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Posts Tagged ‘yuan

Retiring the American dollar

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Off into history's sunset, like the cowboy. This image (modified) is called 'Dollar Green' by the artist mancaalberto (http://mancaalberto.deviantart.com/)

Off into history’s sunset, like the cowboy. This image (modified) is called ‘Dollar Green’ by the artist mancaalberto (http://mancaalberto.deviantart.com/)

Seventy years ago, to the very month, a man named Henry Morganthau celebrated the creation of a “dynamic world community in which the peoples of every nation will be able to realise their potentialities in peace”. It was the founding of what came to be called the Bretton Woods institutions (named after the venue for the meeting, in the USA) and these were the International Bank for Reconstruction and Development – better known as the World Bank – and the International Monetary Fund.

None of the lofty aims that seemed so apposite in the shattering aftermath of the Second World War have been achieved, although what has been written are libraries of counter-factual history that claim such achievements (and more besides) commissioned by both these institutions and their web of supporting establishments, financial, academic, political and otherwise. Instead, for the last two generations of victims of ‘structural adjustment’, and of ‘reform and austerity’ all that has become worthwhile in the poorer societies of the world has been achieved despite the Bretton Woods institutions, not because of them.

Now, seventy years after Morganthau (the then Treasury Secretary of the USA) and British economist John Maynard Keynes unveiled with a grey flourish a multi-lateral framework for international economic order, the Bretton Woods institutions are faced with a challenge, and the view from East and South Asia, from Latin America and from southern Africa is that this is a challenge that has been overdue for too long.

Let's get the de-dollarisation of the world started.

Let’s get the de-dollarisation of the world started.

It has come in the form of the agreement between the leaders of five countries to form a development bank. Russia’s President Vladimir Putin, China’s President Xi Jinping, India’s Prime Minister Narendra Modi, Brazilian President Dilma Rousseff and South Africa’s President Jacob Zuma made formal their intention during the sixth summit of their countries – together called ‘BRICS’, after the first letters of their countries’ names – held this month in Brazil.

What has been set in motion is the BRICS Development Bank and the BRICS Contingency Reserves Arrangement. Both the new institution and the new mechanism will counter the influence of Western-based lending institutions and the American dollar, which is the principal reserve currency used internationally and which is the currency that the IMF and the World Bank conduct their ruthless business in (and which formulate their policies around, policies that are too often designed to impoverish the working class and to cripple labour).

At one time or another, and not always at inter-governmental fora, the BRICS have objected to the American dollar continuing to be the world’s principal reserve currency, a position which amplifies the impact of policy decisions by the US Federal Reserve – the American central bank – on all countries that trade using dollars, and which seek capital denominated in dollars. These impacts are, not surprisingly, ignored by the Federal Reserve which looks after the interests of the American government of the day and US business (particularly Wall Street).

In the last two years particularly, non-dollar bilateral agreements have become more common as countries have looked for ways to free themselves from the crushing Bretton Woods yoke. Only this June, Russia’s finance minister said the central banks of Russia and China would discuss currency swaps for export payments in their respective national currencies, a direction that followed Putin’s visit to China the previous month to finalise the gigantic US$400 billion deal between Gazprom and China National Petroleum Corporation (CNPC). It is still early, and the BRICS will favour caution over hyperbole, but when their bank opens for business, the sun will begin to set on the US dollar.

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Gauging China’s influence on the world-IMF

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Salesperson in a textile shop in Beijing, China. Photo: IMF/Finance & Development

In an article in the International Monetary Fund magazine ‘F&D’ (Finance & Development), Vivek Arora and Athanasios Vamvakidis discuss the ramifications of China’s opening-up policy. They said that the effects are well documented but even so, “the facts are astonishing”. From relatively poor beginnings three decades ago, the authors have said, China’s economy is now second in size only to that of the United States of America.

“Real gross domestic product (GDP) has grown by about 10% annually, implying a doubling every seven to eight years. The resulting 16-fold increase in a major economy’s national income during a single generation is unprecedented.”

China’s opening up has meant increasing linkages with the rest of the world, as reflected in its rising share in world trade, global markets for selected goods, and capital flows. China’s stronger linkages with the global economy have also led to a growing use of its currency, the yuan, abroad, as well as closer correlation of market sentiment in China and the rest of Asia and, more recently, the world. China’s share in world trade has increased nearly tenfold over the past three decades, to about 9 percent, while its share in world GDP has risen to 13% from less than 3%.

“The increase in China’s share of world trade is particularly striking in the markets for certain products. China now accounts for nearly one-tenth of global demand for commodities and more than one-tenth of world exports of medium- and high-technology manufactured goods. China’s rising share in world trade over the past three decades is underpinned by a rise in its share in the external trade of every major region (chart). China’s share is, perhaps unsurprisingly, largest in the trade of other emerging Asian economies (13%), and this share has seen a striking increase over time. But its share of African trade is almost as large, and its share in trade with the Middle East, the Western Hemisphere, and Europe has increased several-fold in recent decades.”

To quantify the effects of China’s growth on the rest of the world, Arora and Vamvakidis conducted an empirical analysis using data from the past few decades (the details are to be found in the paper this article is based upon). Shifting to the longer term, they estimated the impact on the rest of the world of long-term changes in Chinese growth, smoothing over the short-term fluctuations associated with the typical business cycle and focusing on longer-term fluctuations. Their results, based on data for the past two decades, suggest that a 1 percentage point change in China’s growth sustained over five years is associated with a 0.4 percentage point change in growth in the rest of the world (coincidentally the same amount as for the short and medium term).

Written by makanaka

January 25, 2011 at 15:10

East Asia food – noodle wheat shortage and ginger-garlic speculation

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Supermarket 'udon', similar to Ramen. Photo Wikipedia

Noodle wheat? Japan and South Korea need a lot of it every year, about 800,000 tons according to industry estimates from West Australia. Noodle grade wheat requires careful blending to produce the appropriate flour. Japanese and South Korean-type noodles, such as the ‘udon‘ variety, require specialist wheat grades unlike the noodles commonly seen elsewhere, which are made from a more standard flour.

But, as Agrimoney reports, the drought in Western Australia threatens to land Japan and South Korea with a noodle shortage unless supplies of specialist wheat are carefully administered. Agrimoney has quoted top exporter CBH Group, which handles virtually all Western Australia’s grain harvest. West Australian wheat producers are worrying about how to supply noodle-grade wheat while dealing with a near-halving, to below 4m tonnes, in the state’s wheat production.

Noodle wheat typically accounts for 13-14% the state’s wheat crop. Now the shortage means noodle wheat is commanding a premium, currently at Aus$35 a tonne, which is likely to attract “opportunistic” merchants with little experience of handling the blend. Wheat growers in West Australia are being warned to avoid selling to a merchant whose bad handling of the blend might unsettle West Australia’s valuable grain trade relations with two important Asian clients.

Meanwhile, the Economic Observer of China (English) examines produce speculation in China’s agricultural market. Products being targeted according to the newspaper are garlic, ginger, honeysuckle and green beans.

Like many Japanese noodles, udon noodles are served chilled in the summer and hot in the winter. Photo Wikipedia

Shandong’s Jinxiang produces over 6 million ‘mu’ (a ‘mu’ is about 800 sq metres) of garlic. “Garlic is a reliable crop and garners steady expectations and consequently produces strong market liquidity,” said the Economic Observer. “Strong market liquidity and the availability of rural brokers, all contribute to the rapid influx of hot money. The rising price of garlic has attracted local and outside speculators.” Ginger prices have fluctuated significantly in the past few years. The newspaper reports that ginger prices were at a low of 0.4 yuan/kilo in 2008, and then skyrocketed to 4.6 yuan/kilo this year. “Speculating on ginger can generate huge profits. Like the garlic market, most of the money goes to brokers and middlemen.”

One third of prescription medications in China list honeysuckle as an ingredient; 70% of cold and flu medications use honeysuckle. “The price of honeysuckle has risen 400% this yearm” reports the Economic Observer. “Annual national demand is at 20 million kilograms but actual output hovers at 8 million kilograms. Supply of honeysuckle is dependent on distributors, who are hoarding.” Prices of green beans have surged in the past year, from 6.8 yuan/kilo to 24 yuan/kilo. “The green bean trading volume in Taonan has reached over 40 million tons, one fourth of the entire domestic market. However, most farmers have not profited from the market surge because of poor timing, pressure to pay back loans, and planting costs.”