External Expansion Limited

Wednesday, 4 June 2014

YUAN VS DOLLAR: BATTLE FOR INTERNATIONAL HEGEMONY

Clearly in the world are happening political, economic and social changes, so from this blog we want to give the reader an idea of how this metamorphosis affects international trade, but above all, we want to provide information so as to form with realities implicit in the day and usually we are not able to see. In this article we express our personal opinion about what some developing countries should do to be definitely developed based on commercial export potential from its wealth of natural resources which must be increasingly transformed into finished products.
The Theories how things work dating from long ago and are not innovative. Daniel Defoe in 1725 described how the Tudor monarch, Henry VII ( 1485-1509 ), transformed England from an exporter of raw wool in a woolen factory products around the world through policies characterized by protectionist measures to the domestic industry and high rates of tariffs on wool coming from abroad. Ulysses Grant also described how England for two centuries had trusted and applied an extreme protection measures with satisfactory results to which they owed their strength, until the protection had nothing to offer them; back then, Ulysses proposed that the United States once had obtained everything possible form the protection, would adopt free trade and we know that since 1872 overtake the UK as the world's first economic power. In 1885 Friedrich List did a simple exemplification of what the doctrine of Adam Smith professed, using the idea that a country use a ladder to climb a peak of unattainable glory for encouter a situation of advantage over the rest and once there, kicking away the ladder by which it has uploaded thus depriving the rest of climb by the same ladder. Objectively, these measures had consisted in raise industrial power and capacity of the country's international trade through protectionist tariffs and restrictions to such a degree developmental which no other nation could sustain a fair competition against them, and from that moment, wisely eliminated these measures out and preached to other nations the benefits of free trade, obviously assuming that the previous approach was wrong and was now on the right track. Let us not forget what we explained in the article "Unraveling the ins and outs of International Trade", where we analyzed how the United States again in 1973 unilaterally imposed its currency under the false premise that they were the largest economy given their commercial ties extended worldwide, when really were in bankrupt and could not maintain the Bretton Woods agreement, already that they could not continue the convertibility of dollar to gold, so they let fluctuate loosely the dollar against other currencies and declared their non-convertible currency with gold. This situation, in which most countries were also forced to abandon the gold standard for the dollar standard, allowed the United States continue its hegemony at the expense of widely unequal distribution of growth with the rest of the world from which obtained their riches by paying with its own money.

Now and since the financial crisis, many experts predict the decline of the U.S., such as the Algerian intellectual Sami Nair, who recently said that the U.S. has already started to decline slowly and eventually reorganizing the apogee in three possible actors: China, Germany and Russia, by sharing the power among different nations. In his analysis finds that in Europe has happened to lead Germany more than France, being more evident from the euro crisis, because at the start existed more strategic parity between them. There is no doubt that Germany is a power of global leadership, leaving in Europe on background both France and UK, and may even talk as an equals with the United States 70 years after the end of World War II based on explained in our article "The European market and German engine". However, Ukraine put at risk important economic issues, such as enlargement of the area of influence of the European market and Germany's energy dependence on Russia (see "How the conflict of Ukraine affects international trade"). On the other hand, France still on the side of the rich, has run aground, so no surprises in the streets complete unanimity against Europe, having gained in the recent European elections an anti European party. One thing that burn also the alarms is that of the 500 global companies created after 1975, less than 5 are European. Europe is now divided, some like Germany who want stability and low inflation, and others such as Spain and Italy, they need growth and inflation to ease their debts. This implies that the discontent grow up in several countries. The explanations of why it has come to nostalgia and discontent lie in the relative decline of Europe from China and other emerging powers in the inability to establish a democratic system of participation and control that allows citizens feel represented, and in the German strength. In its favor, Europe has the most amazing culture and diversity of the world able to be the seed of growth for technology companies, because the culture allows communication between people. Also, it is an ancient continent that has largely developed despite differences, stay united and which has received U.S. support since World War II, therefore, Germany would not achieve to be world power for us. Russia with its current political leader, Vladimir Putin, has taken a leading role in the international context showing a growing estrangement from the European Union and the United States, so we hope that these new developments do not accrue over time on military conflicts that are definitely a detriment to the societies of the countries concerned, so we don´t believe that they play a major role as a world economic power leaving a greater role to China.

Analyzing China, since 2009 has surpassed the U.S. as the largest energy consumer in the world faster than was expected because was unaffected by the global financial crisis. Its per capita energy consumption is about one-third of the average of the OECD countries giving us an idea that consumption will continue growing in so far the country continues growing economically. Energy demand would have been much higher if the Chinese government had not put the effort required to slow the amount of energy required to produce a dollar of GDP (energy intensity), investing in energy efficiency with the development and implementation of renewable energy. As well, China also managed to overtake U.S. in renewable energy investment according to a study by the Pew Charitable Trust (invested 36 billion dollars compared with almost 19 billion of the U.S.). It also outperforms Spain like third worldwide wind power capacity with 20GW of installed wind power and starting to concentrate more on nuclear power instead of coal power plants. Also, buyers and Chinese companies aspiring to become in the largest landowners in the U.S. and have begun to flood Detroit (nicknamed the Motor City) and formerly known as the largest industrialized city in the world to record the highest per capita income of the country, but today is the largest bankruptcy in U.S. history. In order to leave their private hell, the governor of Michigan, Rick Snyder, seems to be convinced that China can play the role of savior for this city so it would request 50.000 special federal immigrant visas in the next five years to attract professional foreigners willing to work and live in the city, being a reality that many Chinese companies are already taking root in Detroit investing in U.S. companies with new technology in vehicles, selling everything from seat belts until the shock absorbers in retail stores. At the same time, hire engineers and experienced designers in an attempt to acquire the talent and experience of the U.S. automakers. At the moment where China would be overtaking as first power to the U.S., is acquiring in the last years massively European technology and elsewhere, reason why some submits that if bases its growth on a model to copy and buy technology, ever going to have a society based on entrepreneurial knowledge, but clearly are undertaking with their particular way of doing things and are successful.

Very recently, the World Bank made a report indicating that China will overtake the U.S. as the world's first economic power later this year to five ahead of schedule. According to the report based on data collected through 2011, China's GDP, adjusted for purchasing power parity, is much greater than what had been previously estimated , since the end of 2011 accounted for 87% of GDP U.S., while just six years earlier was 72%. Moreover, the IMF estimated that in these four years China will have accumulated with growth of 24%, compared to 7.6% in the U.S., and this information confirmed, would mean that this year China overtakes U.S. as world's largest economy in these terms. This recalculation break the IMF forecast estimated that this would happen in 2019, again on the basis of eliminating the exchange rate on GDP, since, if said calculation shall be done in current dollars, neither the World Bank nor the IMF expected this to occur throughout the decade, because the U.S. is still double that China. For its part, the Chinese Statistical Institute disagrees with the methodology applied to the calculation, rejecting the results mainly from their authorities, as if wishing not be the world's largest economy. These Way of measuring GDP, making it a national economic indicator eliminates the impact of the exchange rate in their calculation, since it becomes a common currency so that the parity of purchasing power is a more direct measure that exchange to determine the purchasing power of money. Thus are measured major economic aggregates in terms of what a currency (dollar or euro) is able to buy in each country, however, some experts (Arvind Subramanian and Martin Kessler of the Peterson Institute) doubt that this indicator serves to asseverate that China is the new world economy. Anyway, these experts say this new calculation ensures that the Chinese currency is trading in their rigth value allowing to be the basis for development of the Chinese economy that so far was based on a depreciated currency to boost exports, but nevertheless, if now approved the internationalization of the yuan, would have a dramatic impact on the world economy, while the U.S. It remains and will remain the major player in the global financial system. Returning to the comparison in current dollars asserts that China remains a much poorer country than the U.S. because the Chinese per capita income amounts to just a fifth of the U.S., even when adjusted for purchasing power. The dominant countries like the UK and the U.S. always been rich countries, so there is no precedent and in which case if this happens, also would put in front of the economy a country without a democratic political system.

Another noteworthy event, took place at the annual meeting of the Bretton Woods Committee this year, where the director of the International Monetary Fund, Christine Lagarde, spoke about the importance of reforms during her tenure noting that the IMF has had to adapt to new circumstances delivering nearly $700 billion in loans with assistance in 150 of the 188 member countries. She questioned by the lack of foresight of the financial crisis, hid behind the problem did not see it obsessively, citing a document published before the crisis where the previus IMF managing director highlighted some of the risks that were emerging, without them to be perceived with great importance clearly showing the fund culture to avoid taking risks and blames. At this same committee meeting of Bretton Woods, the World Bank President Jim Yong Kim, referred to the book by Thomas Piketty who points to two main forces that has brought the world to convergence: the dissemination of knowledge and the investment in training. He explained that the World Bank during the crisis was focused on emergency assistance by putting at its disposal their resources to those who needed. At this meeting he pointed out that they are wondering why do something in one country can cost three times more than in another, when in our view an institution like them, should be clear at this point and if not should check with international trade experts. However, we see of interest to explain the novelty of the World Bank and the International Finance Corporation (IFC), are working to create capital markets in emerging countries through the sale of bonds abroad in local currencies for national investors and international (they have already issued 8.5 billion dollars in 19 currencies since 2011). The emissions are either focused on the financing of specific issues, stimulating economic activity and developing emerging markets for the benefit of local governments and businesses. These bonds are issued by IFC which is a supranational institution with AAA rating, helping to create capital markets by attracting investors such as pension funds that want to put their money into low-risk investments, generally having excess subscribers. This was born two years ago in the Dominican Republic for finance businesses and homebuyers, collecting with the issue of a bond in local currency, money of the Dominicans pension funds to develop the private sector in the country and continued to expand this process in many of the least developed countries.

There is talk that Latin America, as current largest net exporter in the world and composed by least developed countries, it could provide food for nine billion people in 2050 and thus become the granary of the world according to a study by Global Harverst Initiative (GHI), which only would be possible to reach if apply the politics key in pursuit of agricultural productivity. Both Latin America and the Caribbean can count on the third of the freshwater resources in the world and large tracts of land with great potential for cultivation, however, have only achieved a fraction of its potential to increase agricultural production weather for the regional consumption and for the worldwide export. Latin America has great potential to help meet in a sustainable and productive way, the increased food demand, grasses, fibers and fuels of our planet, simply by starting an agenda for agriculture friendly policies to attract investment and innovation necessary to become in a global pantry of the XXI century. Currently, Latin America and the Caribbean accounted for 11% of the value of world food production and accounts for almost 24% of the world's arable land. According to some experts, owns 28% of the world's land is considered medium-high potential for sustainable expansion of cultivated area and 36% of the earth is only about six hours of local markets on average. Noteworthy that in one of our articles we talk about "China: a great opportunity for Latin America", where we explained that the Chinese trade has increased by 21 in the last 12 years being this country one of the major players in Latin America. However, this commercial growth does not benefit their trade balances because the growth of the exchange is reciprocal, where Latin America mainly sells raw materials and China sells its simple manufacturing technology. We also explained the need for Latin America to change the current trend, where 80% of its foreign trade is with countries outside the region, being necessary to increase intra-Latin trade in their manufactures because it would be in a percentage of 20% taking still long way to go, while the intra-Asian trade would be 53%. For their part, African countries with rich mineral soils are also among the poorest countries in the world, being underdeveloped or developing countries, where 80% of its exports are commodities. China is the third most important partner in this continent having interest in resource-rich countries like Angola for their oil and a few other countries for their minerals. U.S. and Europe also have investments in these countries through general construction and exploitation of hydrocarbons as minerals, but China win in influence. Currently, Nigeria comes hard on the continent given its rapid growth in the oil, agriculture and minerals sectors but not without problems of social stability.

In the last months there have applied various sanctions against Russia by Europe and the United States without being able to preventing Russia from continue with its foreign policy to propose a change in the monetary standard used, so there are now at least 40 central banks of various countries that manage stocks of Chinese currency (the yuan) and many others have reported that will continue with the trend. The data emerges from the report submitted by South China Morning Post where manifiested the existence of 40 central banks that invested in the Chinese Yuan and that this figure is increasing, which allows to conclude that China's currency is becoming in a global reserve asset. Some of the 40 central banks belong to the following countries by continent detail: In Europe, Austria, Norway, France and Lithuania; Asia, Hong Kong, Indonesia, Japan, South Korea, Macau, Malaysia, Nepal, Pakistan, Singapore and Thailand; Oceania, Australia; South America, Chile, Bolivia and Venezuela; and Africa, Kenya, Ghana, South Africa, Nigeria and Tanzania. In addition, African countries can already get direct money from China given its growing commercial ties. Already been opened in Frankfurt trading zone where only partipate euros and yuan, which accentuate the clear trend decline in the USD as reserve, since in 2013 accounted for 33% of global currency reserves in dollars while in 2000 were 60% of existing reserves. Although the IMF fails to disclose the percentage of yuan treasured as reserves, someone comments that the figure per hold reserves in other currencies grows by 400%. China and Russia have already signed an agreement that Russian energy exports will be canceled in yuan by China marking the tipping point to the hegemony of the dollar as the universal currency. In the case of China, its currency strengthens the reasons of being a world reserve by the real commercial ties with Africa, Asia, Europe and Latin America being in our consideration an economic power. We believe this trend should be deepened with many Latin American and African countries should join this process of change taking other reserve currencies and fixing the price of their raw materials in other currencies. The countries of Latin America and Africa are rich by the natural resources they possess and their capacity as sources of food, especially Latin Americans since the industries of processed products in developed countries would not be anything without raw materials from developing countries. We do not want to make communism apology, but with the capitalism must be the existence of a better wealth distribution, and this requires a change that couldn´t be possible with the currency that suppressed the potential of the rich countries for their resources and are now under development, but poor due to the actual speculative and financial monetary system. If already exist operations where American interests are absent, why not start the change fixing these raw materials and products in strong currencies of the countries involved in the operation allowing a greater monetary stability regardless of speculation. Latin America should seek a monetary union similar to Europe further tightening their economic policies and trade ties between the countries of the region. At the meeting held this year on the tenth anniversary of Fernando Henrique Cardoso Institute (IFHC) in Sao Paulo, the meeting political leaders, asked unanimously that Latin America would speak with one voice on the international stage and we believe it would be time to do it.

In conclusion, of datas presented we understand how America became a power with the protectionism and later with the imposition of its currency. The financial crisis is the turning point in the decline of USA and no posibility to Europe with Germany leading the way, as well as, Russian that favors to China who take a leading role on the world stage. Then is China, who will play a vital leadership as potency in the world economy. We believe convenient by the data supporting of the just price from Chinese currency, which mainly the developing countries will change the dollar standard to yuan standard gradually through commercial exchange with China. Latin America should lead their union and establish a joint currency that would be backed by natural resources and productive capacity of food. This currency could boost it in the capital markets by selling bonds to domestic and international investors to finance mainly technology industries efficient and responsible to the environment, allowing greater transformation of raw materials into manufactured products. All this must be complemented by policies that favor greater equality between countries and we don´t know the organism who could be able to direct a feat of such magnitude when the two main ones are incapable of take responsibility and would be under the influence of interests that would disapprove a proposal as the one described.

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Until the next article...

Leonardo Dufau
LinkedIn

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