Beijing is pursuing a contradictory set of policies that paradoxically undermine its own economy but prop up the US economy by accommodating the pump-priming of America's central bank. China, along with other countries, holds huge stocks of dollars in reserves. China and Hong Kong are the largest net purchasers of US Treasury securities and have spent US$290 billion on them. Otherwise, US Treasury bond yields would be significantly higher and its ill-fated monetary expansion would have limited ostensible effects.
In an ironic historical twist, China's shift from a command economy has recreated the essential elements of mercantilism. Instead of measuring wealth in terms of gold stocks like the mercantilists, Beijing developed a dollar fetish. Similarly, there is an obsession with export-led growth.
Over two centuries ago, Adam Smith debunked both of these notions. First, the wealth of a country reflects it productive capacities. Second, this wealth can be enhanced by simply trading with other countries. In particular, he portrayed the greatest gains from trade arising from importing rather than exporting.
These growing foreign-exchange reserves are creating domestic inflationary pressures and causing China's public-sector debt to balloon. Since capital controls oblige all exporters to deposit hard currencies in the central bank, they receive either freshly-printed yuan (usually in the form of bank deposits) or government debt.
Both arrangements will eventually become untenable by either generating an intolerable rate of inflation or an unacceptable burden of public-sector debt. There represent very high prices to pay to maintain current policies, including the pegged exchange rate.
At present, there is a great deal of volatility in foreign exchange markets. The largest force behind all this turmoil is a weakening US dollar due to a mix of considerations that have induced foreign-exchange brokers to sell the greenback. In the case of the euro, interest arbitrage in the dollar-euro market means that dollars can be borrowed at low interest rates and traded for euros to buy euro-denominated assets with relatively higher yields. While the US Federal Reserve has aggressively slashed interest rates, the European Central Bank has been reluctant to match the cuts.
It turns out that the valuation of a currency is only one element to the competitive nature of an economy. The bad news is that leaders of countries with stronger currencies must develop the political will to carry out structural reforms or their economies will continue to under-perform. Resistance to reforms for reduction of welfare and pension systems as well as halting rising labor costs mean that health and pension payments will keep labor costs high, especially in Europe. In the eurozone area, insufficient competitive pressures and price rigidities push up domestic prices high while hindering output and job growth.
In all events, a currency can appreciate while the economy remains sluggish or it can depreciate despite robust growth. As it is, the valuation of a country's currency is not so much determined by the performance of its economy than by the forces of supply and demand on foreign currency markets. For a given supply of money, an increase in the production of goods will increase the exchange value of a currency since each unit will buy more goods. Likewise, increasing the supply of money relative to a fixed output of goods will lead to a decline in the purchasing power of money each currency unit buys fewer goods.
So it is nonsense to declare before the fact that China's currency is undervalued. We can only know once all economic players can decide on where they wish to place their financial assets. Given the relatively high rate of growth in China's money supply, there could be considerable pressures for the yuan to depreciate.
This is because a rate of growth of the money supply that exceeds the growth rate of economic activity tends to cause the rate of exchange to fall. Even if exchange rates are fixed but capital can move freely, capital flight from the country tends to put pressures on to end loose monetary policies.
When exchange rates are determined by supply and demand, imbalances can continue for a long time only if most central banks coordinate their policy stances. Once they stop following similar monetary policies, an exchange value of a currency can drop sharply. In the worst case, the collapse of the exchange rate can trigger a severe shock to the real side of the domestic economy
What is happening with respect to international valuations of the dollar at the moment is that America's central bankers are pumping in more money into the system than are most of its trading partners. So, the dollar will continue to weaken until the rate of increase in new money into the US economy no longer exceeds domestic economic growth. And it will have to come into line with the pace of monetary expansion followed by central banks in the rest of the world.
Christopher Lingle is professor of economics at Universidad Francisco Marroquin in Guatemala and global strategist for eConoLytics.com.
Recently, China launched another diplomatic offensive against Taiwan, improperly linking its “one China principle” with UN General Assembly Resolution 2758 to constrain Taiwan’s diplomatic space. After Taiwan’s presidential election on Jan. 13, China persuaded Nauru to sever diplomatic ties with Taiwan. Nauru cited Resolution 2758 in its declaration of the diplomatic break. Subsequently, during the WHO Executive Board meeting that month, Beijing rallied countries including Venezuela, Zimbabwe, Belarus, Egypt, Nicaragua, Sri Lanka, Laos, Russia, Syria and Pakistan to reiterate the “one China principle” in their statements, and assert that “Resolution 2758 has settled the status of Taiwan” to hinder Taiwan’s
Can US dialogue and cooperation with the communist dictatorship in Beijing help avert a Taiwan Strait crisis? Or is US President Joe Biden playing into Chinese President Xi Jinping’s (習近平) hands? With America preoccupied with the wars in Europe and the Middle East, Biden is seeking better relations with Xi’s regime. The goal is to responsibly manage US-China competition and prevent unintended conflict, thereby hoping to create greater space for the two countries to work together in areas where their interests align. The existing wars have already stretched US military resources thin, and the last thing Biden wants is yet another war.
As Maldivian President Mohamed Muizzu’s party won by a landslide in Sunday’s parliamentary election, it is a good time to take another look at recent developments in the Maldivian foreign policy. While Muizzu has been promoting his “Maldives First” policy, the agenda seems to have lost sight of a number of factors. Contemporary Maldivian policy serves as a stark illustration of how a blend of missteps in public posturing, populist agendas and inattentive leadership can lead to diplomatic setbacks and damage a country’s long-term foreign policy priorities. Over the past few months, Maldivian foreign policy has entangled itself in playing
A group of Chinese Nationalist Party (KMT) lawmakers led by the party’s legislative caucus whip Fu Kun-chi (?) are to visit Beijing for four days this week, but some have questioned the timing and purpose of the visit, which demonstrates the KMT caucus’ increasing arrogance. Fu on Wednesday last week confirmed that following an invitation by Beijing, he would lead a group of lawmakers to China from Thursday to Sunday to discuss tourism and agricultural exports, but he refused to say whether they would meet with Chinese officials. That the visit is taking place during the legislative session and in the aftermath