U.S. Treasury Secretary Tim Geithner has spent much of the past few years as Charlie Brown to China’s Lucy van Pelt.
Instead of having the football pulled away just as he’s running up for a kick, Mr. Geithner’s head-against-the-wall routine involves getting rhetorical commitment from Beijing that it realizes it needs to let its currency appreciate and needs to spur domestic-led consumption, followed by underwhelming action toward those ends.
To be sure, China is already seeing a shift away from exports toward domestic purchases as its sales to places like Europe falter. Just last week, the country’s Commerce Minister, Chen Deming, boasted on the sidelines of the National People’s Congress that by 2020, China will be “the biggest domestic market in the world.”
At the same time, Mr. Chen reportedly could barely contain his irritation with a new U.S. law imposing duties on subsidized imports from his country, and other officials have argued that China has no obligation to change its currency policy to suit anyone else. Weaker inflation and the effects of the European crisis on Chinese companies give Beijing little incentive to let the yuan gain these days; this year the currency is down 0.5 per cent against the U.S. dollar after rising 4.5 per cent in 2011.
Canadian officials (and those in some European nations) have repeatedly called on China to play a more forceful role in rebalancing the global economy – urging its leaders to relax a strategy that they say favours Chinese exports over industries in the world’s richest, and most heavily indebted, countries.
Still, the main driver on this issue has been the U.S., which has allowed China more often than not to deflect criticism and cast the U.S. complaints as thinly veiled efforts to block or slow the rise of a potential rival. Mr. Geithner has sought to make the currency issue one where enough Group of 20 countries increase pressure (gang up?) on China to do more. So far, few have taken up the mantle, formally anyway.
Enter Tiff Macklem, the mild-mannered but highly respected No. 2 official at the Bank of Canada.
Mr. Macklem and his boss, Mark Carney, have long urged China to allow more “exchange rate flexibility,” and criticized Beijing when its moves have fallen short. Still, much of that criticism has been followed by diplomatic niceties about all major economies having roles to play to ensure the global economy is more sustainable.
On Monday, Mr. Macklem hinted Canada may be quietly starting to line up countries whose free-floating currencies have been pushed up by policy moves (or inaction) in other nations, in a bid to make the yuan a truly G20 issue. Responding to a question from the audience after a speech in Sao Paulo, Mr. Macklem said Brazil, which this month alone has taken three steps to try and tame its lofty real, should work with Canada at the G20 in promoting “currency adjustments,” according to an account by Bloomberg News. Both countries, he reasoned, are “dealing with the consequences” of China’s behaviour, such as “persistent upward pressure” on their currencies.
Involving Brazil –- another of the increasingly assertive BRIC nations at the centre of a dramatic turnover in global economic power – could give the rest of the G20 a better shot at influencing China. Brazil has been sharply critical of China as it competes with it for market share, but the Latin American country has arguably been even harsher in its disdain for U.S. stimulus efforts. Recall that Finance Minister Guido Mantega has slammed the Federal Reserve’s bond-buying program, or “quantitative easing,” saying it spurred a “currency war” on nations like his because one of its effects is a weaker greenback. While it’s not clear that the Fed will need to do a third round of QE, you can bet Mr. Mantega will blast Washington if that occurs.
As an equal opportunity critic of sorts, Brazil seems better positioned than most to help influence China.
Mr. Macklem suggested in his response that the lack of flexibility in China’s currency means monetary stimulus programs like QE aren’t working as well as they could, implying that measures hated by Brazil wouldn’t be needed for as long were it not for China’s recalcitrance. U.S. policy makers “needed considerable monetary stimulus to restart their economy,” he told his audience in Brazil, and “a very limited exchange rate flexibility with China” is “thwarting the effectiveness of that stimulus.”
“We need to work together to help other countries take the difficult decisions that they need to promote adjustment,” Mr. Macklem reportedly said, referring to the G20.
There’s no indication Brazil is interested in joining forces with Canada on this file. If it is, though, and if its involvement brings other emerging markets along and eventually succeeds in pushing China to relent on its currency, Mr. Macklem’s entreaty could be remembered as a catalytic masterstroke. Indeed, policy makers in a small, open economy like Canada – and at a central bank that may be raising interest rates by the end of this year – must do all they can to limit the factors boosting the loonie, and to ensure that global demand is rebalanced in a way that makes worldwide downturns less likely. But it’s tough to accomplish either alone.
And while this was likely not on Mr. Macklem’s mind, bringing more players into the issue has a political side benefit for President Barack Obama in this presidential election year. That’s because if other nations see themselves as equally invested in securing co-operation from China, and as a result help lead the charge, someone else will look impotent for a change if Beijing pulls away the football.