Collusion_How Central Bankers Rigged the World Page 16
Still, the US dollar suffered as the international community scrutinized its global role. In retaliation for the United States’ accusations of currency manipulation, the Chinese government openly supported reform of the international monetary system and the role of the IMF and its special drawing rights as an alternative to the dollar. Emergent countries, the UN, and other international institutions also endorsed reconsideration of the structure of the international monetary system.
During the height of bank bailouts and cheap-money subsidies, and despite having presided over the NY Fed—the Wall Street “arm” of the Fed during the crisis incubation period—Tim Geithner labeled China the enemy. On January 23, 2009, during his Senate confirmation hearings, as the newly nominated Treasury secretary, Geithner said President Obama believed China was manipulating its currency27 and that Obama would “use aggressively all the diplomatic avenues open to him to seek change in China’s currency practices.”28 Those were financial fighting words. Geithner might have been a bit overzealous because the Obama administration declined to officially cite China for “manipulating” its currency,29 but his public rhetoric kept the issue alive.
China was the largest foreign holder of US Treasury bonds, followed by Japan (until October 2016 when the two switched places).30 As a result of Geithner’s barbs, the price of long-term Treasury bonds dropped slightly, under expectations that Beijing would ease its purchases of US Treasury bonds in retaliation. But the reaction was brief, because China would only hurt the value of its portfolio of US Treasury bonds if it stopped buying US Treasuries. China’s demand for US debt was a critical factor in keeping demand for it, and thus prices, up.
The Fed kept Treasury prices up and rates down through quantitative easing—or purchasing Treasury bonds. This had the effect of making the PBOC’s stash of Treasury bonds rise in price as well. It presented a conundrum for China: selling Treasuries would reduce their portfolio value, but buying them was a tacit affirmation of US monetary policy. This was another reason Zhou led the charge for elevating the yuan as a reserve currency as a means to independence. The less reserves required to match US dollar volume, the more control China would have over its destiny.
At the end of Geithner’s first visit to China in June 2009, People’s Daily, the Chinese Communist Party’s official newspaper, concluded, “After the US Treasurer’s visit to China, it won’t be hard to imagine someone saying, ‘we know what happens when we buy US Treasury bonds. We won’t be dancing around the US’ baton.’”31 It was hard to say whether China would become the United States’ de facto ATM yet again,32 but the writing was on the wall. China would not play nice with the United States while the United States remained critical of China, not while China was helping the United States by lending it money through buying its bonds.
On February 22, 2009, Hillary Clinton, the new US secretary of state, decided to end her trip around Asia by visiting Beijing. There, she met with Chinese president Hu Jintao, Chinese premier Wen Jiabao, and Chinese foreign minister Yang Jiechi. They discussed how to act jointly to foster global economic recovery. In an interview with Shanghai-based Dragon TV, Clinton presented herself as a team player. Now the United States needed China: “We are truly going to rise and fall together. Our economies are so intertwined, the Chinese know that to start exporting again to their biggest market the United States has to take some very drastic measures with this stimulus package, which means we have to incur more debt.”33 To Chinese leaders, Clinton exuded confidence in the integrity of US Treasury bonds to ensure Beijing would keep buying them.34
She had sung a different tune during the 2008 presidential campaign season when she had characterized the Chinese accumulation of US Treasury bonds and debt, in general, as a threat to national security: “It undermines our capacity to act in our own interest,”35 Clinton said in response to a question after her address to the Council on Foreign Relations. “We can too easily be held hostage to the economic decisions being made in Beijing, Shanghai and Tokyo,” she wrote to Paulson and Bernanke in 2007.36
On March 10, 2009, with the Dow in the basement, Fed chair Ben Bernanke spoke on systemic risk to the Council on Foreign Relations in Washington, DC. He echoed Clinton’s refrain of rising and falling together, but he shifted culpability for the fallout of the Fed’s inadequate US banking regulation onto the world. He characterized “global imbalances” that generated financial crises as the “joint responsibility of the United States and our trading partners.”37 The United States could do the crime, but the rest of the world was expected to do the time.
He listed four premises of the Fed’s strategy to confront such crises, addressing the issue of “too big—or perhaps too interconnected—to fail,” strengthening financial system infrastructure, reviewing regulatory policies and accounting rules so they “do not overly magnify the ups and downs in the financial system and the economy,” and considering whether the creation of an authority charged with monitoring and addressing systemic risks would help protect the system from financial crises.38 Technically, the latter was already one of the Fed’s primary jobs.
Meanwhile, China was growing weary of suffering the consequences of US actions it could not influence. On March 13, at the close of the annual National People’s Congress meeting in Beijing, Premier Wen Jiabao questioned the capacity of the United States to honor its financial promises. He noted that during the past few years the United States had depended on Chinese purchases of Treasury bonds to finance its budget deficit. “We have lent a huge amount of money to the United States,[…] I am a little bit worried. I request the US to maintain its good credit, to honor its promises, and to guarantee the safety of China’s assets.”39 In a money-conjuring irony, the more debt the United States incurred in the wake of the financial crisis, and because the Fed policy was keeping Treasury prices high and rates low, the proportion of debt China held was lowered. The Fed would begin to own more debt than China through QE.
Because of the US-related decrease in exports and consequent job cuts, China worried about its yuan. Yet Wen Jiabao had to defend China’s exchange rate policy against ongoing US criticism that demanded depreciation. He did so using actual numbers. “I don’t think the [yuan] is depreciating. Since we reformed the exchange rate in July 2005, the yuan has appreciated 21 percent against the US dollar.[…] No other country can put pressure on our country to depreciate or appreciate the [yuan].” He added, “This is our independent decision and we will not be subject to any outside pressure on the appreciation or depreciation of renminbi.”40
While serving during Hu Jintao’s presidency, Wen Jiabao, former premier, was in charge of economic policies. He sought to rebalance China’s growth to move toward a consumer-led model and away from investments and exports. He said, “Reform and opening up are the fundamental force that drives China’s development and progress.”41
Wen blamed the US financial system outright for the global recession—in response to Geithner’s confirmation hearing rhetoric against China. According to the Wall Street Journal, the PBOC had stopped lending its Treasury holdings for fear the borrowers would go bankrupt.42 It was an exaggerated depiction, but its point was clear.
China’s government and central bank both espoused the dangers posed by the US-led global monetary system. On March 23, 2009, the PBOC released a critical document titled “Reform the International Monetary System” by Zhou.43 It underscored the difficulty countries had honoring domestic monetary policy concerns while meeting the world’s demand for reserve currencies, a situation known as the Triffin dilemma. The conflict, first identified by economist Robert Triffin in the 1960s, exists in monetary policy decision making regarding balancing short-term domestic and long-term international goals: countries whose currencies are global reserve currencies often need to provide an extra currency supply to meet international demand but in doing so could face an additional trade deficit as a result.44
The report made a monumental pronouncement. For the first time publicly, Zh
ou called for the inauguration of a supranational reserve currency related to the IMF’s special drawing rights basket—to be managed by the IMF itself. Zhou’s statement was a declaration of monetary policy warfare. He openly criticized the United States’ inability to restore international liquidity in a definitive way and questioned the right of the US dollar to retain its position as the dominant world reserve currency. In the meantime, the Fed, for its part, was opening all sorts of avenues to provide banks liquidity.
Zhou advised: “The crisis again calls for creative reform of the existing international monetary system towards an international reserve currency with a stable value, rule-based issuance and manageable supply, so as to achieve the objective of safeguarding global economic and financial stability.”45 He was aware of the problems arising from global collusion in the pursuit of monetary policy, a situation into which the Fed had thrown the world.
He stressed, “The SDR has the features and potential to act as a super-sovereign reserve currency.” The SDR was not a currency, per se, but the SDR basket could serve as a reserve or backup to any currency, just as reserves at the Fed and other central banks served as a backup to the US dollar. Zhou added, “Compared with separate management of reserves by individual countries, the centralized management of part of the global reserve by a trustworthy international institution with a reasonable return to encourage participation will be more effective in deterring speculation and stabilizing financial markets.”
The idea of a collective currency had its downside. It aggregated the monetary powers of the major countries reflected by the SDR, but it also blended them in a more representational way, and it was a model that could extend to more currencies or even include gold. Moving toward a currency connected to the SDR basket would diffuse the US dollar’s and US monetary policy’s power, even as it lent power to the IMF, which was largely a US construct.
The next day, in retaliation for Zhou’s antidollar campaign, President Obama, Bernanke, and Geithner united to vehemently reject the idea of a supranational reserve currency. This was about preserving US power over China. At a press conference, Obama emphasized, “I don’t believe that there’s a need for a global currency,” adding, “The reason the dollar is strong right now is because investors consider the United States the strongest economy in the world with the most stable political system in the world.”46
A week later, the G20 kicked off its second meeting in London to discuss solutions to the international crisis. In its pivotal “Leader’s Statement,” the group overrode the US objection to Zhou’s suggestion. Leaders supported the IMF’s capacity to provide international liquidity and establish a stable international monetary system. The statement was the first crack in the wall of the Bretton Woods Anglo-American-European construct. Yet it preserved and promoted the power base of one of its central entities, the IMF.
“The agreements we have reached today,” the G20 statement read, “constitute an additional $1.1 trillion program of support to restore credit, growth and jobs in the world economy. Together with the measures we have each taken nationally, this constitutes a global plan for recovery on an unprecedented scale.”47
About two months later two other cracks in the Bretton Woods wall came in quick succession from the BRIC nations.48 On June 10, 2009, Brazil announced it would lend $10 billion to the IMF.49 President Lula said he hoped it would influence future reforms of the multilateral organism in consideration of Brazil’s prominent role. China and Russia announced loans to the IMF of $40 billion and $10 billion, respectively. Lula affirmed the importance of emergent countries in the wake of the US financial crisis: “The good news is that rich countries are in crisis and that emerging countries are making a huge contribution to save the economy and consequently, save the rich countries.… Wealthy countries are no longer the only ones that account for the world’s production capacity and consumption.”50
The second fracture resulted from the BRIC meeting in Yekaterinburg, Russia, on June 16, 2009. This first meeting of these four major developing nations did not include South Africa (which later made the group the BRICS nations). The meeting highlighted multilateralism and offered strong criticism of the world’s financial situation, the crux of BRICS dogma.51
A week earlier, the chairman of China Construction Bank (CCB) Guo Shuqing called on the US government to issue bonds in yuan instead of US dollars. He affirmed plans to allow Chinese and foreign companies to settle bills in yuan rather than in dollars. The first chairman of a major Chinese bank to support wider use of the yuan, he concluded that “the US government and the World Bank can consider the issuing of renminbi bonds.”52
Further moves away from the United States followed. On July 23, 2009, the Bank of Japan announced the first Tripartite Governor’s Meeting of the PBOC, the BOJ, and the Bank of Korea (BOK) in Shenzen, China, to strengthen “mutual cooperation and communication and better safeguard economic and financial stability in the region.”53 A year later, these ASEAN-3 launched a multilateral currency swap agreement called the Chiang Mai Initiative to provide access to each other’s currencies in the event of a credit crisis.
A month later, on August 13, the IMF announced the allocation of $250 billion in special drawing rights to be followed by another $33 billion.54 The SDR basket’s $283 billion total had increased in size tenfold as a consequence of the G20’s April meeting in London.55
China would not rest until the yuan was part of the SDR basket. When the IMF was first established after World War II, the idea was to have a global currency, but the United States dismissed that notion and fought instead for the dollar to assume the distinction of being the world’s main reserve currency. The shift to SDRs was a power play for the IMF. Pressing for the inclusion of the yuan was a power play for China.
Within a week, China became the first country to buy five-year bonds denominated in SDRs offered by the IMF. The symbiotic relationship between the IMF and China was an indirect attack on the power of the United States. China paid RMB 341.2 billion, or US$50 billion, as part of that strategy.56
Strengthening its international capital markets presence, for the first time on September 8, 2009, China issued $878 million worth of sovereign bonds denominated in renminbi in Hong Kong to offshore investors.57 It was another step to converting the yuan into an international reserve currency. Since 2007, five state-owned Chinese banks had been doing that, including the Bank of China and the China Construction Bank, but only to domestic investors. This was a departure from them.
Battle lines were drawn. International central bankers leveled stronger, coordinated criticism of China’s national currency policy. On October 4, 2009, at IMF meetings in Istanbul, the G7 finance ministers and central bankers demanded China strengthen its currency to correct imbalances in global trade. “We welcome China’s continued commitment to move to a more flexible exchange rate, which should lead to continued appreciation of the Renminbi in effective terms.”58
Chinese central bank vice governor Yi Gang responded that China’s policy toward exchange rates would continue to emphasize stability. “Our exchange rate policy is very clear,” he told Reuters.59
Because it foresaw a longer term in which to achieve its goals, the PBOC somewhat relented. In its 2009 Q3 monetary policy report, the central bank signaled it would work on yuan appreciation in the medium/long term and that the yuan’s value would be referenced to a basket of currencies and leave aside its dollar peg. This would “enable market supply and demand to play a fundamental role in the yuan exchange-rate formation and to keep the exchange rate basically stable at an adaptive and equilibrium level.”60
This happened to be in keeping with the Fed and ECB’s money-conjuring policy. So, politically, China was choosing to placate the United States, on the one hand, while pushing its agenda forward with the IMF and other countries, on the other.
YEAR OF THE TIGER
While the central banks of developed countries maintained money-conjuring policies in 2010, the PBOC did t
he opposite. On January 6, it stated that it would “continue to implement appropriately easy monetary policy,” but it would also raise three-month bill interest rates. The dual rate decision resulted from the PBOC finding itself caught up in that Triffin dilemma.
Meanwhile, US Treasury secretary Tim Geithner adopted a different, more conciliatory strategy regarding China’s yuan policy. During a trip to India in early April 2010, in an interview with NDTV, Geithner said, “I am confident that China will decide it’s in their interest to resume the move to a more flexible exchange rate that they began some years ago and suspended in the midst of the crisis.”61
After India, Geithner traveled to Beijing. There, he had a private conversation with vice premier Wang Qishan. As China Daily wrote, “The decision to hold such a high-level encounter suggested that Washington and Beijing are trying to narrow their differences over currency that threaten to overshadow cooperation on the global economy, Iran’s nuclear program and other issues.”62 The United States’ sudden, more appeasing stance served as a way for the Obama administration to keep China out of Russia and counterbalance Japan’s expansion.
Four days later, on April 12, at the biannual Nuclear Security Summit, held in Washington, DC, the currency topic arose. President Hu Jintao told Obama that China would follow its own course in reforming the yuan.63 It was the first time the two had met since November 2009. Hu affirmed China’s autonomy but confirmed, “China will firmly stick to a path of reforming the yuan exchange rate formation mechanism.”
The Chinese government and the PBOC loosened the yuan’s peg to the dollar on June 19, 2010, as promised.64 The decision was viewed as a white flag in the spirit of alleviating China-US tensions regarding trade and exchange rate policy. As a result, the yuan hit its highest value in five years against the dollar. The move brought optimism to international markets, and stocks in London, Frankfurt, Paris, and New York rose. Chinese officials began traveling with key bankers to promote the use of the yuan in international trade and capital markets.