The claim of the G20 finance ministers and central bankers to have put an end to the threat of a currency war is pure illusion. Yes, they have all agreed on the merits of market-determined exchange rates and to not engage in competitive devaluations, but without benchmarks and definitions that is meaningless.
In one respect it is worse than meaningless in that it avoids the need for substantial adjustment by several currencies and the adoption of more market-driven exchange rates.
This seems largely a victory for China, which has been devaluing competitively by keeping its currency quite close to the dollar and thus falling much against not only the yen and the euro but against a wide range of other currencies, particularly those of commodity exporters with free or largely open forex markets – Australia, Brazil, Thailand, Malaysia, South Africa, etc. And has China really agreed on significant steps to make its currency more market-determined? Not at all.
Meanwhile, the host of the meeting, South Korea, continues to get away with the most egregious of all competitive devaluations, and one by a country that as an OECD country can no longer claim the privilege of poverty to excuse itself. Despite a modest recent appreciation against the dollar, the won has fallen dramatically – 40 percent -- against the yen on a three-year view, as well as against the euro and most Asian currencies.
This has been possible by a mix of capital controls and reserve accumulation and is a blatant beggar-thy-neighbor policy aimed not just at Japan and Europe but also against Taiwan, whose own currency, again protected by capital controls, has tended to track the Chinese yuan – perhaps understandably given its dependence on mainland trade.
No end in sight for trade imbalances
The G20 is no closer to a system that would end the huge trade imbalances of east Asian manufacturing exporters and enable greater equilibrium in world trade and hence avoid the financial bubbles and busts that stem from these imbalances. Southeast Asian countries have thus far been able to absorb the currency appreciation which their more open regimes has brought about.
But that is largely because high commodity prices have improved their terms of trade and thus enabled them to continue to run trade surpluses. But it is beginning to undermine their manufacturing sectors and make them more vulnerable to predatory pricing of imports, particularly from China. India too is being affected. Its capital controls are not very effective particularly as it has been raising interest rates to stem inflation.
So what's next? It seems unlikely that the G20 leaders are going to do much more than their finance ministers when they assemble in Seoul next month. By then US President Barack Obama will be facing a more hostile and doubtless nationalist Congress and President Hu will be wanting his last 18 months in office to cement his "China rising" era and prepare for the succession by the just-anointed heir Xi Jinping.
So what is the future? A sharp fall in the US trade deficit as a result of a double-dip recession there while much of the rest of the world continues to grow? Possible, but not likely. A rash of tariff protection by the US, aimed at China and maybe some others? Possible but again unlikely if only because so many US big businesses source from China and make massive profits as a result – Apple, Walmart, etc or, in a fewer cases, have profitable operations in China – McDonalds, Coca-Cola etc.
That leaves as most likely the option of easy money policies, and probably more quantitative easing by the Federal Reserve, policies seemingly favored by both Fed Chairman Ben Bernanke and Treasury Secretary Timothy Geithner. These are a form of thinly disguised currency devaluation to generate some inflation in the US, reduce the real value of US debts – household and national – and raise the inflationary cost to China, Korea and other manipulators of delaying currency adjustment.
In other words the currency war will go on regardless of official communiqués.
The one positive thing that did come out of the G20 finance meeting was agreement on the reform of IMF voting power to reduce that of an vastly over-represented Europe in favor of China, Russia and others. But this was long overdue and was the one the US and China could easily agree about.
Meanwhile, in Hong Kong, Tsang goes to India
Hurrah! Hong Kong Chief Executive Donald Tsang has discovered India. After years in the job, innumerable visits to obscure parts of China and various countries of lesser standing, Tsang is to go to what will soon be Asia's most populous nation. He even admitted that Hong Kong has lagged far behind Singapore in developing trade and investment relations.
And about time too. The brutal fact is that the single-minded obsession of Tsang and his colleagues with the mainland has greatly eroded Hong Kong's position as a regional and international hub. The stock market has become almost wholly reliant on mainland listings, even though in the longer run Shanghai will probably reclaim them, and the territory's once-intense links with Southeast Asia and its overseas Chinese business community have been allowed to wither. As for links with South Asia, these have been deliberately obstructed by new visa restrictions imposed by Tsang's officials – restrictions which fly in the face of Hong Kong's international role and in particular its claims to be "Asia's World City".
Tsang should also have had another reminder this week of how reliance on the China market and obeisance to Beijing diktats about integration have set Hong Kong up for a nasty fall. Hong Kong's high-cost, short-hours, government-controlled stock exchange may have been making lots of money from its China listings. But other exchanges without this unearned cushion are nimbler. Note that the Australian and Singapore exchanges are planning a merger which would create a dealing platform as big as Hong Kong's – and much more international than a Hong Kong one whose sole foreign listings so far have been dodgy Russian mining companies.
Singapore's links with India, particularly in information technology, have greatly been enhanced by its liberal attitude to grants of permanent residence to Indian professionals. Although Hong Kong remains open to foreign professionals of all sorts, the decline of English usage and increased requirements for Chinese language are barriers.
Hong Kong could particularly benefit from the import of medical personnel from India, the Philippines and elsewhere if it is to both address the demands of an ageing population and become a medical tourism centre to rival Thailand and Singapore. But Hong Kong's long-established South Asian business and professional community has become decreasingly visible while at the low income end of the spectrum people of Nepali and Pakistani descent often face discrimination and exclusion.
Still, Tsang's recognition of India as a major and rising economic power is to be welcomed, however belated.