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Question - Re: INSIGHT - CHINA - G20/UK - CN89

Released on 2012-10-18 17:00 GMT

Email-ID 988064
Date 2010-11-10 14:52:56
Given that US has been trying to build a more united front against china
in trying to stop competitive devaluation, wouldn't the US have
anticipated that china would turn around and use the QE2 move to rally
everyone against the US at this summit as a distraction from its own
In other words, if the QE2 was the US warning shot, is it more likely to
backfire and lead to more gridlock at the g20 or is there something else
up Geithner's sleeve?
Sent from my iPhone
On Nov 10, 2010, at 8:06 AM, Matt Gertken <>

there's a lot of great feedback here. doesn't necessarily conflict with
our assessment of the G20 battle lines, but does have some interesting
thoughts and different angles

On 11/10/2010 5:52 AM, Zac Colvin wrote:

ATTRIBUTION: Financial source in BJ
SOURCE DESCRIPTION: Finance/banking guy with the ear of the chairman
the BOC (works for BNP)

- As to the run up to the G20, i think i sent an email on what the
Chinese are doing a few days ago. An added string to the bow is that
they are doing the normal "let the RMB appreciate in the days before
the meeting / report / visit " technique. This has brought us the
current high of 6.635RMB to the USD as of now. Yesterday saw the
biggest daily climb in the RMB since 2005. This is what their position
looks to be:

1 - We are reforming the RMB. (Slowly but surely)
2 - The US's actions are causing a lot of stress in the International
system. (It was only yesterday that Obama spoke out to defend QE2 for
the first time, up until then the loudest statements about it were
from China and were pretty negative).
3 - The US's actions are especially irresponsible since the USD is the
reserve currency of the system. There is a conflict of interest
between the USD being the reserve currency AND a domestic currency.
4 - Many emerging markets are having to fight hot money inflows
because of the US action.

South Africa Canada Mexico USA Argentina
Brazil China Japan South Korea India
Indonesia Saudi Arabia Russia Turkey The EU
France Germany Italy UK Australia

Here are some of the issues and the key supporters as it appears /
would logically make sense

A - RMB:
Looking at the line-up, it is clear that pretty much everyone wants
the RMB to become more fairly valued. The main question is about

Everyone v
(USA, Japan, EU, Brazil, Indonesia,

B - Current Account surplus fixed targets:
Of course the exchange rate is just part of the puzzle. The current
account surplus issue is a problem. Geithner highlighted this by
targeting the surplus instead of just the currency issue. As Pettis
recently pointed out (and Wolf), there is no point fixing the exchange
rate if the imbalances are maintained through policies designed to
mitigate the exchange rate adjustment. Here the G20 is more split. The
Surplus countries argue that the deficit countries pretty much have
themselves to blame.

Deficit Countries
v Surplus Countries
(USA, UK, certain EU members)
(China, Japan, Germany, maybe
Saudi Arabia)

C - Irresponsible Monetary Policy is bad:
China is of course trying to lead a revolt against US QE2 and is
trying to pressure the US through corralling as many other members as
possible to support its position. It is not entirely clear what the
aim is here. The options are

1 - To literally break dollar dominance / set into motion a process
which seriously reduces dollar dominance. This is obviously the
Chinese ultimate goal, but i don't think they REALLY want it quite

2 - To use this as a bargaining tool / distractive tool in order to
force the US into a more favourable agreement on RMB / Current Account
targets . Hence China is trying to drive a wedge between those looking
to pressure China. It is pretty impressive how the Chinese have made
so much noise about this in the last week or so.... QE2 is
irresponisble and bad for the world. The USD as the reserve currency
is a bad idea. Current account surplus targets are anti free-market
mechanisms. The US is destabilising the world economy (AGAIN). The US
is to blame for its deficit. The US is exporting inflationary

Affected Countries + Working another
angle countries v Non-affected
Countries + Understanding Countries
Brazil, South.Afr, maybe Argentina, India, SK
(China, maybe Germany,Russia, maybe maybe the EU)
(UK, Japan,)

D - Adjustments / reforms should be made very very slowly
As an extra point, there is a BIG question of timing. It is not being
discussed openly before the meeting, but it is perhaps the most
important factor. Surplus / manipulating countries need long term
targets set (if any at all). Deficit / not recovering well / being
affected negatively by the squabble countries would rather things
moved a lot faster, given political pressures at home / financial
pressure at home.

(CHINA, Germany, prob Japan)

(USA, UK, maybe others such as Brazil, SK, Canada)

Obviously there are countries which keep popping up (USA, UK, JAPAN,
CHINA, GERMANY, and some which don't seem to pop up so much (Turkey,
Mexico, Russia). This is partly because some countries are keeping
quite quiet before the conference, so it is hard to guess their
position. Or for some their economic situation doesnt clearly point
one way or another. Or maybe i have missed some key public
statements!!! Anyway, it is clear that there is going to be a lot of
horse-trading on the various issues. The US NEEDS to stress that QE2
has advantages for all (potentially) to counter the negative
perceptions about the capital outflows. QE2 should increase world net
demand. etc. China will need to try and make diluted and snails pace
promises on the RMB in order to win round enough countries to form a
counter to the US on the trade deficit.

China's data comes out very soon. There are guesses of an increased
trade surplus, and perhaps perhaps another increase in Chinese
inflation. I haven't heard any bank lending rumours yet. Added to this
Zoellick was talking about a radical reform of the international
monetary system this week (writing in the FT i think)

- Cameron is leading this trade delegation / visit (i got caught up in
traffic by the motorcade yesterday!!!) A big problem for him
politically is the Human Rights issue. Certain Chinese dissdents
(including Liu's lawyer, and the Ai Weiwei guy who was just house
arrested) are calling for public criticisms about China's human
rights. Cameron is not strong enough at home and the UK is not strong
enough financially to piss off the Chinese too much (publically). So i
think they will be disappointed. Either way, the trip is going to make
Cameron look a little weak in many people's eyes back home, so he
needs to get some good trade deals signed instead. So far UK
government debt has come under the limelight that has been spreading
from Greece via Portugal to Ireland. Altogether here in China i think
the UK has quite a good reputation at the moment.

Jennifer Richmond
China Director
Director of International Projects
(512) 422-9335

Zac Colvin

Matt Gertken
Asia Pacific analyst
office: 512.744.4085
cell: 512.547.0868