As the G20 chair passes from South Korea to France, it will be down to President Sarkozy to try to stop the protectionist trends of the last two years. The G20 nations have introduced more than 400 trade restraint measures, according to the monitoring organisation Global Trade Alert. And Japan, China, Brazil and several other emerging nations have been intervening in markets to stop their currencies rising. US treasury secretary Timothy Geithner’s proposal to establish a policy framework in which balance-of-payments surplus countries, such as China, would increase their imports, was shot down by China and Germany.
Most recently a number of emerging nations, including Brazil, Korea, and Indonesia, have put controls on inflows of capital from abroad. These have picked up sharply following the move by the US central bank, the Federal Reserve, to start a second round of quantitative easing (QE) by buying up to $600bn of treasury bonds over the next few months. The decision was criticised by China, Germany and a few other nations as a form of monetary protectionism before the summit, and clearly soured the mood between the major G20 participants. We now face the prospect of still more protectionism that could destabilise the world economy. David Cameron may have tried to convey this message to China’s leaders earlier this week, but this is really an issue for the US and China to resolve.
America’s support for QE reflects the economic trauma in the US brought on by the financial crisis. A bungee-jump recovery in production has taken place since the 2009 abyss, but demand is weak, and the real rate of unemployment is nearly double the official measure rate of 9.6%. For the US, increasing the money supply through QE is simply another means to allow the economy to destroy debt and accumulate savings: the Fed wants to force down long-term interest rates, induce consumers and companies to spend, and so try to stop the US economy slipping into another recession and deflation, which would worsen the debt crisis. One of the beneficial consequences of QE for America is a weaker exchange rate.
China’s opposition is based on the potentially destabilising consequences for itself, and the international monetary system, of pushing the US dollar down and flooding the markets with newly printed money. China fears that QE is just another means to force it to appreciate the strongly undervalued yuan – a policy to which it is vehemently opposed. China returned to a slightly more flexible currency system in June under some duress, and has let the yuan rise by 3% from early September. China’s reluctance to significantly revalue its exchange rate is understandable in a high-growth, high-savings economy based around manufacturing, artificially cheap capital, a very low exchange rate, and a fear of the social consequences of rising unemployment.
The US and China, then, are pursuing mutually inconsistent economic policies reflecting diametrically opposite circumstances, but centred around a common exchange rate, so the yuan moves little against the US dollar. On this basis, there never will be a meaningful agreement by G20 nations to resolve the underlying problem of imbalances in global trade or local economies.
Ultimately the G20 must recognise that the US has already been dealt its hand by the financial crisis and that China has both choices and flexibility. This would refocus attention where it should be – namely, on the wide-ranging economic and political reforms that China has to pursue. China has to shift economic and political power from companies to consumers, from the cities to the countryside, and from coastal to inland regions.
The Communist party subscribes to some of these broad objectives, but the global consequences of the financial crisis have made reform more urgent. In a country that fears anything other than controlled and incremental change in the interests of the ruling party, we should not hold our breath.
Yet it is in China’s self-interest to rebalance its own economy without delay, to lower the extraordinary 53% of GDP accounted for by national savings and to allow its exchange rate and monetary systems to become more flexible. It may see QE as another bullying tactic, but it is China’s own actions that will determine the shape in which the world emerges from the financial crisis.
George Magnus, a senior economic adviser at UBS Investment Bank and the author of Uprising: Will Emerging Markets Shape or Shake the World Economy?