This is a few days old but I was traveling until yesterday and not clever enough to figure out how to post it.As the dollar weakens against the euro, dollar-pegged currencies like the RMB must necessarily also weaken, and the consequence involves major changes in the global balance of payments.
Sept. 14 (Bloomberg) -- European Central Bank President Jean-Claude Trichet and French Finance Minister Christine Lagarde urged Asian governments to let their currencies appreciate more to close disparities in global trade. ``The yen and the yuan in particular are currencies whose level and spread pose a problem to global trade,'' Lagarde told reporters today after a meeting of euro-area finance chiefs in Oporto, Portugal. Trichet singled out China in saying it is ``desirable'' that Asian nations without floating exchange rates allow more movement in their currencies.
The concern among European officials is that, with the dollar at a record low against the euro, European exports stand to suffer if Asian currencies such as the Chinese yuan and Japanese yen don't gain more. The calls for change come before European Union Monetary Affairs Commissioner Joaquin Almunia visits China next week for talks. While the yuan has risen against the dollar since the government ended a peg to the U.S. currency in July 2005; in the same period, the Chinese currency has declined versus the euro.
That is being reflected in trade data, with the euro region's trade gap with China expanding to 43 billion euros ($59.6 billion) in the five months through May, up 23 percent from a year earlier, according to the latest data. Updated statistics scheduled for release next week may show China surpassing the U.K. as the euro area's biggest source of goods.
If countries like China and Japan continue to run trade surpluses and accumulate reserves (i.e. produce more than they consume), the rest of the world must continue to run trade deficits. Until now the US has absorbed most of these deficits, but if the dollar weakens because of reduced new purchases of dollar assets, one very likely result is that the deficit must shift to countries with stronger currencies – e.g. Europe.
The Europeans have two ways they can deal with this. The less likely way is “import” Chinese monetary policy and buy massive amounts of dollars while expanding the domestic money supply – driving up capital inflows into the US would cause a balancing increase in the US trade deficit.. The more likely way, however, is to see imports expand at a faster rate than exports. – i.e. Euopre would run a growing trade deficit. Given the rigidity of the European economy and high levels of unemployment, I don’t think there is an awful lot of appetite for the latter, and I expect we will see more pressure from Europe on countries perceived as running mercantilist policies to raise the values of their currencies.
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
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October, 2007
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