When someone shares with you something of value, you have an obligation to share it with others.
Thursday, 29 January 2009
Manipulated? Yes, but maybe not overvalued
New US Treasury Secretary Timothy Geithner kicked up a right old stink last week when he told his Senate confirmation hearing that “President Obama... believes that China is manipulating its currency.”
New US Treasury Secretary Timothy Geithner kicked up a right old stink last week when he told his Senate confirmation hearing that “President Obama... believes that China is manipulating its currency.”
As president, he added, Mr. Obama would “aggressively” pursue a change in China’s foreign-exchange policy.
His words provoked predictable howls of mock outrage from Beijing, as officials from a clutch of different government bodies all rushed to say how shocked, shocked they were at such a baseless accusation.
Their rebuttals fooled no one. Of course China manipulates its currency. The Commerce Ministry’s statement that “China will keep its currency stable” effectively admitted as much. Maintaining exchange rate stability in these turbulent times without engaging in currency manipulation would be impossible.
The mainland is hardly alone in such manipulation. Every country that maintains a managed or fixed exchange rate manipulates its currency through intervention in the foreign-exchange market.
Hong Kong does. In the last few months the Hong Kong Monetary Authority has sold about HK$170 billion in the foreign-exchange market to keep the Hong Kong dollar within its permitted trading band against the US currency.
But Hong Kong’s manipulation doesn’t draw Mr. Geithner’s fire. The mainland’s does because Mr. Obama believes Beijing is deliberately holding the yuan well below its fair value in order to gain an unfair advantage for the country’s exports in the US market, to the detriment of US manufacturers.
The trouble with this belief is that determining a currency’s theoretical fair value is well nigh impossible. Different methods give wildly different answers.
But one commonly cited indication that a currency is being kept artificially undervalued is a rapid accumulation of foreign-exchange reserves, and China’s reserve build-up has certainly been rapid. Over the last 10 years, the country’s official reserves have swollen by US$1.8 trillion. In the first quarter of last year alone, they grew by an enormous US$154 billion.
But as the first chart below shows, things have changed since then. In the last quarter of 2008, official reserves grew by just US$40 billion, the smallest addition since the depths of the Sars scare in the second quarter of 2003.
Several explanations have been advanced for this slowdown. Some of it is surely the result of valuation effects. The mainland declares its reserves in US dollars, so if other currencies it holds, for example the British pound, fall against the greenback, the rate of reserve accumulation appears to decline. The effect, however, is small.
Alternatively, Nicholas Lardy at the Petersen Institute in Washington suggests that the slower build-up could be because Beijing used some of its reserves to recapitalise Agricultural Bank of China. But the indications are that the money had been set aside already.
As a result, most observers conclude that the fourth quarter’s decline in reserve accumulation was due to a heavy outflow of hot capital in response to the slump in China’s economic growth. Anthony Chan at fund manager Alliance Bernstein estimates that as much as US$126 billion could have fled the country during the last three months of 2008.
If so, it would indicate that the yuan may not be as undervalued as many believe. Other evidence supports this view. As the second chart below shows, although the yuan appreciated by only 5 per cent against the US dollar over the last 12 months, it climbed by nearly 12 per cent against a trade-weighted basket of currencies.
That leaves the yuan looking relatively expensive. With mainland growth stalling, unemployment rising and domestic demand depressed by the slump in the property market, Beijing is going to be extremely reluctant to risk jeopardising any more export-sector jobs. That means there is little chance of any further yuan appreciation against the US dollar unless the greenback itself falls against other major currencies.
So if Mr. Geithner wants the yuan to rise, he may have to talk down the US dollar. On the other hand, some uncharitable souls might consider that to be manipulation ...
CHINA took Barack Obama's views on the yuan seriously. So seriously that it is doing the exact opposite of what the US president would like. China let the yuan fall the most in a month on Jan 23, right after Timothy Geithner, Mr Obama's pick for Treasury secretary, relayed Mr Obama's campaign position that China was 'manipulating' its currency. The reaction was China's way of telling the new US leader what he can do with his foreign exchange views.
What should currency traders do now? Is a trade war brewing between the world's No 1 and No 3 economies? Is the yuan about to strengthen? Will Mr Obama risk the ire of the most populous nation to make good on his protectionist campaign trail rhetoric? Perhaps the answer is for everyone to relax.
Yes, China manipulates its currency. Arguably, so do Singapore, Argentina, Saudi Arabia and any nation that either pegs its currency, maintains a tight trading band or oversees a 'managed float' system. Even Hong Kong, routinely ranked as the world's freest economy by the Heritage Foundation, manipulates its currency. It has to maintain its link to the US dollar.
'Manipulate' is a charged word, and it's politically incorrect in financial circles. And yet it was hard to keep a straight face when a Commerce Ministry official argued on Jan 24 that 'China has never tried to gain advantage in international trade by manipulating its currency'.
That's no longer the point and Mr Obama's China views seem very much of the pre-2008 variety. Before the US dragged down the global economy, it was possible to give China grief about the yuan. It was fine to argue that China's policies contributed to global instability. Now, it's about avoiding a Chinese meltdown.
With the exception of personal tax decisions, Mr Geithner is smart. He's an old Asia hand, having lived in China, India, Japan and Thailand and studied Mandarin and Japanese. There's zero chance that he hasn't conveyed to Mr Obama the importance that China puts on social stability and the yuan's role in maintaining it. It's hard to believe that Mr Geithner hasn't stressed the dangers of a trade war with the largest holder of US government debt. Federal Reserve chairman Ben Bernanke, a Great Depression scholar, is sure to advise against policies that inhibit growth. Until further notice, consider the Obama administration's trade ideas more rhetoric than a harbinger of provocative policy steps. The currency manipulator label is rather toothless anyway. The administration of former president George W Bush avoided it so as not to antagonise China. Yet China didn't let the yuan gain 21 per cent between July 2005 - when China scrapped its US dollar peg - and July 2008 because the US demanded it. China did it because it was best for China. The global slowdown means that the yuan will probably end 2009 weaker than it started the year.
There's also a be-careful-what-you-wish-for angle here: If China lets the yuan trade freely in markets tomorrow, it's more likely to drop in value than surge. So-called hot money may flee, global companies may repatriate profits and Chinese savers might buy overseas assets.
One can hope that Mr Obama is employing a broader strategy with his yuan views: Sending a message that Asian countries whose rapid growth relies on weak exchange rates need to reconsider their economic models, as the US needs to do with its own.
The argument's thrust, says Ray Attrill, Sydney-based global research director at Forecast Ltd, is that 'the ultimate resolution of the current financial and economic crisis requires a global rebalancing entailing much stronger internal demand dynamics'. The US, of course, needs to consume less. US officials should ask questions of China. It remains big on spin, small on transparency. China's aggressive policing of the Internet and lack of respect for international property rights inhibit innovation, grassroots job creation and economic growth. Corruption and pollution are clear dangers to the outlook.
Mr Obama's ideas remind one of a key argument in James Fallows' recent book Postcards From Tomorrow Square: Reports From China - the US obsession with the yuan underlines a failure of imagination. Yes, an undervalued currency helps China, but it's not the only reason for the nation's export prowess. Lax labour, environmental and safety standards have as much to do with China being the so-called factory floor of the world as anything else. Now that the global economy is grinding to a halt, China will be spending unprecedented amounts of public money and doing all it can to stabilise things. Anyone who thinks that China is about to let its currency strengthen is dreaming. That goes for the US president, too.
William Pesek is a Bloomberg News columnist. The opinions expressed are his own.
Geithner's yuan call takes heat from economists, policy makers
Morgan Stanley's chairman Stephen Roach calls it 'horrible advice'
January 29, 2009
(DAVOS) US Treasury Secretary Timothy Geithner's call for China to loosen restrictions on its currency was criticised by economists and policy makers at the World Economic Forum.
Allowing the yuan to strengthen would be 'economic suicide' amid an economic slump, Stephen Roach, Morgan Stanley's Asia chairman, told a panel in Davos, Switzerland yesterday. 'I've never seen an economy in recession voluntarily raise their currency. It's horrible advice.'
Renewed clashes over the yuan threaten to stoke tension between two of the world's biggest economies and undermine cooperation to counter the global recession and top economists and bankers warned that undue international pressure could act against attempts to get a greater Chinese support for any recovery campaign.
China limited yuan gains against the dollar in July 2008 after the currency rose 21 per cent following the end of a peg three years earlier.
'It is probably not the right time to focus on the Chinese exchange rate given that it is not a central element of the world crisis,' IMF' chief economist Olivier Blanchard said at a press conference. 'There are many other things we should be thinking about.'
'Shouting from Washington to Beijing is not going to make a difference,' said South Africa's Finance Minister Trevor Manuel.
Mr Geithner, who took office two days ago, last week said that President Barack Obama believes China is 'manipulating its currency', suggesting the new administration may take a tougher line with the biggest foreign buyer of US government debt.
'Obama - backed by the conclusions of a broad range of economists - believes that China is manipulating its currency,' Mr Geithner told senators in written testimony. 'The question is how and when to broach the subject in order to do more good than harm.' Obama's team will 'forge an integrated strategy on how best to achieve currency realignment in the current economic environment'.
China's commerce ministry said on Jan 24 that the country hasn't manipulated its currency to promote exports and that accusations of government tampering in foreign exchange will fuel US protectionism. China's yuan trades at about 6.85 to the dollar.
World Bank Chief Economist Justin Lin said that 'protectionism is the danger, especially in these kind of difficult circumstances'. 'Any currency appreciation decision would not contribute to solving the difficulties and mis-balances and would not help growth.' The Obama administration said this week that it will determine in coming months whether China is manipulating the yuan, which could lead to new trade friction.
White House spokesman Robert Gibbs said the administration had not decided its policy on yuan's value, despite the stir caused by Treasury Secretary Mr Geithner last week.
According to Mr Gibbs, Mr Geithner 'was restating what the president had said during the (election) campaign', when he said that Mr Obama believes China is manipulating its currency.
'I think it's safe to say this administration will determine in the spring what that means.' The Treasury Department issues twice-yearly reports on global currency policies. The next one is due in April, and a finding against China could trigger US sanctions. -- Bloomberg, AFP, Reuters
To help pull the world out of economic crisis, German Sterligov, one of Russia's first multimillionaires, has swapped his valenki for polished office boots.
After spending four years in a wooden hut in a forest outside Moscow, Sterligov has leased out almost an entire floor atop a skyscraper in the Moskva-City business district to launch a global barter system.
Sterligov, who doesn't watch television and rarely uses the Internet because of his Orthodox religious principles, plans to start facilitating the barter of debt and goods with his company, the Anti-Crisis Settlement and Accounting Center, by early March.
While the global economic crisis didn't sweep into Russia until September, Sterligov said he sensed that trouble was looming in August and got to work.
"I decided that barter trade would be the right choice for the world in times of liquidity problems and payment delays," he said in a recent interview.
So from August to November, computer programmers hired by Sterligov created an interactive database allowing the barter of debt and goods worldwide.
Sterligov illustrated a possible barter deal with a real-life example: Magnitogorsk Iron & Steel Works' estimated debt of 1 billion rubles ($30.4 million) to Mechel for coal supplies.
"Mechel could put information about MMK's nonpayment in our system and then add which products it needs itself," Sterligov said.
MMK, in turn, would put 1 billion rubles of steel into the system, he said. At some point, a company would surface that wanted steel and had a product needed by Mechel, and the deal would be completed.
"For this to work, you have to have thousands of bids in the system," Sterligov said, adding that debt would probably become the most popular item for barter.
Mechel and MMK declined to comment about their possible participation in such a system.
Barter trade was widespread in Russia in the 1990s, when economic turmoil following the Soviet collapse prompted companies to pay employees and creditors with the products they produced — anything from bricks to vegetable oil.
Sterligov built his fortune through one of Russia's first mercantile exchanges, which he launched in 1990, and subsequently got involved in businesses, "ranging from fish processing to metals trade," he said.
Sterligov said he had invested "several million euros" into the Anti-Crisis Settlement and Accounting Center. "I have no business plan — it's my money — and I spend as much as I want and is reasonable," he said.
Sterligov said he has opened offices through joint ventures in New York, London, Brussels, Hong Kong, Paris and Sydney and plans to open three more soon — in Istanbul, Berlin and Milan. He said his company owns 51 percent in each joint venture.
He declined to disclose the firms' names before an official presentation of his company in late February.
The company currently has 13 regional offices across Russia and plans to boost the number to 1,000 — mostly small offices in towns and villages — by March, when the whole system is to be launched.
Sterligov plans to hire around 15,000 people in Russia, mainly workers who have been laid off in recent months as companies scaled back production and axed investment plans.
Sitting in his office on the 26th floor of the Moskva-City skyscraper, Sterligov said it takes him two hours to get to work from his hut in a forest of the Mozhaisky district of the Moscow region, 100 kilometers northwest of Moscow, where he lives with his wife and five children.
"I still have sheep, chickens, goats and cows, but now they are mainly my wife and children's responsibility," said Sterligov, 42.
He said he would return to the woods as soon as the world gets out of the economic crisis.
Sterligov moved to the forest in 2004 after selling all of his holdings, including "several luxurious houses" in the prestigious neighborhood along the Rublyovo-Uspenskoye Shosse and some property abroad. "I had to pay back huge debts from my election campaigns," Sterligov said.
Sterligov unsuccessfully ran for Krasnoyarsk governor and Moscow mayor before then-President Vladimir Putin ended popular elections for the positions. He also tried to run for president in 2004 but was denied registration because of his failure to get notary certification for the signatures of support that he had submitted. Sterligov says he followed all the proper legal procedures.
He refused to say how he had earned the money for the Anti-Crisis Settlement and Accounting Center.
Several companies contacted by The Moscow Times expressed an interest in using barter trade during the crisis. "We could use barter trade to pay our contractors with the square meters that we build," said Yevgeny Plaksenkov, chief executive of Miel, a leading real estate company. "We know how it all works through our experience in the 1990s."
The crisis of liquidity logically leads to barter trade, he said. "However, barter is like a drug for the economy," he said. "It may give a temporary effect, but if you continue playing with barter it throws the economy backward."
Sergei Ryabov, head of regional and strategy development at Titan-Agro, an agro-business holding, said Sterligov's plans had potential. "In times of crisis, all means are good," he said.
Economists and legal experts, however, were highly skeptical about Sterligov's initiative. "The price of money is not high enough yet to return to the underdeveloped economy of the 1990s," said Natalya Orlova, chief economist at Alfa Bank. "The state was weak then, and taxes were barely paid. It is all different now."
Sergei Voitishkin, a corporate partner at Baker & McKenzie, said barter would not work because of hassles involving taxes and property rights. "The crisis is an opportunity to make economies more efficient, whereas barter schemes throw us back into the Dark Ages, which is definitely not what modern economy needs," he said.
US FED: Fed Maintains Range of 0.0% To 0.25% For Fed Funds Rate
Washington, January 28 - The Federal Reserve decided to maintain its fed funds target rate at a range between 0.00% and 0.25% as expected.
It remains the lowest target ever set by the Fed since it began publicly setting rates in 1990. Now that the Fed has no more room to cut rates, it is now in the process of purchasing large quantities of agency debt and mortgage-backed securities and will expand these purchases 'as conditions warrant.' The Fed had only stated plans to do this in their last statement on December 16.
The Fed has also said it is 'prepared' to purchase longer-term Treasury securities, a move they were only evaluating during their last meeting.
The Fed also repeated that the outlook for economic activity has 'weakened further', and conditions 'are likely to warrant exceptionally low levels of the federal funds rate for some time.' In this release, it said that it 'anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant.
The Fed says inflation pressures 'will remain subdued in coming quarters.' Last month it expected inflation to 'moderate further in coming quarters.'
Voting against the measure was Jeffrey Lacker, 'who preferred to expand the monetary base at this time by purchasing US Treasury securities rather than through targeted credit programs.'
With no room to cut interest rates, Fed policymakers try persuasion
By Peter Coy January 28, 2009
Federal Reserve rate-setters couldn't cut rates any more, so—in a divided vote—on Jan. 28 they cranked up their recession-fighting rhetoric instead. In ordinary times, the Fed's chief nemesis is inflation. But in a remarkable turn of events, the policymakers hinted that inflation is now actually too low. They said they see "some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term."
The lone dissenter in the Open Market Committee's 8-1 vote to leave rates unchanged was the group's most hawkish member, Jeffrey Lacker, the president of the Federal Reserve Bank of Richmond. But even Lacker wasn't against fighting recession by printing more money. His only objection—at least according to the Fed statement—was that the Fed should increase the monetary base by buying more Treasury securities, rather than through "targeted credit programs." By targeting certain types of assets, such as mortgage-backed securities, commercial paper, and soon auto and student loans, the Fed is meddling more in the workings of the markets than many conservatives feel comfortable with.
Voting for the first time was William Dudley, a former deputy of Timothy Geithner at the Federal Reserve Bank of New York, who became president after Geithner was chosen to be President Obama's Treasury Secretary.
Short-Term Rates You Can Depend On
The Fed couldn't cut its federal funds rate any more because it already cut it to zero at its December meeting—a range of zero to 0.25%, to be precise. That has left the Fed reaching for more unconventional tools. One of them is talk—i.e., making it abundantly clear to the markets that short-term interest rates are going to stay low for a long time to come. Such a conviction tends to bring down long rates as well.
Accentuating the negative on the economy, the Fed said it "anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant." And it repeated its December statement that "weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time."
Lone Dissenter Questions Stategy
The split between Richmond's Lacker and the rest of the board is over what other measures the Fed should take to bring down long-term interest rates. The Fed said it continues to buy "large quantities" of mortgage-backed securities and corporate debt of "agencies," which include the likes of Fannie Mae and Freddie Mac. That's intended to funnel money to the housing market, which is the source of much of the troubles in the financial system and economy. It's also beginning to support consumer and small-business loan markets through a new program called the Asset-Backed Securities Loan Facility. Those are the programs that give Lacker pause. According to the Fed statement, he'd rather see the Fed buying Treasuries, which are obligations of the federal government.
Of course, that doesn't directly help consumers and businesses. On that score, the Open Market Committee said it is prepared to buy longer-term Treasuries "if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets."
Some economists thought the Fed's rhetoric was muddy. The Fed's statement "is a wonderful example of how bad its communications can sometimes still be," wrote Paul Ashworth, senior economist of Capital Economics. He said the Fed offered "a series of cryptic possibilities."
6 comments:
Manipulated? Yes, but maybe not overvalued
Tom Holland
29 January 2009
New US Treasury Secretary Timothy Geithner kicked up a right old stink last week when he told his Senate confirmation hearing that “President Obama... believes that China is manipulating its currency.”
As president, he added, Mr. Obama would “aggressively” pursue a change in China’s foreign-exchange policy.
His words provoked predictable howls of mock outrage from Beijing, as officials from a clutch of different government bodies all rushed to say how shocked, shocked they were at such a baseless accusation.
Their rebuttals fooled no one. Of course China manipulates its currency. The Commerce Ministry’s statement that “China will keep its currency stable” effectively admitted as much. Maintaining exchange rate stability in these turbulent times without engaging in currency manipulation would be impossible.
The mainland is hardly alone in such manipulation. Every country that maintains a managed or fixed exchange rate manipulates its currency through intervention in the foreign-exchange market.
Hong Kong does. In the last few months the Hong Kong Monetary Authority has sold about HK$170 billion in the foreign-exchange market to keep the Hong Kong dollar within its permitted trading band against the US currency.
But Hong Kong’s manipulation doesn’t draw Mr. Geithner’s fire. The mainland’s does because Mr. Obama believes Beijing is deliberately holding the yuan well below its fair value in order to gain an unfair advantage for the country’s exports in the US market, to the detriment of US manufacturers.
The trouble with this belief is that determining a currency’s theoretical fair value is well nigh impossible. Different methods give wildly different answers.
But one commonly cited indication that a currency is being kept artificially undervalued is a rapid accumulation of foreign-exchange reserves, and China’s reserve build-up has certainly been rapid. Over the last 10 years, the country’s official reserves have swollen by US$1.8 trillion. In the first quarter of last year alone, they grew by an enormous US$154 billion.
But as the first chart below shows, things have changed since then. In the last quarter of 2008, official reserves grew by just US$40 billion, the smallest addition since the depths of the Sars scare in the second quarter of 2003.
Several explanations have been advanced for this slowdown. Some of it is surely the result of valuation effects. The mainland declares its reserves in US dollars, so if other currencies it holds, for example the British pound, fall against the greenback, the rate of reserve accumulation appears to decline. The effect, however, is small.
Alternatively, Nicholas Lardy at the Petersen Institute in Washington suggests that the slower build-up could be because Beijing used some of its reserves to recapitalise Agricultural Bank of China. But the indications are that the money had been set aside already.
As a result, most observers conclude that the fourth quarter’s decline in reserve accumulation was due to a heavy outflow of hot capital in response to the slump in China’s economic growth. Anthony Chan at fund manager Alliance Bernstein estimates that as much as US$126 billion could have fled the country during the last three months of 2008.
If so, it would indicate that the yuan may not be as undervalued as many believe. Other evidence supports this view. As the second chart below shows, although the yuan appreciated by only 5 per cent against the US dollar over the last 12 months, it climbed by nearly 12 per cent against a trade-weighted basket of currencies.
That leaves the yuan looking relatively expensive. With mainland growth stalling, unemployment rising and domestic demand depressed by the slump in the property market, Beijing is going to be extremely reluctant to risk jeopardising any more export-sector jobs. That means there is little chance of any further yuan appreciation against the US dollar unless the greenback itself falls against other major currencies.
So if Mr. Geithner wants the yuan to rise, he may have to talk down the US dollar. On the other hand, some uncharitable souls might consider that to be manipulation ...
The rhetoric and the reality of yuan bashing
By WILLIAM PESEK JR
January 29, 2009
CHINA took Barack Obama's views on the yuan seriously. So seriously that it is doing the exact opposite of what the US president would like. China let the yuan fall the most in a month on Jan 23, right after Timothy Geithner, Mr Obama's pick for Treasury secretary, relayed Mr Obama's campaign position that China was 'manipulating' its currency. The reaction was China's way of telling the new US leader what he can do with his foreign exchange views.
What should currency traders do now? Is a trade war brewing between the world's No 1 and No 3 economies? Is the yuan about to strengthen? Will Mr Obama risk the ire of the most populous nation to make good on his protectionist campaign trail rhetoric? Perhaps the answer is for everyone to relax.
Yes, China manipulates its currency. Arguably, so do Singapore, Argentina, Saudi Arabia and any nation that either pegs its currency, maintains a tight trading band or oversees a 'managed float' system. Even Hong Kong, routinely ranked as the world's freest economy by the Heritage Foundation, manipulates its currency. It has to maintain its link to the US dollar.
'Manipulate' is a charged word, and it's politically incorrect in financial circles. And yet it was hard to keep a straight face when a Commerce Ministry official argued on Jan 24 that 'China has never tried to gain advantage in international trade by manipulating its currency'.
That's no longer the point and Mr Obama's China views seem very much of the pre-2008 variety. Before the US dragged down the global economy, it was possible to give China grief about the yuan. It was fine to argue that China's policies contributed to global instability. Now, it's about avoiding a Chinese meltdown.
With the exception of personal tax decisions, Mr Geithner is smart. He's an old Asia hand, having lived in China, India, Japan and Thailand and studied Mandarin and Japanese. There's zero chance that he hasn't conveyed to Mr Obama the importance that China puts on social stability and the yuan's role in maintaining it. It's hard to believe that Mr Geithner hasn't stressed the dangers of a trade war with the largest holder of US government debt. Federal Reserve chairman Ben Bernanke, a Great Depression scholar, is sure to advise against policies that inhibit growth. Until further notice, consider the Obama administration's trade ideas more rhetoric than a harbinger of provocative policy steps. The currency manipulator label is rather toothless anyway. The administration of former president George W Bush avoided it so as not to antagonise China. Yet China didn't let the yuan gain 21 per cent between July 2005 - when China scrapped its US dollar peg - and July 2008 because the US demanded it. China did it because it was best for China. The global slowdown means that the yuan will probably end 2009 weaker than it started the year.
There's also a be-careful-what-you-wish-for angle here: If China lets the yuan trade freely in markets tomorrow, it's more likely to drop in value than surge. So-called hot money may flee, global companies may repatriate profits and Chinese savers might buy overseas assets.
One can hope that Mr Obama is employing a broader strategy with his yuan views: Sending a message that Asian countries whose rapid growth relies on weak exchange rates need to reconsider their economic models, as the US needs to do with its own.
The argument's thrust, says Ray Attrill, Sydney-based global research director at Forecast Ltd, is that 'the ultimate resolution of the current financial and economic crisis requires a global rebalancing entailing much stronger internal demand dynamics'. The US, of course, needs to consume less. US officials should ask questions of China. It remains big on spin, small on transparency. China's aggressive policing of the Internet and lack of respect for international property rights inhibit innovation, grassroots job creation and economic growth. Corruption and pollution are clear dangers to the outlook.
Mr Obama's ideas remind one of a key argument in James Fallows' recent book Postcards From Tomorrow Square: Reports From China - the US obsession with the yuan underlines a failure of imagination. Yes, an undervalued currency helps China, but it's not the only reason for the nation's export prowess. Lax labour, environmental and safety standards have as much to do with China being the so-called factory floor of the world as anything else. Now that the global economy is grinding to a halt, China will be spending unprecedented amounts of public money and doing all it can to stabilise things. Anyone who thinks that China is about to let its currency strengthen is dreaming. That goes for the US president, too.
William Pesek is a Bloomberg News columnist. The opinions expressed are his own.
Geithner's yuan call takes heat from economists, policy makers
Morgan Stanley's chairman Stephen Roach calls it 'horrible advice'
January 29, 2009
(DAVOS) US Treasury Secretary Timothy Geithner's call for China to loosen restrictions on its currency was criticised by economists and policy makers at the World Economic Forum.
Allowing the yuan to strengthen would be 'economic suicide' amid an economic slump, Stephen Roach, Morgan Stanley's Asia chairman, told a panel in Davos, Switzerland yesterday. 'I've never seen an economy in recession voluntarily raise their currency. It's horrible advice.'
Renewed clashes over the yuan threaten to stoke tension between two of the world's biggest economies and undermine cooperation to counter the global recession and top economists and bankers warned that undue international pressure could act against attempts to get a greater Chinese support for any recovery campaign.
China limited yuan gains against the dollar in July 2008 after the currency rose 21 per cent following the end of a peg three years earlier.
'It is probably not the right time to focus on the Chinese exchange rate given that it is not a central element of the world crisis,' IMF' chief economist Olivier Blanchard said at a press conference. 'There are many other things we should be thinking about.'
'Shouting from Washington to Beijing is not going to make a difference,' said South Africa's Finance Minister Trevor Manuel.
Mr Geithner, who took office two days ago, last week said that President Barack Obama believes China is 'manipulating its currency', suggesting the new administration may take a tougher line with the biggest foreign buyer of US government debt.
'Obama - backed by the conclusions of a broad range of economists - believes that China is manipulating its currency,' Mr Geithner told senators in written testimony. 'The question is how and when to broach the subject in order to do more good than harm.' Obama's team will 'forge an integrated strategy on how best to achieve currency realignment in the current economic environment'.
China's commerce ministry said on Jan 24 that the country hasn't manipulated its currency to promote exports and that accusations of government tampering in foreign exchange will fuel US protectionism. China's yuan trades at about 6.85 to the dollar.
World Bank Chief Economist Justin Lin said that 'protectionism is the danger, especially in these kind of difficult circumstances'. 'Any currency appreciation decision would not contribute to solving the difficulties and mis-balances and would not help growth.' The Obama administration said this week that it will determine in coming months whether China is manipulating the yuan, which could lead to new trade friction.
White House spokesman Robert Gibbs said the administration had not decided its policy on yuan's value, despite the stir caused by Treasury Secretary Mr Geithner last week.
According to Mr Gibbs, Mr Geithner 'was restating what the president had said during the (election) campaign', when he said that Mr Obama believes China is manipulating its currency.
'I think it's safe to say this administration will determine in the spring what that means.' The Treasury Department issues twice-yearly reports on global currency policies. The next one is due in April, and a finding against China could trigger US sanctions. -- Bloomberg, AFP, Reuters
Millionaire's Crisis Plan: Return to Bartering
By Nadia Popova
27 January 2009
To help pull the world out of economic crisis, German Sterligov, one of Russia's first multimillionaires, has swapped his valenki for polished office boots.
After spending four years in a wooden hut in a forest outside Moscow, Sterligov has leased out almost an entire floor atop a skyscraper in the Moskva-City business district to launch a global barter system.
Sterligov, who doesn't watch television and rarely uses the Internet because of his Orthodox religious principles, plans to start facilitating the barter of debt and goods with his company, the Anti-Crisis Settlement and Accounting Center, by early March.
While the global economic crisis didn't sweep into Russia until September, Sterligov said he sensed that trouble was looming in August and got to work.
"I decided that barter trade would be the right choice for the world in times of liquidity problems and payment delays," he said in a recent interview.
So from August to November, computer programmers hired by Sterligov created an interactive database allowing the barter of debt and goods worldwide.
Sterligov illustrated a possible barter deal with a real-life example: Magnitogorsk Iron & Steel Works' estimated debt of 1 billion rubles ($30.4 million) to Mechel for coal supplies.
"Mechel could put information about MMK's nonpayment in our system and then add which products it needs itself," Sterligov said.
MMK, in turn, would put 1 billion rubles of steel into the system, he said. At some point, a company would surface that wanted steel and had a product needed by Mechel, and the deal would be completed.
"For this to work, you have to have thousands of bids in the system," Sterligov said, adding that debt would probably become the most popular item for barter.
Mechel and MMK declined to comment about their possible participation in such a system.
Barter trade was widespread in Russia in the 1990s, when economic turmoil following the Soviet collapse prompted companies to pay employees and creditors with the products they produced — anything from bricks to vegetable oil.
Sterligov built his fortune through one of Russia's first mercantile exchanges, which he launched in 1990, and subsequently got involved in businesses, "ranging from fish processing to metals trade," he said.
Sterligov said he had invested "several million euros" into the Anti-Crisis Settlement and Accounting Center. "I have no business plan — it's my money — and I spend as much as I want and is reasonable," he said.
Sterligov said he has opened offices through joint ventures in New York, London, Brussels, Hong Kong, Paris and Sydney and plans to open three more soon — in Istanbul, Berlin and Milan. He said his company owns 51 percent in each joint venture.
He declined to disclose the firms' names before an official presentation of his company in late February.
The company currently has 13 regional offices across Russia and plans to boost the number to 1,000 — mostly small offices in towns and villages — by March, when the whole system is to be launched.
Sterligov plans to hire around 15,000 people in Russia, mainly workers who have been laid off in recent months as companies scaled back production and axed investment plans.
Sitting in his office on the 26th floor of the Moskva-City skyscraper, Sterligov said it takes him two hours to get to work from his hut in a forest of the Mozhaisky district of the Moscow region, 100 kilometers northwest of Moscow, where he lives with his wife and five children.
"I still have sheep, chickens, goats and cows, but now they are mainly my wife and children's responsibility," said Sterligov, 42.
He said he would return to the woods as soon as the world gets out of the economic crisis.
Sterligov moved to the forest in 2004 after selling all of his holdings, including "several luxurious houses" in the prestigious neighborhood along the Rublyovo-Uspenskoye Shosse and some property abroad. "I had to pay back huge debts from my election campaigns," Sterligov said.
Sterligov unsuccessfully ran for Krasnoyarsk governor and Moscow mayor before then-President Vladimir Putin ended popular elections for the positions. He also tried to run for president in 2004 but was denied registration because of his failure to get notary certification for the signatures of support that he had submitted. Sterligov says he followed all the proper legal procedures.
He refused to say how he had earned the money for the Anti-Crisis Settlement and Accounting Center.
Several companies contacted by The Moscow Times expressed an interest in using barter trade during the crisis. "We could use barter trade to pay our contractors with the square meters that we build," said Yevgeny Plaksenkov, chief executive of Miel, a leading real estate company. "We know how it all works through our experience in the 1990s."
The crisis of liquidity logically leads to barter trade, he said. "However, barter is like a drug for the economy," he said. "It may give a temporary effect, but if you continue playing with barter it throws the economy backward."
Sergei Ryabov, head of regional and strategy development at Titan-Agro, an agro-business holding, said Sterligov's plans had potential. "In times of crisis, all means are good," he said.
Economists and legal experts, however, were highly skeptical about Sterligov's initiative. "The price of money is not high enough yet to return to the underdeveloped economy of the 1990s," said Natalya Orlova, chief economist at Alfa Bank. "The state was weak then, and taxes were barely paid. It is all different now."
Sergei Voitishkin, a corporate partner at Baker & McKenzie, said barter would not work because of hassles involving taxes and property rights. "The crisis is an opportunity to make economies more efficient, whereas barter schemes throw us back into the Dark Ages, which is definitely not what modern economy needs," he said.
US FED: Fed Maintains Range of 0.0% To 0.25% For Fed Funds Rate
Washington, January 28 - The Federal Reserve decided to maintain its fed funds target rate at a range between 0.00% and 0.25% as expected.
It remains the lowest target ever set by the Fed since it began publicly setting rates in 1990. Now that the Fed has no more room to cut rates, it is now in the process of purchasing large quantities of agency debt and mortgage-backed securities and will expand these purchases 'as conditions warrant.' The Fed had only stated plans to do this in their last statement on December 16.
The Fed has also said it is 'prepared' to purchase longer-term Treasury securities, a move they were only evaluating during their last meeting.
The Fed also repeated that the outlook for economic activity has 'weakened further', and conditions 'are likely to warrant exceptionally low levels of the federal funds rate for some time.' In this release, it said that it 'anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant.
The Fed says inflation pressures 'will remain subdued in coming quarters.' Last month it expected inflation to 'moderate further in coming quarters.'
Voting against the measure was Jeffrey Lacker, 'who preferred to expand the monetary base at this time by purchasing US Treasury securities rather than through targeted credit programs.'
The Fed Cranks Up Its Rhetoric
With no room to cut interest rates, Fed policymakers try persuasion
By Peter Coy
January 28, 2009
Federal Reserve rate-setters couldn't cut rates any more, so—in a divided vote—on Jan. 28 they cranked up their recession-fighting rhetoric instead. In ordinary times, the Fed's chief nemesis is inflation. But in a remarkable turn of events, the policymakers hinted that inflation is now actually too low. They said they see "some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term."
The lone dissenter in the Open Market Committee's 8-1 vote to leave rates unchanged was the group's most hawkish member, Jeffrey Lacker, the president of the Federal Reserve Bank of Richmond. But even Lacker wasn't against fighting recession by printing more money. His only objection—at least according to the Fed statement—was that the Fed should increase the monetary base by buying more Treasury securities, rather than through "targeted credit programs." By targeting certain types of assets, such as mortgage-backed securities, commercial paper, and soon auto and student loans, the Fed is meddling more in the workings of the markets than many conservatives feel comfortable with.
Voting for the first time was William Dudley, a former deputy of Timothy Geithner at the Federal Reserve Bank of New York, who became president after Geithner was chosen to be President Obama's Treasury Secretary.
Short-Term Rates You Can Depend On
The Fed couldn't cut its federal funds rate any more because it already cut it to zero at its December meeting—a range of zero to 0.25%, to be precise. That has left the Fed reaching for more unconventional tools. One of them is talk—i.e., making it abundantly clear to the markets that short-term interest rates are going to stay low for a long time to come. Such a conviction tends to bring down long rates as well.
Accentuating the negative on the economy, the Fed said it "anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant." And it repeated its December statement that "weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time."
Lone Dissenter Questions Stategy
The split between Richmond's Lacker and the rest of the board is over what other measures the Fed should take to bring down long-term interest rates. The Fed said it continues to buy "large quantities" of mortgage-backed securities and corporate debt of "agencies," which include the likes of Fannie Mae and Freddie Mac. That's intended to funnel money to the housing market, which is the source of much of the troubles in the financial system and economy. It's also beginning to support consumer and small-business loan markets through a new program called the Asset-Backed Securities Loan Facility. Those are the programs that give Lacker pause. According to the Fed statement, he'd rather see the Fed buying Treasuries, which are obligations of the federal government.
Of course, that doesn't directly help consumers and businesses. On that score, the Open Market Committee said it is prepared to buy longer-term Treasuries "if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets."
Some economists thought the Fed's rhetoric was muddy. The Fed's statement "is a wonderful example of how bad its communications can sometimes still be," wrote Paul Ashworth, senior economist of Capital Economics. He said the Fed offered "a series of cryptic possibilities."
Post a Comment