In matters of trade, the Chinese hold the high cards

Implications: David Lague in Beijing reported in the November 28 issue of the International Herald Tribune that China demurred in regard to European demands for yuan appreciation. Beijing is under pressure to curb its trade surplus with Europe. Prime Minister Wen Jiabao told the visiting French president, Nicolas Sarkozy, that China would move with deliberation. The European Union is china’s largest trade partner. The current exchange rate of the yuan versus the euro contributes to China’s accumulation of euros. While President Sarkozy was visiting Beijing, a delegation of European officials began talks with Chinese officials. The United States, China’s second largest trading partner is also concerned about the value of the yuan. In December, U.S. Treasury Secretary Henry Paulson will lead a delegation of Bush administration officials to Beijing to deliver a similar message. Chinese leaders agreed on balanced trade but refuse to alter the yuan exchange rate. Trade statistics mislead, they say.

Analysis:  

This is a classic case of the mice trying to talk the cat into putting on the bell. The Chinese believe that they are completely correct in maintaining the yuan at its present exchange rate, at least for some time yet. They are not going to be bullied into doing something they don’t want to do. Central banker Jean-Claude Trichet is determined to keep the euro strong in keeping with his belief that a strong nation, namely the European Union, should have a strong currency. Europe’s trade imbalances with China result from social policies that restrict free employment and by extension, reduce economic performance. Trichet is not imbued with the siren song of all good socialists “Poverty for Everyone” His appearance in Beijing was essentially window dressing. He remains at odds with Sarkozy about the value of the euro. It is far from clear what will be the outcome of this contretemps. It is the moribund dollar that threatens the system. The world needs a new international agreement patterned on the Bretton Woods agreement of 1944. With an abandoned gold exchange standard, the International Monetary Fund and the World Bank have become obsolete if not superfluous. Another complication is the electronic movement of capital, which operates in the vacuum of a control mechanism. To argue that competitive interest rates can set the value of a currency even when the printing presses are running wide open, is ridiculous. Germany had its experience with this in the great hyperinflation of 1923. President Putin, aware of hyperinflation in Russia following the 1917 Revolution, is steadily strengthening the ruble. The euro is strong with adequate gold reserves in the several treasuries of the member states. The only antidote to the several factors that currently contribute to the world financial crisis is a compact of stabilization among the leading nations of the world. Without it, crisis will follow crisis, far into the indefinite future.