Post a Comment On: China Matters

I have an article up at Asia Times Online about China’s interest in IMF Special Drawing Rights (SDRs) as an alternative to the U.S. dollar as an international reserve currency: China Discovers Value in the IMF.

The Obama administration’s effort to expand the lending capacity of the IMF by US$100 billion—an important precondition for increased issuance of SDRs—is facing united Republican opposition and skepticism from a swath of liberal Democrats in the House of Representatives. The fact that the IMF credit is tacked onto the supplemental appropriation bill for the Iraq and Afghan wars isn’t helping.

The spectacle of liberals teaming up with anti-Obama conservatives in an attempt to hand the White House a humiliating defeat is an interesting one and, to President Obama’s advisors, no doubt unwelcome.

In contrast to its lacksadaisical approach to the release of the hapless Uighur detainees at Guantanamo, the White House is apparently vigorously “whipping” this issue, and one imagines that Rahm Emanuel will be able to prevent 40 Democratic votes from sliding into the “No” camp and dooming the bill.

In any case, the idea that China might be able to diversify away from the dollar without adjusting its artificially low RMB:US$ exchange rate apparently gives some economists, like the Council on Foreign Relations’ Sebastian Mallaby, some heartburn.

In an article mockingly entitled Beijing’s Aspiring Houdinis Play with the Dollar, Mallaby poured scorn on China’s forex ideas:

So neither the IMF idea nor the scattershot attempts to internationalize the yuan will rescue the Chinese from their dilemma. China has accumulated at least $1.5 trillion in dollar assets, according to my Council on Foreign Relations colleague Brad Setser, so a (highly plausible) 30 percent move in the yuan-dollar rate would cost the country about $450 billion — about a tenth of its economy. And, to make the dilemma even more painful, China’s determination to control the appreciation of its currency forces it to buy billions more in dollar assets every month. Like an addict at a slot machine, China is adding to its hopeless bet, ensuring that its eventual losses will be even heavier.

Bwa-ha-ha-ha! Your pitiful schemes are doomed to failure! The invisible hand will crush you!

Maybe.

But maybe not.

I would suspect that the window of opportunity for condescending sarcasm by arrogant Western economists is closing fast.

Despite half-hearted attempts to blame Chinese T-bill purchases for fueling the West’s propensity toward criminally reckless lending, the signature financial collapse of the last 80 years was engineered by the genius economists of America and Europe, not the dumbass mercantilist Commie bureaucrats of Beijing.

And, in a couple years, it may seem better to have a trillion or two in the bank—as China does—instead of piling up a trillion or two in deficits—as the U.S. is doing.

We’ll see.

Meanwhile, China is also taking concrete steps to use the yuan for international settlements in transactions with Asian countries, promoting yuan transactions by Hong Kong banks, and preparing to sell some yuan denominated bonds.

The settlement efforts are actually modeled on old business arrangements between China, Vietnam, and other ostracized Communist countries back in the day when nobody had dollars and the RMB had to be used to keep score.

In other words, a logical, pragmatic regional approach to the nagging dollar problem, and not piece of foolhardy, grandiose global legerdemain.

Behind Mr. Mallaby’s sneering I detect, perhaps wrongly, the frustration of an economist who sees China dodging the bullet once more.

If China comes out of the current global recession looking pretty good, this will be the second time in the last twenty years that its monetary and forex policy confounded the naysayers, first time being the 1997 financial crisis brought to Asia courtesy of deregulation, George Soros, and the IMF…

…and the RMB exchange rate hawks centered around ex-IMF research department director and determined panda kicker Michael Mussa, Nicholas Lardy, and Morris Goldstein at the Peterson Institute may be forced to examine the assumptions that underlie the view that China’s refusal to float the RMB is counterproductive and futile.