The Germans Keep Hitting Themselves on the Head with the Austerity Hammer
Montagu King, or Mervyn Norman?

Martin Wolf Exhorts China to Stop Loving the Dollar So Much


Why China hates loving the dollar: In criticising US fiscal and monetary policies and, in particular, the Federal Reserve’s policy of “quantitative easing”, Mr Hu was following a well-trodden path. In the 1960s, Valéry Giscard d’Estaing, then French finance minister, complained about the dollar’s “exorbitant privilege”. John Connally, US Treasury secretary under Richard Nixon, answered when he described the dollar as “our currency, but your problem”. The French and now the Chinese desire exchange rate stability but detest the inevitable result: an open-ended commitment to buying as many dollars as the US creates. Both want to discipline US policies. Both have failed. Are things likely to be different this time? No.

The Chinese and other heavy interveners have a peculiar way of showing their distrust of the dollar. Between January 1999, just after the Asian financial crisis, and October 2010, the global stock of foreign currency reserves increased by the staggering total of $7,450bn. China alone added $2,616bn. During the recent financial crisis, global reserves did provide a cushion to holders, falling by just $473bn from July 2008 to February 2009 (6 per cent of the initial stock). But then purchases restarted: between February 2009 and October 2010, reserves rose by another $2,004bn....

Why have relatively poor countries made these huge investments in the low-yielding liabilities of the world’s richest countries and, above all, of the US? Why has China, in particular, purchased vast quantities of debt from a country whose policies it distrusts – more than $2,000 for every Chinese and some 50 per cent of gross domestic product? The answer is that this is the by-product of efforts to keep the currency down and exports competitive....

Is there a plausible reform of the international monetary system that would solve the Chinese dilemma?... What about turning the renminbi itself into a global reserve currency? In the very long run, this must happen. But any swift move in that direction would raise two difficulties for China. First, it would only make sense if the currency were to be unpegged from the dollar, in which case the mercantilist strategy would collapse. Second, for a currency to become global it must be freely convertible and traded in deep and liquid financial markets. China would have to abandon exchange controls and liberalise its financial system. It would become impossible to force Chinese people to hold vast quantities of low-yielding bank deposits. Above all, the authorities would lose their most important source of economic control: the banking system. This is surely close to inconceivable in the near term....

China cannot pursue its mercantilist strategy and also avoid accumulating dollar liabilities of doubtful long-term value. This is the “Triffin dilemma”.... The solution for China is to... allow the renminbi to rise faster. That would surely create adjustment problems. But those adjustments are in China’s own interests.... [E]vidence suggests that China is still willing to move only very slowly. That is a mistake. My advice to Mr Hu is simple: if China wants to escape from the tyranny of that dreadful dollar, stop buying. Please.