A Few Facts Following the G20

Author Jim O’Neill 

From the conversations I have had this week, I am not at all sure that many people really understand the world economy and global markets, perhaps me included. Put another way, how can so many well- trained educated people have such different views on key topics, especially when they relate to China?
 
Let me give you two examples. On Thursday, I was a guest on the BBC Today programme.  I was there to share my opinions on the G20, Chinese policies, its currency and the usual issues.  I followed their own economics editor, who described a rather sullen mood amongst policymakers in Seoul about the event.  Then it was my turn.  I essentially said that I didn’t agree with virtually anything I had heard on that segment of the programme. I hasten to add that I think that the BBC’s economics editor is very good.  Later in the day, on an internal call, the topic of the Chinese currency came up again, and when I suggested that it had appreciated quite a bit now in the past 5 years, some people seemed to think I had just landed from outer space –or the Chinese party PR machine.
 
From what I can tell, and I have checked it with all the pertinent ex-colleagues from the GS economics department, since China unpegged their currency in summer 2005, it has risen by about 20 pct against the Dollar, something in the vicinity of 14 pct on a, nominal, trade-weighted basis. Adjusted for inflation, the real trade-weighted exchange rate has risen by close to 19.5 pct as of yesterday in those five years. Now, by any stretch of imagination, this is quite a sizeable move.
 
To listen to purveyors of “currency wars” and other such excitable talk, one would think that China had not allowed their currency to move at all.
 
WHAT IS A CURRENCY WAR?
 
To be frank, I am not in the slightest bit sure.  However, this phrase is being bandied around with remarkable ease.
 
 Wikipedia defines a war as “a phenomenon of organized, violent conflict, typified by extreme aggression, societal disruption and adaptation, and high mortality”. Adding the word, currency, in front of this, I think would make some people think a little differently about the casual use of this expression, or at least one would hope so.
 
A few weeks ago, I asked an ex US policymaker whether he thought it was possible that the US authorities might actually consider directly intervening to buy CNY. I didn’t add, but was thinking that if the answer were, “yes”, then this might be closer to something that might be vaguely described as a currency war.  In fact, he very quickly answered “no.”
This debate about currencies is taking place at a time when we are witnessing history in the making.  In a relatively short amount of time, a very large number of the world’s 6.5 billion plus people are emerging from true poverty, with China and India leading the way. In the context of the Wikipedia definition of a war, how can people say these things so casually?
 
HERE ARE SOME OPINIONS FOR YOU TO PONDER:
 
1.     As mentioned above, the Chinese currency has appreciated by close to 20 pct on an inflation-adjusted basis in the past  5 years.
2.     It has also appreciated by about 20 pct in nominal terms against the Dollar.
3.     Some of this has been more recent. It has appreciated between 2-3 pct against the Dollar since the Summer.
4.     China’s trade surplus, after the first 10 months of this year, is running at a rate of about 3.2 pct of their GDP. This is less than half, in fact less than a third, of its peak.
5.     Similarly, the current account surplus is currently running at about 5 pct of GDP, close to half its pre-crisis peak.
6.     Chinese import growth is running at close to a $ 400 bn annual rate this year over last year. As I am fond of saying, this is more than the size of the Greek economy.
7.     While it remains to be seen whether these improvements are merely cyclical, they might be structural.
8.     If it is only cyclical, China will do even more to ensure that it is structural, including allowing an even larger rise of its exchange rate than the one currently planned.
9.     Linked to these last two points, I suspect that irrespective of the G20, China has committed to reduce its current account surplus to less than 4 pct of GDP.
10.   Chinese policymakers are probably thinking of another 5 pct-ish rise of the exchange rate in 2011 to add to the 5 pct it has long since planned for this year, of which they have executed on about half of that.
11.   Those commentators that were expecting a lot from the G20 meeting were perhaps a bit naïve. There have only really been a couple of “G” meetings historically that have been big “deal” meetings, with the 1985 Plaza Accord being the most famous.  It is a bit of romantic fantasy to expect things like that to be repeated, often.
12.    In any case, it is often the protocol for “G” Leaders meetings to simply transport the economics part from the Finance Ministers meeting, usually held in advance. The Finance Ministers told us 2 weeks ago what they thought.
13.   The French now take over the leadership of the G20, and we should expect to hear plenty more about reform of the international monetary system.
14.   I think it is quite feasible that we shall hear  more about the possible rise of the role of the SDR beyond its main purpose as a unit of account for the IMF. In particular, if the world’s leaders and the IMF were truly thinking about representing the new modern world, they should bring in the CNY as one of the component currencies, now, without waiting until the CNY is fully convertible.
15.   It is not actually the case that you need to be a floating currency, free of restrictions on usage, to be part of the SDR. When it was first introduced, a number of currencies had capital controls.
16.   By including the CNY now, China would be encouraged to continue with its more recent accelerated progress on opening up the use of the CNY. And, as anyone in Hong Kong can testify, this is very exciting.
17.   It is not entirely clear that the CNY is significantly undervalued anymore. In fact, the GS economics department’s valuation model doesn’t suggest that it is.
18.   The only strong point that the “undervalued CNY believers” cite is the level of, and growth of, China’s FX reserves. However, even here, it needs to be recognized that China’s “basic” balance is bigger than the current account due to so many people trying to  invest in China and also find a way to speculate on the currency.
19.   And my last point. I have an increasing hunch that the US may soon join the “export party” that some other developed countries are enjoying, in large part because of China and the other BRIC nations.