China has loosened its peg to the dollar. So reads triumphant headlines in the West. As if this were some sort of Chniese climb-down. It is not.
I said in a post a little while ago, the Chinese would not allow their currency to appreciate. So surely I should admit I was wrong and keep quiet? Well not quite. I am quite happy to admit that the Chinese did play a cleverer game. But I think you’ll find the Chinese currency won’t appreciate very much relative to the dollar. I think you’ll find this is a token effort designed to draw the venom of any criticism from the US at the G20 and beyond, and to make any protectionist actions on the part of the US Congress look what what they would in fact be – a trade war.
The policy I think the Chinese are following is the one I have written about for months now. I and, I would like to point out, other more informed observers than me. The big error of judgement would be to see the Chinese actions as falling neatly into line with the US desire to have China become more open to importing goods from the US as per the US desire to export more. This, I think, is NOT what the CHinese have in mind. China merely wants its citizens to have more cash and for that cash to buy more. While they acheive this they are happy to make small festures designed to show them as cooperative and ‘doing their part’.
Some imports will do better. If that pleases the American political class so much the better. But I do not think the Chinese currency will appreciate all that much over the medium term. I also think a modest stock market rise in anticipation of profits will drizzle away. As other less uplifting news seeps back to mind.
In the mean time China is pursuing a policy of developing a domestic economy of domestic production, imports from foreign businesses that China part owns or is soon to buy, and wage increases. China would like its citizens to feel their incomes are looking up, so as to help off-set a continued cooling of the property price bubble. China has been trying and will continue to try to reign in the Banks unwise lending and the siphonning-off of regional government funds to support the property bubble.
Such moves will make some of the aspiring middle class unhappy and poorer. Best therefore, to get a few million workers feeling that the government is taking a little notice of them.
I also wonder if we will see a coordination of any rises in the value of Chinese currency relative to the dollar, being accompnied by the use of China’s dollar holdings to settle large foreign deals – dollar debt holdings for Oil and Gas and mineral rights. The third world will happily accept such holdings to offset their own dollar debts.
At the same time, as CHina can point to its beginning to ‘deal with its currency’ China will be able to turn round and ask what steps the West is taking to dealk with its end of the global imbalances? Namely overwhelming debts. And the answer will be uncomforatble for Washington. Won’t it? Europe will point to austerity measures being enforced, or ‘begun’ at least from Hungary to Ireland, Greece to Germany. WHat will the US point to? Another Big Bank bail out and stimulus. Another raising of the Federal Debt celing?
The achilies heel of America right now is that it can not and will not be able to enforce wide-spread austerity cut backs. Washington may try to talk about cuts but they would be politically very, very difficult and futile. A great deal of poliitcal damage would be done both among those who voted for Obama and in the vast Barrel of Pork that IS State politics and for what? The resulting savings would be a piss in a river. America doesn’t have the vast welfare state to dismantle. What savings it can make are tiny in relation to the on-going bank bail outs and military expenditures .
A large part of the growing animosty between America and Europe is because Europe has broken ranks withe the ‘Bail-out forever’ policy of Wall Street and its mouth piece, the Fed. By breaking ranks Europe exposes the FED policy to scrutiny merely by having something against which it contrasts.
All in all Wall Street may find itself getting cought uncomfortably between actions taken in China and those taken in Europe.
Of course actions in Europe are by no means settled. Here, at least there, is hope that if the banks need to be bailed out yet again this would seriously stiffen popular resentment. Savage cuts made on the advice of bankers, who then turn around and demand that banks in europe should be bailed out again may not be easy to spin.