Can Europe + China = 1 full cup of milk?
I just returned from yet another gathering of Europeans and Chinese to talk about their joint future. It’s great to see (or not see) that the Americans are excluded from the event. Typically, the Germans and French dominate but the Brits are usually observers. To be fair the Brits stage their own exclusive events with the Chinese. Good thing about Singaporeans – we are welcome to all events.
Anywayz, enough of introduction. The agenda of the gathering was to debate the evolution of the world currency market into a multi-currency one from the current one that is dominated by the USD. Specifically, they envision a world dominated by the USD + 4 (EUR, GBP, JPY, CNY). There was a call for a show of hands after the symposium and over half believe this would be the scenario in under 5 years from now. I couldn’t put up my hand because I think the world is more likely to end up with just USD and CNY. Let me elaborate. But first, I’m bounded by the Cheltham House Rules. So I won’t say which event this was, where I went and who I met.
– The EUR’s roughly 25% share of world reserves really came from combining their members’ reserves which were all converted into EUR after they jointly the EUR as their anchor currencies. The non-member reserves probably accounted for 5-10%. The USD’s share of world reserves still stand close to 60% and has in fact gone up in the past year. As a case in point – the Asian holdings of US Treasuries in proportion to their foreign reserves have also gone up rather than down in the past two years after recovering their reserves from the plunge during the Lehman-induced currency crash in 2008-09.
– So in reality, the EUR is really no where here without their members. The German leaders’ admission that they have benefitted the most from the monetary union all these years is meant for the ears of their electorates who would be voting for their Bundestag (parliament) sometime this September to October. Italy will run a presidential election on 24-25 February – the technocratic Monti government might just not make it because Mario Monti’s austerity measures have made him so hugely unpopular that the clever Silvio Berlusconi is now waiting in the wings to make a comeback. Bottom line is Italians are very different from Germans.
– So can the EUR really survive? The Germans are still insisting it will and in fact, they will go from monetary union (the formation of the EUR) to a fiscal union, a banking union and then a political union. At this point, I nearly wanted to put up my hand to say – wouldn’t it have been much more logical to do it the other way around – start with a political union, then a banking union, a fiscal union and a monetary union. I then recalled how I was hammered to the ground by another European leader about the same time a year ago in a similar Euro-Sino event. I asked then if the EU had a backup plan for member exit.
– Now over to China. There was a subtle message here from the Europeans to the Chinese – open up, float the RMB and together we can achieve a more balanced, i.e. a less USD-denominated world. But are the Chinese ready? The answer is “no”. But the reason isn’t as what everyone – including myself in the past – thinks. It’s not only that China’s domestic capital markets are shallow and its monetary policy still lacks a proper interest rate anchor. The reason is the US is not ready. It does China no good now to let the CNY float or turn fully convertible when the dollar and the US economy are still on a weak footing. Why let the RMB overshoot and invite problems of domestic overheating and jeopardize the export sector? This is not matrydom. It’s stupidity. China should float only when the US is stable. And it really doesn’t matter whether the Europeans are ready at that point.
– When do we know the US is ready? When we see the USD stops playng the contrarian risk barometer. We have seen many brief attempts last year during the near meltdown of the EUR. But the true turnaround is when the Fed signals it is ready to end QE.
The crux of the matter is this – the European economies have been in the “glass is half” state for a long, long time. Depending on whether you are German or Greek, one would argue it’s half full and the other would say it’s half empty. Can China help them to fill up the cup of milk? No.
It is very difficult to drive a currency out of existence, except for complete and utter destruction of a country/region/civilisation due to war, pestilence or natural catastrophe. Even hyperinflation and regime change throughout history have seen a currency continue to exist although it can be devalued, debased or re-named. European woes have been relegated to the lesser worry of 2013 and not prime-time news anymore vs the continued soap operadic situation in the U.S. of fiscal cliff, debt ceiling, sequestration and other battles between the GOP & Democrats that will provide the fodder for uncertainty in the financial markets. In fact, just look at the surge in EUR/USD from 1.30 to 1.3350 and probably 1.35 & 1.37 are not difficult targets now. German bunds have risen in yields vs U.S. Treasuries 10-year note and this will be reflective a ”Less EURO centric problems” environment for now in 2013.
Precisely that – the Europeans refuse to give up, the euro’s “strength” is always borrowed from the dollar’s weakness. I’m willing to bet the euro ends the year at 1.25 than 1.35.
All good comments. In fact, I would venture to say that some time in the next few decades we would see regional currencies.
There is no EUR strength, duh. Am too pessimistic or is everyone too optimistic? Sorry folks, there is no light at the end of the tunnel yet. We have seen many false starts and this would most likely be another of them.
On the CNY bit, there have been mumblings by leaders in China to reduce restriction for CNY and I think it would be beneficial for China to have a stronger CNY. Primarily because I no longer see China as the world’s factory because they are becoming too expensive and a little problematic to manage, strikes and riots happening too frequently. Chinese factories are not that productive too. A stronger CNY means the Chinese have increased spending power and this might event bode well for companies that have their set their sights overseas.
In fact, we have reached the point that it might make sense for some products to be made near their market. Apple for example has started to assemble some products in US and they are not being altruistic or patriotic that’s for sure. Tim Cook may not be as inventive as Steve Jobs, but he was an effective COO for sure.
Hmm… I used to be a fairly big China believer – from a purely commercial angle for sure (personally – I’ve my other issues). But my last trip there triggers some fresh thoughts – facilities are getting old, the streets are getting more crowded and the smog has got even worse. I wonder how could this country mint the world’s reserve currency when it is still not able to fix these overheating problems from the past. I’m gradually coming to the view that they need to fix these problems from within first before they open up. I used to think that opening up the capital borders would force them to “move on” and the “solutions” would fall nicely in place – they import more, produce less at home and that cures the pollution. But this last trip finally made me realize that it isnt so simple. There are many hidden issues – income inequality, uncontrolled/ undetected problem underground loans. Opening up the capital borders is not a good quick fix. They need time as they say – time heals.
On that note, I attended another interesting seminar today – talking about the role of gold in transiting us into a mullti-currency world. It sets me thinking… when it comes to money, the common man can only think two-dimension. You either buy an ice cream cone with an ounce of gold, 1 USD, 10 RMB but… you’re not gonna be able to keep switching from one unit of accounting to the other…
There is also this thing about gold – as long as we are never going back to using gold as the medium of exchange – good grief, imagine the weight of our Prada bags – then gold will never displace currencies. Gold will always only be a store of value and never even a unit of accounting. So it comes one round – we have hope to find another world reserve currency (note – singular). What is it? USD, EUR or CNY – not all three… in my opinion. We can’t deal with it. Imagine… oil is denominated in EUR, cotton in USD, milk in AUD… coal in CNY… can you deal with that?
Well… every country goes through the phase of development. Just not too long ago, the western world had conditions similar to China today. China is facing the same test today – either sort out the issues and continue development or they would stay stuck at this stage. Yes, they had easy growth over the last decade. Not, its make or break. There are many countries around the world that simply cannot grow because of social and political imbalances. Without going into the mechanics and not intending to sound like a communist, but I believe that if wealth is spread out instead of being concentrated in the hands of a few, there are more opportunities made available to society, in general.
Also, anthropologist think that there is a relationship between developed countries today and historical civilizations. Cultures that has a history of having a organized political and social structure seems to fair better (not having any prejudice here, just pointing out historical relationships here). I am no expert but you can’t fight history. Some how, I have faith that the current crop of leaders are at least trying to do the necessary. Chinese leaders are actually more measured and forward thinking than what many think. Why do I say that, while we see Beijing covered in smog, I kind of favor their energy policy. Despite their current level of GDP, they are putting in good effect into carbon neutral technologies. At least they are trying. It might take a decade or two, but at least the direction is right.
I totally agree with you take on gold, money and currencies. =)
People are just getting so attached to these stuff that they forgot why they were invented. Its used as a stored value for the exchange of product and services. Nothing more, nothing less. Then we invented the banking system which I shall not discuss here. It gets too complicated and technical. The thing is, anything can be used as a stored value as long as it is finite. Check out Bitcoin, some geek(s) invented it because he felt currencies/money should be in control by the people and not government. Strange thing is, there is an exchange rate for Bitcoin, so you can invent money as long as you get enough people to believe in it!
For the people who believe in some Armageddon scenario… don’t buy gold, it is illogical. In the words of Barton Biggs, stock up on canned food, medicine etc. For this reason, I don’t buy gold, you can’t eat it. And yes, I don’t and hope the world is not coming to an end. My 2 cents worth.
If they dont need to check my net worth as an issuing agency, I’ll gladly mint my own coin!