A new daring game and China’s responses

Tsang Shu-ki (15 March and 2 April, 2009)

The global financial and economic crisis is entering a new stage.

Remember the conventional saying (adjusted for inflation) that if you owe a bank $100,000, you are its slave; but if you owe it $100 million, it is your slave.

Guess who the banker is and who owes whom what, this time round.

After watching news about Secretary Hilary Clinton’s visit to China almost immediately after Obama took over the White House, with a clear message to Beijing that it should hold on to U.S. treasuries; and the latest pronouncement by Premier Wen Jiabo at the National People’s Congress that the U.S. had a responsibility to ensure (insure?) the value of China’s huge holdings, I wonder who the “banker” is. And who is the “slave”?

A new daring game seems to be emerging in the world. Governments and corporations which have diversified from or dumped US dollars in the past year are not laughing, despite the hardship created mainly by Wall Street, with the tanking of the euro, oil prices and the exchange rates of commodity currencies.

China’s intentions have been to invest in real sectors; but its attempts have been regularly blocked outside Africa, Latin America and Australia, largely out of geopolitical considerations. Its success, in gathering the biggest pool of foreign exchange reserves, has been back-firing.

The country which owes the rest of the world an amount of money never known in history is turning the table around. Do you guys dare to call me illiquid or even insolvent? Why don’t you understand that you actually “need” all these debts that I am creating, to keep us all afloat?

What kind of a world is this? Well, we have to wait. History, above political manipulation, seems to have a certain sense of justice in the long run. I hope to be able to see that one day.

China’s responses (2 April 2009)

Given the seriousness of the global situation, it is no laughing matter and China seems to mean business with Premier Wen’s open expression of worries.

In the run up to the G20 Summit in London, PBC Governor Zhou Xiaochuan published the now famous “three pieces” (besides other pronouncements by top officials):

(1) “Reform the International Monetary System”

http://www.pbc.gov.cn/english/showaccdoc.asp?col=6500&id=181

(2) “On Savings Ratio” http://www.pbc.gov.cn/english/showaccdoc.asp?col=6500&id=182

(3) “Changing Pro-cyclicality for Financial and Economic Stability”

http://www.pbc.gov.cn/english/showaccdoc.asp?col=6500&id=185

And China has been backing its words with actions by going forward in signing and finalizing bilateral currency swap arrangements with (in temporal sequence): (1) South Korea; (2) Hong Kong; (3) Malaysia; (4) Belarus; (5) Indonesia; and (6) Argentina, in a matter of less than four months, and to the tune of RMB 650 billion. More are coming (“Strengthen Regional Financial Cooperation and Actively Conduct Currency Swap” - http://www.pbc.gov.cn/english/showaccdoc.asp?col=6400&id=1262).

President Hu Jintao, on the other hand, also reportedly made a “solemn commitment” before attending the G20 Summit, saying that, “as a responsible member of the international community, China will continue to take an active part in the international cooperation to keep international financial stability and promote world economic growth, support international financial organizations in increasing financing capacity in response to the changes in the international financial market and extend greater support for the developing countries influenced by the crisis. We are willing to actively participate in the trade financing plan of the World Bank International Finance Corporation (IFC)” (Boost Trade Finance in Fulfillment of G20 Summit Commitments

-http://www.pbc.gov.cn/english/showaccdoc.asp?col=6400&id=1263).

These steps are not going to derail the predominant reserve currency status of the U.S. dollar any time soon. Nevertheless, let anyone who thinks China is just bluffing be warned.