Branded (Almost)

Someday historians may look back at this period in time and have a good chuckle - when paper money, and digital money that isn't even printed on paper, facilitated global trade and countries feared being branded a "currency manipulator". When money backed by nothing other than faith in the issuing government to act responsibly flooded the world.

Just yesterday, in the Treasury Department's semi-annual report on exchange rate policies, it was revealed that China had evaded the red-hot iron with a sizzling "M" for another six months.

China will not be Branded a "Manipulator" (before clicking that link, turn your speakers down and get ready to step back in time).

Had the designation been applied, consultations between the two nations would have ensued, leading to possible trade sanctions if the United States were to win their arguments before the World Trade Organization.

Treasury Secretary John Snow said China's record remained "deeply concerning" but according to their report, the Treasury Department was "unable to determine, from the evidence at hand, that China’s foreign exchange system was operated during the last half of 2005 for the purpose (i.e., with the intent) of preventing adjustments in China’s balance of payments or gaining China an unfair competitive advantage in international trade."

Even if someone other than John Snow were doing the talking, would anyone take this seriously?

The world is filled with currency manipulators, though it seems that to qualify as one in the eyes of the U.S. government, you have to do it for specific reasons - to prevent trade imbalances from adjusting or for an unfair advantage in trade.

The motivation for China's currency manipulation, based as it is on a keen desire to avoid a fate that is in any way similar to what Japan experienced in the early 1990s, or to what the rest of Asia went through in the late 1990s, appears to have saved their derriere from the hot iron until at least November.

A lot can happen between now and November.

According to this report from Bloomberg, by the time November gets here the relationship between Asia and the U.S. regarding currencies may have somewhat of a different feel to it - maybe a very different feel.

Asia may be getting ready to fix its currencies to a local anchor, dumping the region's unofficial dollar peg.

Even as they continue to pile up U.S. debt in their foreign- exchange reserves to keep their currencies stable against the dollar, Asian nations, China among them, are preparing for a scenario where the dollar does indeed collapse under the weight of a record U.S. current account deficit.

At the Hyderabad meeting, finance ministers of China, Japan and South Korea got together with their counterparts from the Association of Southeast Asian Nations, or Asean. The 13-nation group said it would sponsor a research project, titled ``Toward greater financial stability in the Asian region: Exploring steps to create regional monetary units.''

This is no innocuous academic exercise. Regional monetary units are a euphemism for a parallel Asian currency, an idea that has been around since the 1997-98 financial crisis and is now, for the first time, entering the realm of policy making.

It seems that the U.S. approach to international exchange rate policies, the "my currency is your problem" approach that has worked so well for the better part of half a century, may be tested in the not too distant future.

It will surely be tested at some point in the future, given the many intractable problems facing the U.S., its money, and its debt. Once again, the timing is the hard part.

Then of course, there is this report, which gives the distinct impression that the nine engineers that run China may be a little ahead of their counterparts at the Treasury Department.

Gold has surged to $700 an ounce for the first time in 26 years after Chinese economists suggested the country should quadruple its bullion reserves to protect against a falling dollar.

Speculators have been alert to any sign that Beijing may be planning to switch a portion of its massive $875bn reserves into gold, a move that would electrify the market.

They seized on comments yesterday by Liu Shanen, an official at the Beijing Gold Economy Development Research Centre, who said China should raise the portion of gold in its reserves from 1.3pc today to between 3pc and 5pc. Such a move would entail the purchase of 1,900 tonnes of gold, equivalent to gobbling up nine months of global mine production.
...
Tan Yaling, an economist at the Bank of China, backed the call for higher gold reserves to "help the government prevent risks and handle emergencies in case of future possible turbulence in the international political and economic situation".
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Ross Norman, director of the BullionDesk.com, said China may already be a silent buyer on the open market.

Central banks are supposed to record their gold purchases with the IMF promptly, but they have been known to move stealthily for months before declaring.

"This market has been bouncing back so quickly after each bout of profit-taking that it looks as if somebody big is trying to get in. It's too darn hot for my liking," he said.

The only question here is, why stop at three or five percent?