirk Ehnts

The FT brings the news regarding the yuan/dollar regime:

Thursday, Tim Geithner, Treasury secretary, warned China that congressional anger could result in rapid action. “I think the strength of the sentiment in Congress is overwhelmingly strong, it’s bipartisan and it reflects how important this is to the United States,” he told the Senate finance committee.

The business of news is – news. I have seen a lot of talk about the yuan/dollar regime, and the lines are pretty much clear to me. On one side, the Chinese Communist party, supported on the US side by the government, the financial sector and some academics, like these views published on voxeu.org (see here, here, and here).

On the other side, you have Fred Bergsten (see his column at voxeu.org here), Paul Krugman (here) and more people (like me) arguing that the exchange rate regime yuan/dollar leads to disequilibrium and misallocation of resources, creating bubbles in financial markets along the way and being dynamically unstable.

So the news that Geithner has come around is just news. The Chinese government has announced many times already the intention to appreciate the exchange rate. Nouriel Roubini believes that this will happen in July next month, but I am not so sure. The Chinese central bank has increased its sterilization of dollar inflows lately, and the US deficit with China has not changed by much. Have a look yourself (thanks to Finn Körner for providing the graph):


In a time of a depreciating euro, will China react to its loss in competitiveness on euro zone markets with a self-inflicted loss in competitiveness on the US market by appreciating its currency? Put differently, can China turn from export-led growth to sources of domestic demand that quickly?

I think this defining question will be with us for a long time. And maybe, just very maybe, the countries that come out of their imbalanced trade troubles first get to be #1 in the new financial order of the 21st century. So, who will it be, the US and China (Asia) starting a Pacific century, or the EU (euro zone) rising to form a troika with the other two?