Archive for November 10th, 2010

Wednesday, November 10, 2010

Post on Demand: In Praise of Quantitative Easing ***)

German chancellor Angela Merkel rejected American demands for putting caps on current-account balane surpluses, according to a financial article by sina.com. According to the same article, she also expressed the hope that a confrontation between the US and China concerning trade and currency exchange rate could be avoided during the G-20 summit in Seoul, South Korea. In an interview on Monday, she had also warned that currency-related tensions could lead to increased protectionism. US treasury secretary Timothy Geithner‘s suggestion to define targets for current-account balances were commented by Japan’s minister of finance, Yoshihiko Noda, who is quoted by sina.com as saying that the G-20 were unlikely to agree on any specific targets (20国集团不太可能会就任何硬性数据达成一致意见). It was more likely that the summit would agree on a common approach, the details of which would then be referred to the participating countries’ finance ministers for further discussion.

Why a Weak Yuan?

Why? Answers from JR's Weblog - the World's Reference Point

Sina.com also notes that the US Federal Reserve Bank’s decision to gradually spend 600 billion US dollars on buying US bonds (an approach commonly referred to as quantitative easing) was met with global criticism, as this would lead to an influx of large amounts of money into the global economy, without having much of an effect on reviving the American economy. Chinese Central Bank vice governor Ma Delun (马德伦) is quoted as worrying that the Fed’s decision could harm efforts for balanced global growth, and put emerging countries under pressure to adjust balances of payment (给新兴市场带来调整国际支付余额的压力), and that it could push the build-up of asset bubbles (推动资产泡沫的形成).

The main hoped-for effect of quantative easing would be that, given the artificially high demand for US treasuries would reduce the treasuries’ yields, thus chasing investors into riskier, alternative investments, as the Economist describes it this week *). In those terms, and in making the dollar less attractive as a currency, one could already consider this round of quantitative easing (QE2) a success, the Economist quotes a hedge-fund ecomomist, and adds:

With a bit of a lag, these easier financial conditions are supposed to boost growth through three channels. First, lower real yields spur borrowing and investment. This channel is bunged up: many households cannot borrow because their homes have fallen in value and because banks are less willing to lend. But the remaining two channels remain open. Higher share prices have raised household wealth by some $1.4 trillion, which will spur some spending. And the lower dollar should help trade. American factory purchasing managers reported a sharp jump in export orders in October and a drop in imports. *)

Certain Chinese export commodities – or their availability on global markets in general, but for Japan in particular, could use some quantitative easing, too. While Chinese foreign minister Yang Jiechi apparently assured US secretary of state Hilary Clinton that China would be a “responsible supplier” of rare earths, the Economist quotes an official in Tokyo as saying that Japan has not received a single shipment since the captain’s release **) [referring to a rowe between China and Japan after the arrest of a reportedly steaming drunk **) fishing skipper in September, in the vicinity of the Senkaku Islands]. The same Japanese official is quoted as saying that the Chinese have even hinted to Japanese manufacturers that if they want rare earth, they should move their factories to China.

The Economist suggests that the Chinese foreign ministry might actually be in favor of taking a less confrontational stance in China’s dealings with its neighbors, but that the foreign minister is not even in the Politburo, let alone on the standing committee.

Quantitative easing may turn out to be an option for the US to remain relaxed and unconfrontational during the Seoul G-20 summit. And quantitative easing from China’s part could help to make the Chinese foreign ministry a more reliable source of information, concerning the country’s business policies.

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Notes
*) The Economist, November 6, p. 83
**) The Economist, November 6, p. 59/60
***) JR serves the people. All the above is a shameless post on demand. Here you are, Alex. If other readers of this beautiful blog would like this expert to share his insights in the Chinese media with them, write to duibudui@hotmail.com, or comment and express your wishes here.

Related
China, Germany slam US Money Policy, Reuters / Indian Express, Nov 10, 2010
Merkel: Protectionism “Greatest Danger”, WSJ, November 8, 2010
The US Has Lived on Borrowed Money for Too Long, Spiegel International, Nov 8, 2010
Don’t Count on Global Governance, Social Europe Journal, Nov 8, 2010
Sino-Japanese SNAFU in Hanoi: “Full Responsibility”, Oct 30, 2010

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