Fred Bergsten, “New imbalances will threaten global recovery”

New imbalances will threaten global recovery, Financial Times
By Fred Bergsten

Published: June 10 2010 03:00 | Last updated: June 10 2010 03:00

Global imbalances are about to jump again. New estimates from the Organisation for Economic Co-operation and Development suggest that the sharp decline in the exchange rate of the euro, along with tepid European growth, will produce eurozone surpluses of at least $300bn (€251bn, £208bn) annually within the next few years. The tightening of fiscal policies throughout Europe in response to the crisis, along with the new balanced budget amendment in Germany, will both depress domestic demand and require easier monetary policy that will weaken the euro further.

No one would accuse the eurozone of competitive devaluation. However, there is considerable satisfaction throughout Europe with the weak currency. Martin Wolf of this newspaper has already characterised Europe’s de facto strategy to export its way out of stagnation as “stumbling into a beggar-my-neighbour policy”.

Whatever the intent, these European developments will have effects similar to the overt steps taken by other major countries to enhance their trade competitiveness. The most extreme case is the massive intervention by China and surrounding countries to keep their currencies severely undervalued. Other emerging markets are likewise seeking to expand further their war chests of foreign exchange by running large external surpluses. Switzerland has intervened substantially to hold its currency down. The eurozone has joined this “new mercantilism” and the result will be a sharp rise in global imbalances.

The counterpart increases in deficits will again accumulate mainly in the US as no other country could attract the requisite financing. The large deficit countries within the eurozone must reduce their imbalances. Along with the large surpluses of China and other Asian countries, the new European surpluses will probably double the American current account deficit beyond its previous record of $800bn in 2006. The US could then maintain its recovery only by continuing to run large budget deficits and again tolerating debt-financed consumer demand. This is the opposite of the rebalancing strategy agreed by the Group of 20 leading economies as critically important for sustaining global expansion and reiterated by its finance ministers last weekend.

Many regard this scenario as a desirable resolution of the current European crisis. Investor proclivities to buy Treasury securities and dollars could finance the American deficits for a while. The US would provide the global collective good, as in the past, by accepting increased dollar overvaluation and further increases in its external debt and deficits.

There are three glaring problems with this vision, however, all centred on the US. First, the sharp escalation of its own domestic and international imbalances would intensify the risk of future market attacks on the dollar and US financial assets. As soon as Europe and other alternatives regain their acceptability to investors, the unsustainability of the US situation would return to centre stage at even more dangerous levels.

Second, the higher imbalances themselves could sow the seeds of a new financial crisis just as they helped sow the seeds of the last crisis. Such huge inflows of foreign capital would keep US financial markets excessively liquid, hold interest rates down, promote underpricing of risk and thus again generate irresponsible lending and borrowing.

Third, a renewed explosion of the US trade deficit could well trigger the outbreak of protectionist trade policies that has been largely avoided to date. With unemployment remaining very high, job losses to the “new mercantilism” abroad are likely to incite strong political reactions. The virtual absence of a positive trade policy under President Barack Obama has created a dangerous vacuum in which new import restrictions, especially aimed against “unfair exchange rates,” could readily prevail.

At its upcoming summits in Toronto and Seoul, the G20 must adapt its rebalancing strategy to prevent this new threat to continued recovery and lasting global stability. Surplus Germany, along with China and Japan, must stimulate domestic demand. China must let the renminbi strengthen substantially. Joint intervention in exchange markets should prevent or reverse any significant further fall in the euro. Additional allocations of Special Drawing Rights would enable countries to build reserves without running trade surpluses.

Most importantly, the US must convince the world it is unwilling again to become the consumer and borrower of last resort. Only then will other countries stop relying on rising trade surpluses and become serious about generating domestic demand. Such a US strategy will of course focus on medium-term fiscal correction and increased private saving. But it will also have to end the chronic dollar overvaluations of the last 30 years, and euro depreciation along with continued renminbi manipulation will inevitably push currency issues back to the top of the global agenda. The writer is director of the Peterson Institute for International Economics in Washington

Keith Bradsher, “Europe’s Debt Crisis Casts a Shadow Over China”

Europe’s Debt Crisis Casts a Shadow Over China, New York Times
Published: May 17, 2010
Keith Bradsher

HONG KONG — The pain of the European debt crisis is spreading as the plummeting euro makes Chinese companies less competitive in Europe, their largest market, and complicates any move to break the Chinese currency’s peg to the dollar.

Chinese policy makers reached a rough consensus early last month about breaking the dollar peg and letting the currency, the renminbi, rise in value somewhat, according to people close to Chinese currency policy makers. Uncoupling the currencies would make American goods more competitive against Chinese products. But for various reasons, China has not yet put that policy into place.

And in light of the euro’s nose dive, such a move could be difficult. Letting the renminbi rise against the dollar would also mean a further increase in the renminbi’s value against the euro, creating even more problems for Chinese exporters to Europe.

The euro has plunged against the renminbi in recent weeks, at one point Monday reaching its lowest level since late 2002.

The steep rise of the renminbi prompted a Commerce Ministry official in Beijing to warn Monday that China’s exports could be threatened.

The official’s comments were the most explicit yet on the implications for China of Europe’s recent financial difficulties. The comments also suggest that even China — the world’s fastest-growing major economy and increasingly the engine of global growth — is not immune to the crisis that started in Greece and threatens to spread across much of Europe.

“The yuan has risen about 14.5 percent against the euro during the last four months, which will increase cost pressure for Chinese exporters and also have a negative impact on China’s exports to European countries,” Yao Jian, the ministry’s spokesman, said at a news conference in Beijing, according to news services, using another term for China’s currency.

It is a potentially awkward moment. The American secretary of commerce, Gary Locke, is in China this week leading the first cabinet-level trade mission of the administration of President Obama.

Some economists warn that China may face more problems. The biggest reason Chinese exports plunged early last year was not weakening demand in industrialized countries but a sudden, temporary disappearance of trade finance from Chinese and foreign banks. The availability of trade finance could easily become a serious problem again soon, said Dong Tao, the chief Asia economist at Credit Suisse.

Chinese exporters rely very heavily on bank letters of credit to finance their shipments. The availability of the letters of credit is closely linked to overnight lending rates between banks. When banks have trouble borrowing money themselves — as has been happening as a result of worries about European banks’ possible losses from the region’s sovereign debt crisis — they tend to cut sharply the issuance of letters of credit for trade finance.

The banks see that as a quick, easy way to conserve cash without violating the terms of other financial obligations, like established lines of credit for big corporations.

Interbank lending rates surged late last week and on Monday and must now come back down very quickly to persuade banks to keep issuing letters of credit, Mr. Tao said. “Without trade finance, trade won’t happen,” he said.

The Shanghai stock market plunged Monday, with the composite index falling 5.1 percent on worries about global demand as well as concerns about possible further moves in China to limit a steep rise in real estate prices this spring.

Some Chinese companies are already running into difficulty because of the euro’s fall against the renminbi.

“We have been receiving calls from some European clients who signed contracts with us earlier this month, and they all want to cancel their orders, since the depreciation of the euro has eroded all their margins and then some,” said Elvin Xu, the sales manager of Guangdong Ouyi Electrical Appliance in Zhongshan, China, which makes gas stoves, heaters and water heaters.

“They say they cannot increase the prices at their end to their customers, given intense competition in their marketplace,” Mr. Xu added.

The renminbi is rising along with the dollar against the euro. The Chinese government has continued to intervene heavily in currency markets in recent weeks to prevent the renminbi from rising against the dollar, maintaining an informal peg of 6.827 renminbi to the dollar, the level since July 2008.

Because American companies in particular compete in the Chinese market with European companies in many industries, the euro’s weakness against the renminbi is putting American companies at a disadvantage. The American commerce secretary, Mr. Locke, said Monday in Hong Kong that Mr. Obama’s goal was to double American exports by 2015. Short-term currency fluctuations do not detract from that goal, he said in an interview, adding, “Who knows what the euro will be next month, six months from now or a year from now?”

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Patti Waldmeir, “EU call for stronger renminbi rebuffed”

European officials failed yesterday to persuade Beijing to begin strengthening its currency, despite “frank” talks between top officials ahead of today’s EU-China summit in the eastern Chinese city of Nanjing.

Scarcely a fortnight after Barack Obama, the US president, called on his Asian tour for an appreciation of the renminbi, European officials made similarly little progress towards their goal of easing pressure on European exporters from the weak Chinese currency.

Three of Europe’s most senior economic policymakers met Wen Jiabao, China’s premier, Zhou Xiaochuan, central bank governor, and other senior officials for a mini-summit on the renminbi.

After the meeting, Jean-Claude Juncker, Luxembourg’s prime minister, who chairs eurozone finance minister meetings, said of China’s plans to strengthen its currency: “I can’t say I am more optimistic than I was before I came here.”

José Manuel Barroso, European Commission president who met Mr Wen for a private dinner last night, said afterwards: “The Chinese reiterated their position on the matter . . .

“They are telling us exactly what they told President Obama – exactly the same.”

State television reported that Mr Wen had restated Beijing’s long-standing position that the renminbi’s exchange rate should be kept at a reasonable, balanced level.

Today’s EU-China summit is expected to focus on climate change, coming only days before United Nations-sponsored meetings in Copenhagen.

Last week, China unveiled a proposal to curb the carbon intensity of its economy after Washington also announced a carbon-cutting target.

Mr Barroso said the EU welcomed the Chinese offer, adding that the US and Chinese initiatives “seem to have created some momentum” for the Copenhagen talks.

Jean-Claude Trichet, the European Central Bank president, said Chinese officials had reiterated their intention to implement currency reforms launched in July 2005, when Beijing ended a peg to the dollar and said it would let the renminbi float in a managed band with reference to a basket of currencies.

But he stressed that Europe should not “overinterpret” the importance of that statement.

The officials stressed the problems caused by the weak renminbi for European exporters.

The EU’s exports to China, the world’s fastest-growing leading economy, fell 5.3 per cent in the first half of the year as the euro’s appreciation made goods from the region less competitive.

The euro has gained 15 per cent against the Chinese currency in the past year, fuelling complaints that the renminbi’s unofficial peg to the weakening US dollar is creating an unfair advantage for China’s exporters.

Eurozone officials argued that a gradual, orderly rise in the renminbi was in the interests of both China and the world economy.

However, Mr Juncker said Beijing’s officials had argued that it was hard to convince the Chinese public to support an immediate appreciation of the currency.

Beijing insists China needs a stable exchange rate against the dollar to assist its economic recovery which, it says, has benefited the world.

http://www.ft.com/cms/s/0/e9aa81ce-dd4e-11de-ad60-00144feabdc0.html