Forget the Gold Standard, this is the Rise of the Redback
Look at your keyboards. Somewhere between the 3 and the 5 keys, expect a change: the appearance of the ¥ (yuan sign) in addition to the £, $ and € signs. This is the conclusion I draw from the truly incredible outbreak of international economic discord in the run-up to this week’s Seoul G20. I am beginning to wonder if we are at a profound historical turning point in world economics.
Suddenly, after years of gentle economic diplomacy, the worm is turning. The backstory is about what I have previosly called the ‘Dim sum‘. It was a trading relationship, monetary marriage and unusual economic embrace that saw a boom that lasted over a decade, a boom that was supercharged when China joined the World Trade Organisation.
In the 2008 US elections, the consequence of that relationship, that China lent the US about $800bn, became a debating point between Obama and McCain. I was in China when Hilary Clinton, a new Secretary of State told her hosts: “I appreciate greatly the Chinese governments continuing confidence in US treasuries”.
But the noises that were previously all about reassurance are now turning to something more combative. Again I was dumbfounded a year ago whilst in Washington DC at a speech by White House economic adviser Larry Summers. A member of the state-run Chinese press publicly asked Mr Summers if he could guarantee the value of China’s investments in the US.
And after last week’s $600bn QE2 announcement from the US Federal Reserve the quiet reserve of economic diplomacy seems to have been jettisonned for the monetary megaphone. Senior Chinese ministers openly criticising the US, the German finance minister calling US policy “clueless”. And then today there is Dagong.
Do you know what Dagong is? You should do. It is the latest front in currency war. And China’s international credit rater, a rival to S&P/ Moodys, has just downgraded US government debt to A+ (-ve). Naturally it rates China’s debt as AAA. And in some ways it is quite funny.
However if I lend you a £100, whose credit rating matters? The one I choose, or the one you do? The rating assessment that accompanies it is a quite intriguing English language assessment of how China views US policy. It predicts we are heading for ‘utter chaos in the international currency system’.
“In essence the depreciation of the US dollar adopted by the US government indicates that its solvency is on the brink of collapse, therefore it wants to cut its debt through the act of devaluation with the national will; such a move has severely harmed the interests of creditors,” it says.
And if you are unconvinced by China’s answer to Standard & Poors (though it can not be said that US ratings agencies have covered themselves in glory in the past decade) then consider an important new report from HSBC, The rise of the Redback, A guide to renminbi internationalisation.
It ties in last week’s QE2 announcement with the clash of world reserve currencies. This is not about persuading the rich world to abandon the dollar. This is about the organic growth of trade between emerging economies, so-called South-south trade, which is responsible for 55 per cent of China’s trade.
Already China is trialling settlements of trade in various provinces with the renminbi, and has quietly signed up bilateral currency swaps with several Asian Central Banks and Argentina.
China has not just been seeking out strategic purchases of natural resources in Africa. It has been sniffing around the fringes of the Eurozone offering to help loan money to Europe’s overindebted periphery.
Net result is that HSBC expects over half of China’s trade to be settled in ¥ within 3-5 years as opposed to just 3 per cent now.
There is a very long way to go in this process, but the mood music ahead of the G20 Seoul meeting is that the Rise of the Redback will start in earnest today.