Category Archives: Asia

IMF Reform and Isolationism in Congress

A long-awaited reform of the International Monetary Fund has now been carelessly blocked by the US Congress.   This decision is just the latest in a series of self-inflicted blows since the turn of the century that have needlessly undermined the claim of the United States to global leadership. 

The IMF reform would have been an important step in updating the allocations of quotas among member countries.  From the negative congressional reaction, one might infer that the US was being asked either to contribute more money or to give up some voting power.   (Quotas allocations in the IMF determine both monetary contributions of the member states and their voting power.)  But one would then be wrong.  The agreement among the IMF members had been to allocate greater shares to China, India, Brazil and other Emerging Market countries, coming largely at the expense of European countries.  The United States was neither to pay a higher budget share nor to lose its voting weight, which has always given it a unique veto power in the institution.

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The Latest on the Dollar’s International Currency Status

 

      Most people know that the general trend in the dollar’s role as an international currency has been slowly downward since 1976.   International use of the dollar as a currency in which to hold foreign exchange reserves, to denominate financial transactions, to invoice trade, and to serve as a vehicle for foreign exchange transactions is below where it was during the heyday of the Bretton Woods era (1945-1971).  But few are aware of what the most recent numbers show.         It is not hard to think of explanations for the downward trend.   Since the time of the Vietnam War, US budget deficits, money creation, and current account deficits have often been high.  Presumably as a result, the dollar has lost value in terms of other major currencies or in terms of purchasing power over goods.   Meanwhile, the US share of global output has declined.  Most recently, the disturbing willingness of some American congressmen in October to pursue a strategy that would have the Treasury default on legal obligations has led some observers to ask the natural question whether the dollar’s international currency status is now imperiled. Moreover some EM currencies are joining the list of international currencies for the first time.  Indeed, some analysts have suggested that the Chinese yuan may rival the dollar as the leading international currency by the end of the decade!  (Eichengreen, 2011; and Subramanian, 2011a, 2011b.)          The trend in the dollar as an international currency has not been uniformly downward, however.  Interestingly, the periods when the public is most concerned about the issue do not coincide well with the periods when the dollar’s share is in fact falling.  By the criteria of international use as a reserve currency among central banks and as vehicle currency in foreign exchange markets, the most rapid declines took place during the intervals 1978-1991 and 2001-2010. (The yen and deutschemark were the rising currencies during the first period, and the euro during the second.)  In between these two intervals, during the years 1992-2000, there was a clear reversal of the trend, notwithstanding a popular orgy of dollar declinism around the middle of that decade.  Central banks held only an estimated 46% of their foreign exchange reserves in the form of dollars in 1992, but had returned to almost 70% by 2000.  Subsequently, the long-term downward trend resumed.  According to one estimate, the share in reserves declined from about 70% in 2001 to barely 60% in 2010 (Menzie Chinn).   During the same decade, the dollar’s share in the foreign exchange market also declined:  The currency constituted one side or the other in 90% of foreign exchange trading in 2001, but only 85% in 2010.       The most recent statistics unexpectedly suggest that the dollar’s standing has again taken apause from its long-term decline.  The International Monetary Fund reports that its share in foreign exchange reserves stopped declining in 2010 and has been flat since then.  If anything, the share is up very slightly thus far in 2013 (COFER, IMF, Sept. 30, 2013).   Similarly, the Bank for International Settlements reported in its recent triennial surveythat the dollar’s share in the world’s foreign exchange markets rose from 85% in 2010 to 87% in 2013 (preliminary global results). That the dollar has been holding up so well comes as a surprise, in light of dysfunctional US fiscal policy.   Or maybe we should no longer be surprised.  After all, when the global financial crisis erupted out of the American sub-prime mortgage mess in 2008, the reaction of global investors was to flee into the United States, not out.  They clearly still regard the US Treasury bill market as the safe haven and the dollar as the top international currency.  The explanation must be the one that is so often noted: the absence of good alternatives.  In particular, the euro has its own all-to-obvious problems.  Indeed the euro’s share of reserve holdings and its share of foreign exchange transactions have  both fallen by several percentage points over the last three years (reserves from 28% of allocated reserves in 2009 and 26% in 2010, to 24% in the most recent 2013 figures; forex trading from 39% of transactions in 2010 to 33% in 2013).        What about the vaunted yuan?  According to the IMF statistics, it hasn’t yet broken into the ranks of the top seven currencies in terms of central bank reserve holdings.  The top six are the US dollar and euro, followed by the yen and pound (the latter quietly reclaimed the number three position in 2006 and has been running neck-and-neck with the yen recently), and the Canadian dollar and Australian dollar (also running neck-and-neck). According to the BIS statistics, China’s currency has finally broken into the top ten in forex trading; but its share is only 2.2% of transactions. This is behind the Mexican peso at 2.5%, and still farther behind the Canadian dollar, Australian dollar and Swiss franc.  (See Table 1 and Figures 2 & 3).   Since 2.2% is much less than China’s share of world trade, it would be more accurate to say that the renminbi is becoming a normal currency than to say that it is becoming an international currency, let alone the top international currency.Despite recent moves by the Chinese government, the yuan  still has a long way to go.  Of the three kinds of attributes that a currency needs to become widely used internationally the yuan  has two – size of the home economy and the ability to hold its value – but still lacks the third:  deep, liquid, open financial markets.        What might account for the recent stabilization of the dollar’s status?  What do the last three years have in common with the preceding period of temporary reversal, 1992-2000?   Both intervals saw striking improvements in the US budget deficit, both structural and overall.   The federal deficit is now less than half what it was in 2009 or 2010; and the record deficits of the 1980s were converted into record surpluses by the end of the 1990s. Perhaps the fiscal observation is a coincidence.   It would be foolish to read too much into two historical data points.  It would be even more foolish to believe, just because American politicians have failed to dislodge the US dollar from its number one status over the last forty years, that they could not accomplish the job with another few decades of effort.  Pound sterling had the top spot in the nineteenth century, only to be surpassed by the dollar in the first half of the twentieth century. It is not an eternal law of nature that the US currency shall always be number one.   The day may come when the dollar too succumbs in its turn.  But that day is not this day.    

 

 

Figure 1: The share of the dollar in central banks’ foreign exchange reserves stopped its downward trend in 2010-2013

Reserves

source: Menzie Chinn (2013), based on IMF’s COFER.

 
 
 

 

Table 1: The share of the dollar in global foreign exchange trading reversed its downward trend in 2010-2013

 

Table 1

 

Source: Bank of International Settlements’ Triennial Central Bank Survey, Sept.2013.

 

Figures 2 and 3: The share of China’s yuan in foreign exchange trading is rising, but still ranks behind many other currencies

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Protectionist Clouds Darken Sunny Forecast for Solar Power

 
On July 27 negotiators reached a compromise settlement in the world’s largest anti-dumping dispute, regarding Chinese exports of solar panels to the European Union.   China agreed to constrain its exports to a minimum price and a maximum quantity.   The solution is restrictive relative to the six-year trend of rapidly rising Chinese market share (which had reached 80% in Europe), and plummeting prices.  But it is less severe than what had been the imminent alternative:  EU tariffs on Chinese solar panels had been set to rise sharply on August 6, to 47.6%, as the result of a “finding” by the EU Trade Commissioner that China had been “dumping.”   The threat of likely retaliation by China helped persuade the Europeans to back off from their determination to impose such high protective walls around their own solar panel industry. 

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Dispatches from the Currency Wars

The value of the yen has fallen sharply since November, owing to the monetary component of Japan’s efforts to jump-start its economy (“Abenomics”).  Thus the issue of currency wars is expected to feature on the agenda at the G-8′s upcoming summit in Enniskillen, UK, June 17-18.

The phrase “currency wars” is catchy.  But does it have genuine analytical content?   It is another way of saying “competitive devaluation.”  To use the language of IMF Article IV(1) iii, it is what happens when countries are “manipulating exchange rates…to gain an unfair competitive advantage over other members…” To use the language of the 1930s, this manipulation would be a kind of beggar-thy-neighbor policy, with each country seeking to shift net exports toward its own goods at the expense of its neighbors.

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Will Emerging Markets Fall in 2012?

Emerging markets have performed amazingly well over the last seven years. They have outperformed the advanced industrialized countries in terms of economic growth, debt-to-GDP ratios, and countercyclical fiscal policy.  Many now receive better assessments by rating agencies and financial markets than some of the advanced economies.

As 2012 begins, however, emerging markets may be due for a correction, triggered by a new wave of “risk off” behavior among investors. Will China experience a hard landing? Will a decline in commodity prices hit Latin America? Will the sovereign-debt woes of the European periphery spread to neighbors such as Turkey in a new “Aegean crisis”?

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The Rise of the Renminbi as International Currency: Historical Precedents

All of a sudden, the renminbi is being touted as the next big international currency.   Just in the last year or two, the Chinese currency has begun to internationalize along a number of dimensions.   RMB bank desposits are now available in Hong Kong.  A RMB bond market has grown rapidly there as well, with the issuers including major multinationals such as McDonald’s.   Some of China’s international trade is now invoiced in the currency.  Foreign central banks have been able to hold RMB since August 2010, with Malaysia going first. 

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The Phylloxera Analogy: Lessons from Emerging Markets

    
      In 2008, the global financial system was grievously infected by so-called toxic assets originating in the United States.  As a result of the crisis, many have asked what fundamental rethinking will be necessary to save macroeconomic theory.  Some answers may lie with models that have in the past been applied to fit the realities of emerging markets — models that are at home with
the financial market imperfections that have now unexpectedly turned up in industrialized countries.  The imperfections include default risk, asymmetric information, incentive incompatibility, procyclicality of capital flows, procyclicality of fiscal policy, imperfect property rights, and other flawed institutions.   To be sure, many of these theories had been first constructed in the context of industrialized economies, but they had not become mainstream there.   Only in the context of less advanced economies were the imperfections undeniable.  There the models thrived.     
 

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Gold: A Rival for the Dollar

     Robert Zoellick put a few sentences about gold toward the end of a column in today’s FT that are drawing a lot of attention.   I doubt very much if the World Bank President has in mind a return to the gold standard, but goldbugs and critics alike are talking as if he does.

      Even if one placed overwhelming weight on the objective of price stability — enough weight to contemplate a rigid straightjacket for monetary policy — gold would not be a suitable anchor.   The economy would be hostage to the vagaries of the world gold market, as it was in the 19th century:   suffering inflation during periods of gold discoveries and deflation during periods of gold drought.   This is well-known.   I am confident Zoellick understands it.   (He and I were in the same macroeconomics seminar at Swarthmore College in the 1970s.)

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