G20 meeting preview: what to expect?22 October, 2010, 0:07. Posted by Zarathustra
Tags: Currency, G20, War
Just like the fictional Prime Minister Jim Hacker said, this sort of summit is merely a “public relation circus” (in Yes, Prime Minister, “Diplomatic Incident”).
The focus on the meeting will certainly be the currency war and protectionism, in particular the currency warfare between China and the United States (for more on economic warfare, see my on-going series on “Second Cold War”). As in my another article has mentioned, the problems of US trade deficit has very little to do with the Chinese Yuan, even though Chinese Yuan is indeed undervalued according to the Economist’s Big Mac Index.
In the long-run, the Chinese currency will appreciate in my view, after all, developing countries tend to have undervalued currencies in purchasing power parity terms. In short-term, letting Chinese Yuan to appreciate significantly will bring a dilemma. On one hand, letting the currency float may help their inflation and asset bubble problem, but on the other hand, it will kill exports. And ultimately both may slow the economy. The Chinese authority is also very wary of following the footstep of Japan after the Plaza Accord in 1985, as Bank of Japan increased money supply in order to prevent Japanese Yen appreciate too quicker, and also to stimulate the economy after the recessionary effect of appreciation of its currency. The expansionary monetary policy in turned led to an asset bubble, with of burst of it caused the lost decade.
As for the United States, their pressure on China should be more a political one. As the matter of fact, even though the US dollar weakened against the Japanese Yen after the Plaza Accord, the US trade deficit with Japan has not become a surplus or balanced. With a mid-term election coming in November, and the slow recovery in the US economy, the President Obama administration would obviously want to have some achievement on that front to pressure the Chinese even they may know that it is useless.
So what can we really expect? The Chinese is unlikely to make any major concessions no matter how much the US pushes for, and certainly the currency war of competitive devaluation will not help the world economy as there will be no real depreciation if all depreciate together (although money supply will rise). I believe the deal we might see would be just some negotiated-in-advance agreement, which might hopefully calm some countries down and stop the fighting (for the moment). Another Plaza Accord should be out of the question. After all, it is in every country’s interest to cooperate on currency and trade issues as protectionism will hurt everyone.