G-20: China is clearly looking for a new world order

I don’t want to beat a dead horse here, but the Chinese have been making a lot of muscular moves diplomatically. While shifts in balance of power often take decades, it is increasingly apparent that China is making a strategic move in that direction right now.

We have been chronicling these moves here in a series of posts at Credit Writedowns:

It is hard not to get the impression from this lead-in to the G20 conference that China is making a strategic move of huge consequence here.

Let’s be clear: the U.S. has overspent. It is a debtor nation, dependent on the kindness of foreigners. Somehow it believes it can still lead the world and is trying to strong-arm the rest of the G-20 into believing that stimulus must be the order of the day when the Europeans clearly want regulation.

Yes, stimulus is important, but outside of the United States and the U.K., most see this depression as one caused by Anglo-American-style laissez-faire capitalism and the need now is for more regulation. French President Nicolas Sarkozy has threatened to walk out of part of the summit unless the U.S. abandons its calls for reflating the unbalanced old world order.

China on the other hand wants a new world order. The latest story leads me to believe that China is not bluffing. They are deadly serious about knocking the U.S. down a peg. This comes from the French daily Figaro:

Beijing wants to challenge U.S. leadership

A few days before the G20, China has mounted an offensive on the role of the dollar and the reform of the IMF.

Even if they like subtle strategic concepts, the Chinese also know that sometimes the best defense is offense. Tired of constantly being attacked on the yuan and trade policy, Beijing has mounted a frontal assault by attacking the power of the dollar a few days before the G20. The offensive comes in the form of a proposal to establish a new international reserve currency which could be organized around the “special drawing rights” of the IMF.

The Governor of the Central Bank of China, Zhou Xiaochuan, called twice in one week, for a necessary reform of the world monetary system, without which “fiscal and monetary measures are useless.” In just a few months, the change in posture is spectacular. “In November, the Chinese went to the G20 in Washington with a rather low profile, using passive cooperation, playing their role as one of many,” points out a Pekingese observer. And what’s more, all this despite a natural role as challenger to U.S. leadership.

Obama meeting Hu Jintao
The proposal, moreover, seems to have been long prepared and coordinated with a number of other countries, including Russia. That said, even if it is legitimate, Beijing is under no illusions about its feasibility in the short term. The monetary issue is not at the heart of the G20. Regardless, China has made it an item of interest. And the presidents Hu Jintao and Barack Obama are to speak at their first meeting tomorrow on the sidelines of the summit.

On the issue of reform for voting rights in the IMF, Beijing is once again strong enough. In a long article published in the Times of London Friday, the Vice-Premier Wang Qishan has clearly explained the situation. China wants more weight in the IMF, but has no desire to engage its huge reserves in the Fund as it has been invited to do. Again, officially, the discreet Chinese have still not confirmed their position. Beijing would require profound reforms before making any further efforts. Meanwhile, the contribution would continue to be “defined by the present allotment.” China will not become a bilateral creditor of the IMF. It will not be the “banker of the world” as some hoped.

These things don’t happen overnight, but we are certainly now witnessing the end of American hegemony.

Source
Pékin veut contester le leadership américain – Figaro

Related articles
Les ambitions de Nicolas Sarkozy pour le G20 – Le Monde
La France met la pression avant le G20 à Londres – Figaro

18 Comments
  1. Hal says

    What gets me while I watch this and the rest of the G-20 news about dumping the dollar is why is the stock market up and gold remaining steady. I’m looking at gold with ExactPrice and it surprises me that it is remain steady in the low $920 range. I would expect it to be taking off.

    The rioters are attacking the banks, China and Russia are calling for a new reserve currency and I can’t help think that kind of fear wouldn’t translate into the financial markets.

    Interesting.

  2. Edward Harrison says

    It seems as if the price action is completely divorced from reality. Certainly, this demonstrates that markets do not trade on fundamentals over the short-term, but sentiment and internal technicals.

    The market was way oversold before the rally began last week. Now, it seems a bit overbought. But, I can’t say I anticipate a major sell-off here unless things get significantly worse in the real economy.

    As for Gold, wait until inflation rears its head.

  3. recruiterrick says

    The Chinese will soon be using surpluses to buy gold, and not US Treasuries. When that happens, it will break the chokehold JPM and a few other banks have exerted on PM futures on the COMEX.

    Gold has a historic ratio to silver of 9:1 – 13:1, meaning that if gold is $100 per oz, then silver would usually be at $9-13 per oz. Since the bull run in gold starting in 2002, that ratio has been subverted by banks controlling the options trading at the big commodity traders. That will change sometime late summer, early fall of 2009.

    The current gold – silver ratio is about 70:1. Silver, if left purely to the market demand, should be around $60 per oz. The historic ratio will come back, and with a vengeance. Many variables, any one of which can cause havoc, are waiting to blow up. When they do, those manipulating behind the scenes will be left with no clothes on.

    One of the major variables that will emerge is China’s wish to create a regional currency for Asia based on the Yuan. Japan, Korea and Singapore have already, in theory, agreed. It will take 12 – 18 months, but expect that to become reality. When it does, China will begin issuing its own debt. That means the Chinese, Koreans, Japanese et al will not be buying US Treasuries.

    That is very bad news for the US, as our current economic recovery plans have us selling an additional $8 Trillion in Treasuries over the next 5 years. Without those buyers, Obama’s plan has no chance of success.

  4. VangelV says

    “Yes, stimulus is important, but outside of the United States and the U.K., most see this depression as one caused by Anglo-American-style laissez-faire capitalism and the need now is for more regulation.”

    This sentence is so off the mark that it is difficult to figure out where to start.

    Let us begin by noting that in the current environment, ‘Anglo-American-style laissez-faire capitalism,’ means highly regulated systems that are supervised by government agencies and the central banks. That arrangement does not resemble real laissez-faire capitalism, which has no room for such things as banking cartels, complex regulatory structures, or meddling in the economy by central banks or governments. What we witnessed was a failure of misguided and ineffective regulation, not laissez-faire capitalism.

    We also need to point out that the EU banking system, which is hardly an example of, ‘laissez-faire capitalism,’ has gotten in as much trouble as the American and UK financial systems. Why didn’t the French regulators, who should have spotted the sub-prime paper fraud, not tell the French banks to stay away from American mortgages issued to people with bad credit? Or the Spanish regulators? Or the EU itself? I hope that the author does not mean to suggest that the EU suffers from too little regulation.

    I would argue that to solve the crisis we need a true move towards laissez-faire capitalism. That means that we need to take away the power of governments and central banks to rob workers and savers of purchasing power by creating money and credit out of thin air, to take away the power of governments to meddle in the markets and to let failure be punished by the market. There is little doubt that most nations have existing laws against the initiation of force and against fraud, and that those laws are sufficient to protect individuals. We don’t need other laws that are supposedly put into place to protect individuals but serve to allow politicians and bureaucrats to line their pockets as they use their power to redistribute wealth from the productive to the politically connected.

  5. aitrader says

    Let’s not forget that China is the fourth largest economy and is still dwarfed by Japan and the US. They may be angling, but they don’t yet have the oomph to force a play. Their Yuan would need to float and that would put them at a disadvantage due to their export based economy and force them to develop internal markets, which seems anathema to the Communist Party’s goals.

    They seem to be taking an altogether different tact. They are opening the Yuan on a bilateral basis, country by country, where China can maintain their peg and dictate the terms of exchange. They are also pushing for a new global reserve currency based on the IMF special drawing rights. This move would stalemate the US influence on the world economy via its dollar reserve status and would allow China to maintain their artificial peg of the Yuan.

    It seems a smart play. I wonder how far they can push bilateral agreements until a near true float is accidentally achieved? What would be the result of two or more of their bilateral partners suddenly using the Yuan between them without China as a middleman? All that Yuan has to go somewhere. It may not all return to China. I doubt Chinese policy makers are looking this far ahead or perhaps they have a contingency plan in the event this occurs.

    Interesting times…

  6. M.G. in Progress says

    G20 Summit- 2009 Odyssey – The Dawn of Man
    at

    http://mgiannini.blogspot.com/2009/04/g20-summit-dawn-of-man.html

  7. Vangel says

    “What would be the result of two or more of their bilateral partners suddenly using the Yuan between them without China as a middleman? All that Yuan has to go somewhere. It may not all return to China. I doubt Chinese policy makers are looking this far ahead or perhaps they have a contingency plan in the event this occurs.”

    It seems to me that the Chinese are hoping that the RMB becomes money that is used by other nations to facilitate trade. That would give China the reserve currency advantage that was enjoyed by the United States.

  8. Hal says

    Edward, to you have any feel on the inflation time table?

    Since this all started last year I’ve been thinking that we would start seeing the first wave come onto the shore sometime in Oct/Nov this year. Of course I may be eating my crystal ball.

  9. Edward Harrison says

    The inflation story seems a long way off. Oil is moving up but year-on-year comparisons won’t look good for quite a while. Inventory purges are still ongoing and GDP is declining.

    My sense is that oil is going to be a leading indicator before GDP goes positive. That means Q4 at the earliest in my view. But again, the probability of recovery is not enormous. It may happen, but then again it may not. We still have a long way to go. And if there’s no recovery, then there’s no inflation

  10. Vangel says

    Inflation is already in the system as the central banks are busy printing as much as they can. As for oil, what is being missed is the fact that decline rates are very high and prices are too low to justify capital investment in marginal production that will produce much more expensive oil. This means that the supply of oil will be declining and that eventually this decline will offset a fall in demand even if we go into a depression. And that means higher prices for oil even if the central banks were not printing money as quickly as they can.

  11. Edward Harrison says

    Vangel,

    Inflation IS already in the system waiting for a transmission mechanism to make itself felt. While I do not think that mechanism is likely to present itself without a recovery, your comments underline a potential transmission mechanism – oil.

    I agree that oil investment is getting crushed here. I mentioned as much in a post on ConocoPhillips a while back:

    https://pro.creditwritedowns.com/2009/01/conoco-phillips-34-billion-writedown-makes-me-bullish.html

    I think with the severe investment cuts supply will indeed drop to meet demand and a higher price will be the result – recovery or no recovery. This and a falling dollar could be the mechanisms through which inflation embedded in the system are made manifest irrespective of what turn the economy takes.

    I am skeptical that the Fed can drain this liquidity before inflation appears on the scene in the form of higher consumer prices.

  12. Vangel says

    Edward

    Even if we invested as much as we possibly could in energy exploration and development there is no way to keep the supply increasing or flat because new projects are of much lower quality and potential. My worry is that we are not ready for a post peak oil world because there has been too much meddling in the energy sector to allow for a smooth transition.

    With idiot bureaucrats and special interests putting up barriers to the construction of nuclear and coal plants and with unconventional oil projects being threatened by carbon taxes we will not be able to have a smooth transition to a new source. That probably means that the US, which is by far the biggest consumer of oil will have to do without. What could make the situation much worse is a transition to a new reserve system that includes a basket of other currencies and/or commodities such as gold, silver, copper, etc. In such a scenario the power of the US is diminished very rapidly and other nations, which rely on economies that are based on the production of real goods and services, become much more important. That could mean a rise for China, Brazil and Russia (if they hold together politically) and a decline of the US, UK, France and other Western nations.

    Real wealth comes from the accumulation of productive capital. Sadly, the idiots in Congress have made such an accumulation extremely difficult so capital has gone to places where it is more appreciated.

    1. Edward Harrison says

      Vangel, I happen to believe the data supports your peak oil view of things and that we are seeing only a temporary respite here. You should check out Gregor Macdonald’s site gregor.us for an interesting take on these issues. Obviously, the oil drum is a good place to go as well. Ultimately, the resource-rich US is squandering its inherent advantages and we shall soon see what the consequences are.

  13. aitrader says

    Interesting that you are aware of the looming oil production descent Edward. That is certainly a rarity among economists. Even after the CEO’s of Total, BP, and Shell have chimed in to the same peak oil tune, most mainstream economists have not.

    An article with your fine analytical skills about the impact of a declining production curve would be an interesting read.

    My own view is we are entering an economic period akin to an undamped shock absorber and that we will see radical oscillations up and down on a macro view until we reach some steady state a long ways down the road. I expect that when this current cycle plays out we will boom briefly and then bust again as oil skyrockets.

    It certainly will be an interesting ride. Resource conflict would seem inevitable in light population and energy demand.

    1. Edward Harrison says

      aitrader,

      I’ll definitely have to consider writing more on this issue. My view is this: we have reached peak or peak-cheap oil and basically demand will grow over time (the present period notwithstanding). With supply constrained that means repeated spikes and severe recessions. A few have claimed this recession is oil related as recessions in 1973, 1980, 1990 and 2001 were. Every recession since peak U.S. oil has actually been oil related.

      Definitely, I will need to say a lot more about this going forward. Take a look at the books on my reading list and you’ll see a few titles that I think are mandatory reading on this topic.

  14. Vangel says

    “It certainly will be an interesting ride. Resource conflict would seem inevitable in light population and energy demand.”

    I am not a fan of mathematical models in economics because they fail to capture the real world complexity that is evident to any objective observers. That said, I wish that some competent economist would make an effort to use queueing theory to project the effect of a fairly balanced supply/demand situation to prices.

    If you look at a supermarket you find that long queues when there aren’t enough employees working at checkout and no lines when there are too many. An interesting observation is that when there is a balance there is a great deal of volatility and an outside observer notes swings between very long lines and no lines. I suspect that a world in which demand matches supply but where supply has plateaued there is a great likelihood for very large volatility. I suspect that will provide the gamblers with plenty of opportunities for gains but that the largest and safest gains will come to the shareholders of companies that have healthy cash flows that can be used to purchase competitors during the pull-backs.

  15. VangelV says

    Edward

    There are a number of great books on Peak Oil that you may enjoy reading. In no particular order my list includes:

    Hubbert’s Peak: The Impending World Oil Shortage

    Beyond Oil: The View from Hubbert’s Peak

    Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy

    I also think that you need to include Rothbard’s great book, Man, Economy & State, on your list and should consider looking at, Mises: The Last Knight of Liberalism, by Jörg Guido Hülsmann. If you are interested in the topic of the Great Depression you might also want to look at Robert Higgs’, Depression, War, and Cold War: Studies in Political Economy.

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