How times change. Nineteen months ago, world leaders gathered at the London Summit and agreed to coordinate economic policies. Acting together, they pulled the world economy back from the brink. Depression was avoided and recovery followed.
That was the high point for global policy coordination. It seems a long time ago. Now countries are pursuing more domestic-oriented goals. The trouble is, because of the extreme differences in economic outlook, policies pursued in one region are having detrimental effects elsewhere.
Low interest rates in the West are leading to asset bubbles across emerging economies, as money flows in search of higher returns. In contrast, intervention by China and others to keep currencies cheap is adding to trade tensions with the West, where jobs are scarce.
The result is inflation in the East, deflation in the West. Something will have to give. Hence exchange controls, the fear of protectionism and talk of currency wars. In the West, growth is slowing as last year’s policy stimulus fades. A double dip recession is possible if there is a policy mistake, a further shock or a loss of confidence. Of these, premature policy tightening is the big fear. Regulatory overkill now seems likely as politicians force draconian measures on banks, leading them to shrink balance sheets and curb lending. A new credit crunch beckons.
Basel III is the name given to the new requirements for bank capital and liquidity. Although a global deal, the US never adopted its predecessor, Basel II, and some countries may implement different measures now.
With high unemployment in the West, countries could well adopt tougher, not softer, measures. That is a worry, as regulators seem to assume capital will be cheap and widely available. It will not. Any increase in the cost of raising capital for banks is likely to be either passed on to customers or will limit the ability of banks to lend.
Hence, in the West, interest rates will have to stay low to limit the pain. This will feed flows to the East, adding to bubbles and inflation across Asia. Thus, currency policy has taken center stage.
Intervening to stop a currency appreciating is easier than trying to stop one weakening. If a currency is overvalued and the markets decide to sell, then it is just a matter of time before it falls. In contrast, governments and central banks can stop a currency appreciating, but there are costs.
The easiest way is to intervene and accumulate currency reserves, as China and others have done. High reserves can be welcome in a crisis, but they also boost monetary growth, thereby adding to inflationary fears, unless offset or sterilized, usually through bond sales.
As a result, it has become fashionable to consider exchange controls. These take many forms. Recently Brazil doubled the tax on bond inflows, and Thailand reintroduced a withholding tax for foreign investors.
However, if a country has been liberalizing, controls may be less effective, making them easier to circumvent. In addition, any tax may have to be high to deter investors if they still think a country’s prospects are good. Despite this, I favor such controls if they deter speculators.
The combination of cheap money, one-way expectations and the ability to either leverage up or borrow creates an environment in which asset price inflation soars and bubbles are created, destabilizing economies. Ideally, to absorb inflows, countries should deepen and broaden their financial markets. Indeed, that should be a long-term aim across Asia as it also helps economies switch from export-led to domestic-driven growth.
In the near term other measures may be needed. Hong Kong and Singapore recently used specific macro-prudential measures to cap their property markets. Some opt for currency appreciation, although it hits export competitiveness. This year Thailand, Malaysia, Singapore and India have opted for this approach. Thus recent talk of currency wars needs to be kept in perspective. Although many Asian currencies are undervalued, the big problem is the Chinese yuan.
An equally important problem is the belief that currency moves alone will guarantee a stronger global outlook. They won’t. They are only part of the story. To rebalance the global economy there is a need for the West to save, the East to spend and currencies to adjust. China, by keeping its economy strong, feels it is doing its bit. Hence the Chinese are unlikely to shift policy dramatically, preferring gradualism.
Ahead of next month’s G20 meeting in Seoul, it is always possible that there will be a faster pace of appreciation, but this is unlikely to be sufficient. In turn, others are intervening to retain competitiveness.
Across Asia, stronger currencies, higher interest rates and macro-prudential measures to curb asset prices with exchange controls to curb speculative inflows may all be needed. However, progress could be gradual. That is a challenge. In the West, fragile economies mean a failure to resolve the currency issue could lead to trade protectionism, led by the US. This is why global policy coordination is crucial.
Gerard Lyons is chief economist at Standard Chartered Bank.
Saudi Arabian largesse is flooding Egypt’s cultural scene, but the reception is mixed. Some welcome new “cooperation” between two regional powerhouses, while others fear a hostile takeover by Riyadh. In Cairo, historically the cultural capital of the Arab world, Egyptian Minister of Culture Nevine al-Kilany recently hosted Saudi Arabian General Entertainment Authority chairman Turki al-Sheikh. The deep-pocketed al-Sheikh has emerged as a Medici-like patron for Egypt’s cultural elite, courted by Cairo’s top talent to produce a slew of forthcoming films. A new three-way agreement between al-Sheikh, Kilany and United Media Services — a multi-media conglomerate linked to state intelligence that owns much of
The US and other countries should take concrete steps to confront the threats from Beijing to avoid war, US Representative Mario Diaz-Balart said in an interview with Voice of America on March 13. The US should use “every diplomatic economic tool at our disposal to treat China as what it is... to avoid war,” Diaz-Balart said. Giving an example of what the US could do, he said that it has to be more aggressive in its military sales to Taiwan. Actions by cross-party US lawmakers in the past few years such as meeting with Taiwanese officials in Washington and Taipei, and
The Republic of China (ROC) on Taiwan has no official diplomatic allies in the EU. With the exception of the Vatican, it has no official allies in Europe at all. This does not prevent the ROC — Taiwan — from having close relations with EU member states and other European countries. The exact nature of the relationship does bear revisiting, if only to clarify what is a very complicated and sensitive idea, the details of which leave considerable room for misunderstanding, misrepresentation and disagreement. Only this week, President Tsai Ing-wen (蔡英文) received members of the European Parliament’s Delegation for Relations
Denmark’s “one China” policy more and more resembles Beijing’s “one China” principle. At least, this is how things appear. In recent interactions with the Danish state, such as applying for residency permits, a Taiwanese’s nationality would be listed as “China.” That designation occurs for a Taiwanese student coming to Denmark or a Danish citizen arriving in Denmark with, for example, their Taiwanese partner. Details of this were published on Sunday in an article in the Danish daily Berlingske written by Alexander Sjoberg and Tobias Reinwald. The pretext for this new practice is that Denmark does not recognize Taiwan as a state under