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| Paying for the stimulus | | US has little or no negotiating power with China when it comes to issues like yuan exchange rate |
| Business Standard / New Delhi Feb 24, 2009, 00:55 IST |
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After the tough talk by Treasury Secretary Tim Geithner, asking China to raise the yuan’s exchange rate, Secretary of Sate Hillary Clinton has sung a different tune during her visit to Beijing last week. She has asked China to continue buying US treasury bills and thereby to finance President Obama’s stimulus plan; she has also argued that this is a matter of self-interest for China, which needs assured markets when its exports are plummeting and causing large-scale unemployment at home. This is the opposite of the MAD (mutual assured destruction) of nuclear strategy, since it underlines mutual inter-dependence. Yet, the contradictions are obvious. If China is to keep buying US treasury bills, it needs a trade surplus, which is what an under-valued yuan would help achieve. But then, what happens to Mr Geithner’s demand?
The truth, it would appear, is that the US has little or no negotiating power with China when it comes to these issues. While there is inter-dependence of the kind that exists between any supplier and customer, the balance of power would seem to have shifted to Chinese hands. Such is the price of the USA’s economic profligacy—which has led to a situation where more dollars are held outside the US than within the country. In an earlier age, the excess US dollars that were sloshing around in the world resulted in a snapping of the link between the dollar and gold. When President Nixon took the dollar off the gold standard in 1971, under the Smithsonian agreement, it was a response to pressure from President de Gaulle of France, who demanded gold in exchange for dollars. Now, the spoiler could potentially be China.
For all that, there is no immediate risk to the US dollar—largely because the European Union is not willing to do what would be needed to make the euro an alternative reserve currency, or the preferred denominator for international transactions. Tighter monetary control in Europe has meant that there are no euro surpluses sloshing around in the rest of the world, and the main markets (like oil) still quote prices in dollars. Some central banks have re-balanced their holdings, and moved away from the dollar in varying degrees in order to better manage risk, but the dollar remains essentially unchallenged. And so long as there is no perceived risk to the dollar’s external value, countries like China will not hesitate to keep buying US treasuries. After all, they have proved a better bet than some of the other investments that Beijing has made—like Blackstone.
What could make a difference to this scenario would be the birth of regional clearing unions; one has been talked about for East Asia for some years, but there has been no serious action so far. However, such a union would appear inevitable once it becomes obvious that China has replaced the US as the largest trading partner for every East Asian country, bar none. India too might follow down that line, since its trade with China is growing much faster than Indo-US trade. If the biggest chunk of trade is intra-regional in nature, and appropriate financial mechanisms are worked out to facilitate this, then the importance of the dollar starts dropping. But that is some way off, until Beijing decides that the time has come to give the dollar a jolt.
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