London, United Kingdom (PressExposure) November 22, 2010 -- Analysts at "Guardian-inter" say that one of the main reasons the United States failed to rally support from fellow members at the recent G20 summit in Seoul, Korea for coordinated pressure to be exerted on China to allow its currency to appreciate was the perception among many nations that China's monetary policies appear to be in earnest.
In order to understand this perception, one must compare the measures taken by the authorities in the United States and China to combat the challenges faced by their economies. The US is desperately trying to boost the pace of its flagging economic recovery because, firstly, jobs are not being created in sufficient quantity to even meet the demands of population growth. Secondly, inflation is not at a sufficient rate to reduce the real value of US debt - both that of its government and of its banks - and thirdly, the value of assets like real estate - upon which much of the toxic debt uncovered by the subprime fiasco was and remains secured - has yet to reach the bottom of its trajectory. The US authority tasked to deal with this is the Federal Reserve and its method for dealing with all three problems is quantitative easing or good old money printing. It believes that by increasing the amount of money in the financial system, commercial banks will hopefully start lending again, businesses will resume hiring, consumers will begin buying real estate again and inflation will rise (and hopefully overshoot the Fed's 2% target).
"One has to remember that the current furor over trade imbalances and dollar/renminbi exchange rates ignores the fact that, for over a decade, the US was perfectly happy to pay China in US treasuries and agency debt in return for the cheap goods Americans gorged themselves on. It's only now that, faced with growing deficits and high unemployment, they're persisting in running with this rather self-serving argument that China's monetary policy is somehow damaging their economy", said one "Guardian-inter" analyst.
China on the other hand, has an economy that has been growing rather too quickly and it is running the risk of overheating. It has the world's largest population and employment for huge swathes of its 1.4 billion people is provided within its export sector and, if it contracts, there would be significant civil unrest. Its advantage is that it holds the largest foreign currency reserves in the world; the equivalent of over $2 trillion. The Chinese authorities have, indeed, used this advantage to keep China's currency pegged loosely to the US dollar which keeps its exports competitively priced in foreign markets and workers' jobs safe. But they've not denied it.
At the beginning of November, the Federal Reserve announced it would be printing another $600 billion to help its economic recovery gather pace. The trouble is that, during the two-month run up to the announcement, US economic data had been steadily improving and, two days afterwards, official figures showed the US economy created 151,000 new private sector jobs in October, the best numbers for years. Many countries subsequently questioned the need for the extra $600bn of Fed funny money and, according to "Guardian-inter", many suspect that QE2 was a back-door attempt to weaken the dollar and give American exporters the upper hand in foreign markets.
Of course, the Fed has denied this but there was no mistaking the surge in equity values and the impact this would have had on US banks as investors dumped the dollar and bought more of those assets the Fed wants them to buy.
Last week, however, China raised capital requirements for its banks in another attempt to take the heat out of its simmering economy. With the country widely viewed as the most viable engine for future global economic growth basically trying to slow it down, investors began selling equities and buying... yes, you guessed correctly, the US dollar.
"How much longer this game of cat and mouse can continue is anyone's guess but, for now, the Chinese authorities appear to be claiming and holding the moral high ground. The G20 understandably regarded the Fed's actions as somewhat disingenuous but China's policies seem very appropriate given the rude health of their economy. Even if they do artificially suppress the value of the renminbi, they've made no secret of it which is more than can be said of the Americans whom, in China's place, would be doing exactly the same thing", said the "Guardian-inter" analyst.