The United Nations Conference On Trade And Development has issued a new policy brief in which it blasts reinvigorated unilateral demands by assorted "economists, editorialists and politicians" who have "taken it upon themselves to “remind” the surplus countries, and in particular the country with the biggest surplus, China" that it is now their responsibility to do what it must to facilitate US exports. Instead, the UNCTAD argues that the "decision to leave currencies to the vagaries of the market will not help rebalance the global economy." It also notes that "the international community has allowed global monetary incoherence to reign before and after the crisis. Indeed, “markets” were permitted to manipulate currencies in a way that made some sovereign governments and central banks look like penniless orphans. The need for a new approach to global macro-economic governance is more urgent than ever, because today’s currency chaos has become a threat to international trade and could be used as an alibi by major trading countries for resorting to protectionist measures." Of course, when it comes to what Uncle Sam demands, all else is secondary, and everyone should immediately drop their pants and do his bidding. Not in this case though: the UNCTAD makes it clear that China should continue doing what it is doing, as acquiescing to US extortion would risk destabilizing the world economy once again.
The UN next proceeds to caution against the massive global casino which has been renewed courtesy of irresponsible bubble blowing policies practices by virtually all central banks across the globe:
In fact, the calm after the storm of the recent financial meltdown did not last for long. Institutional “investors” are back in business in global currency markets. With their resurgence, countries are again facing huge inflows of hot money that cannot be put to any productive use, but which create severe price misalignments and trade distortions. The global “casino”, nearly empty a year ago, is crowded again, and many new bets are on the table. However, the recovery in the real economy is modest at best. In fact, the rebound of stocks, commodity futures and currency trade in several emerging and developing economies since March 2009 displays the makings of highly correlated big new bubbles and the threat of a new round of financial crisis. Of even greater concern is that the crisis notwithstanding, faith in “market fundamentalism” is unswerving. That faith continues to sustain the naïve belief that a solution to misalignment may be found by leaving the determination of exchange rates to unregulated financial markets.
The UNCTAD points out that this brand new round of irrational exuberance will likely impact the economies of developing countries, whose currencies are used by carry traders across the world to hedge positions shorting low yielding currencies.
The effects of the new exuberance on financial markets are adverse for countries with once-fragile currencies, such as Brazil, Hungary and Turkey. Exploiting the differentials between interest rates, the so-called currency carry trade in these countries and in the big financial markets of the North has become even easier today. Rates in the North are generally close to zero, whereas maintaining “confidence” in countries with weaker currencies – under the aegis of IMF programmes since the onset of the crisis – has called for higher rates than before. The first results of the new “confidence” in weak currencies are ominous. An appreciation of the Brazilian real and the Hungarian forint has forestalled urgently needed gains in competitiveness and could again lead to severe overvaluation, a dramatic distortion of trade patterns and new imbalances.
Focusing specifically on China, the UN may hope that the 130 Congressmen who have endorsed the simplistic push for CNY flotation, although it will certainly not happen. Which is unfortunate, because the UN's warning is that should China agree to be bullied by the US, the world may experience another financial crisis.
In fact, as a response to the current global crisis that originated elsewhere, China has done more than any other emerging economy to stimulate domestic demand, and as a result its import volume has expanded significantly. Private consumption is rising at breakneck speed. According to several estimates, Chinese private consumption increased by 9% in 2009 in real terms, dwarfing all the other major countries’ attempts to revive their domestic markets. But even in the preceding decade, real private consumption, at an average 8% growth rate, was an important driver of growth, backed by wage and salary increases in the two-digit range and strong productivity growth. Unit labour costs (nominal compensation divided by productivity) are rising more there than elsewhere, resulting in a continuous loss in competitive power even with a fixed exchange rate. Expecting that China will leave its exchange rate to the mercy of totally unreliable markets and risk a Japan-like appreciation shock ignores the importance of its domestic and external stability for the region and for the globe.
And a direct stab at the "sterile polemic" that has gripped the US over the past several days as push for CNY floating escalates:
It is time to break with a sterile polemic that ignores the increasing evidence from a range of experiences showing that both absolutely fixed/pegged and fully flexible/floating exchange rate systems are suboptimal. These so-called “corner solutions” have added to volatility and uncertainty and aggravated the global imbalances. With this as a starting point, the debate can move forward to explore new common formulas for exchange rate management that increase consistency between trade and financial flows in a globalized economy.
The full UNCTAD presentation below should be read by all who wish to grasp the other side of the story, instead of merely the unilateral rhetoric that mainstream media has been exposing US society to.
Yet what is possibly the most damning observation for a push to CNY flotation is the following chart which compares the relative levels of the DXY and CNY. Obviously, as the DXY strengthened, the CNY compensated by strengthening alongside. Yet as the DXY has weakened, the CNY has remained at a fixed level. The ironic observation is that the Chinese currency, at least as determined by some relative ratio with the US Dollar is, in fact, overvalued, and likely by about 10%.
The irony in all of this, is that while both countries have been pursuing the same QE-style politics, China has been much more successful due to its increased productivity, its trade balance, and its much lower debt burden. Is this whole episode seeking to punish, and push China to do what the US needs, merely yet another case of monetarist scapegoating? Even if the answer is yes, we are confident it is irrelevant. It is completely unreasonable to assume that China will force its currency higher merely to satisfy its biggest debtor (ironically enough, no politicians in the US seem to know what leverage is, in this case focusing on its "negotiation" variant). And as The Economist pointed out, further demands for China to do something, anything, will only be met with increased rebuffs and derisive laughter of the variety that Tim Geithner already experienced once.