JOHN MASON - The battle of globalization goes on.


The battle of globalization goes on

Whether one accepts it or not, the battle of globalization goes on.

And, one specific reason why it goes on is, as Henny Sender writes in the Financial Times, China is not going to let it die.

The reason behind this argument is that China wants to have one of the major reserve currencies in the world.

Although, as Ms. Sender writes, the value of the US dollar has been relatively strong and the value of the renminbi, the Chinese currency, has weakened, over the longer-run, the Chinese are in the game to play a much bigger role in world trade and world finance.

The important concept here, I believe, is “over the longer-run.”

One of the most useful pieces of advice that I have ever received in my professional life came to me in the 1990s, when a friend of mine, who had worked with the Chinese, who had traveled to China, and who was familiar with their thinking, told me that the Chinese think in terms of decades while Americans tend to think in terms of one or two years…whenever the next election is.

It seems to me that we need to keep this in mind when we look to see where the dollar and the renminbi might be in the next five to ten years. But, we must not forget about the Euro in this discussion, as well.

The situation is not unlike the one that occurred just as Donald Trump was becoming president of the United States. The situation arose out of the annual conference held in Davos, Switzerland.

The president-elect had presented forcefully the idea that he took a more nationalistic view of world trade and that globalization was not a part of his agenda.

Chinese President Xi Jinping stepped right up at Davos and declared to the world that China was for globalization and would be there to see that it progressed.

President Xi has followed up on this pledge and is pushing China and Chinese trade all over the world as President Trump breaks down trade agreements and pushes tariffs and sanctions on others.

Over the past two- to three-years, China has done many of the things necessary to improve the status of its currency when it relates to becoming a more important reserve currency.

Although not much headway has been gained at this point, it appears that China is right on the edge of moving forward to achieving its goal.

This may be one reason why President Trump and officials in the Trump administration have been charging the China with explicitly trying to devalue its currency.

I won’t go into the arguments on this point right now, but to get a better grasp of this situation I would recommend you read the op-ed piece in the Wall Street Journal by Jason Furman, Harvard economics professor and former chairman of the White House Council of Economic Advisors during President Obama’s second term in office.

Actually, Mr. Furman suggests that “Beijing is doing precisely the opposite” and then goes on to explain why. The primary reason is that the United States has been doing things that actually have strengthened the dollar versus the renminbi.

Over the longer-run, however, Trump’s America First policies along with his out-of-control fiscal policy will shift the relative position of China and the United States in the world. And, as America continues to pull back while China forges ahead, not only will China’s position in the world economy improve, but there will be more reason for the renminbi to be substituted for the US dollar.

So, the first point here is that going down the track that China and the United States seem to advancing on, not only will China become more and more of a competitor for the economic leadership of the world, but the renminbi will challenge, more and more, the position of the dollar as the world’s most favored reserve currency.

But, this brings in a second issue that Ms. Sender advances and that is the role of the Euro within this setting. She writes, “A world in which the dollar is the dominant reserve currency means Washington can chose to dictate policy to Europe as it has, for example, on the question of doing business with Iran.”

“Yet is it wishful thinking to believe the Euro, which according to recent data from the International Monetary Fund has about a 20 percent share of central bank reserves, can play anything but a minor role?”

“Europe,” she concludes, like the rest of Asia, will have to decide where its future lies, with China or with a shrill but shrinking US.”

The question here is about Europe and whether or not it has already missed its chance.

The European Union is a mess right now because it has failed to pull together developing a united budget, a united banking system, and various nations have failed to bring in the reforms necessary to exist as a “modern” nation.

Furthermore, there is now the nationalism that is going on within its community with the British and Brexit almost totally discombobulated and the Italian government's budget pushing Brussels to the edge.

The EU has postponed things and postponed things and now finds itself in a position where it seems as if the community might fall apart. Unite to build a strong Euro so as to challenge the dollar’s position relative to that of the renminbi?

Sounds, like a lot of “wishful thinking.”

So China moves on alone to challenge the role of the dollar. The latest effort is the Chinese move to open up “it’s own government bond market to foreign investment in the hope that it can one day become an attractive alternative to the US market.”

We may not like a lot of the things China does…or is doing…but China still perceives itself as a major player in world markets and will do what it deems to be necessary to achieve this goal.

It is unfortunate that the United States seems to be opening the door for them to attain what they want to achieve.


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