Rabo: China Can Only Achieve Its Goals Under A New Bretton Woods Regime

By Michael Every of Rabobank

Shift or Spin?

As Bloomberg notes today, “China is Digging Deep Into Its Currency Toolkit to Manage Yuan”. This follows the first hike in the FX reserve requirement ratio since 2007. As the article goes on to point out: “The PBOC is seeking to curb speculation in the yuan without derailing a plan to liberalize the currency and promote its global usage.” Now this statement is true. It’s also not going to be possible – not as a critique of China, you understand, but for anyone in that position.

You cannot liberalize a currency in order to internationalize it, and maintain exchange rate stability once global markets have a free supply of it, and can push it up, or down: unless everything else except FX rates –growth, inflation, interest rates, trade flows, and capital flows– are held stable between China and the rest of the world. At least not without re-writing the global financial rules so we effectively go back to a new Bretton Woods (pegged to…?).

Allow me to remind readers that under the gold-backed Bretton Woods, member countries could only change their exchange rate against the metal (and thus the US dollar) by more than 10% with IMF approval, which was contingent on its determination that the applicant’s balance of payments was in a “fundamental disequilibrium”. Any country that changed FX rates without approval or after being denied approval was denied access to the IMF entirely. Given that “fundamental disequilibrium” was never defined, very few >10% movements were seen. Indeed, some FX rates only moved once in two decades. Imagine being an FX broker going for lunch and missing the only trade of your career; and contrast that with our 24/7 trade-FX-from-home culture of today embraced by those who seem to pine for the gold that backed Bretton Woods.

In short, unless we get a huge shift either in China or the rest of the world, or both, then talk of CNY internationalization is more likely to be spin – which is something we have argued since the Chinese currency was first put in the IMF basket of “global reserve currencies” back in 2015,…to no real effect whatsoever so far in terms of its global usage, as we see above.

Not entirely unrelated, Bloomberg also reports: “Xi Seeks ‘Lovable’ Image for China in Sign of Diplomatic Rethink”. Chinese officials have been told to create a “trustworthy, lovable, and respectable” image for the country; to “make friends extensively, unite the majority, and continuously expand its circle of friends with those who understand and are friendly to China.”; and the missive is to get “a grip on tone” in global communications, and to be “open and confident, but also modest and humble.” Obviously, such a step would be welcome, not just from China, but globally. However, the question of shift or spin again emerges. After all, Beijing has been embracing so-called ‘Wolf Warrior’ diplomacy since 2017, and its representatives around the world, and the excitable Global Times, have used language strong enough to get pushback even from European governments; and the Global Times’ editor has even openly advocated an attack on Australia should a war start in the South China Sea.

Indeed, the Global Times’ take on the new national PR direction is a little different from Bloomberg’s. Its headline is “China needs a voice that matches its national strength, international status: Xi”; and it states China needs “to develop a voice in international discourse that matches China’s comprehensive national strength and international status,” and that “experts” say “China will not keep silent amid a stigmatization and propaganda warfare launched by the US and its allies.” Perhaps underlining the communication and perception gaps that have emerged in recent years, it adds: “Analysts said that due to the cultural tradition of humility of the Chinese nation, China is not a country that loves promoting itself to other nations, and it doesn’t like playing tit-for-tat with others, and prefers to treat others with kindness. This is a key reason why China’s voice in the Western-dominated global public opinion field is yet to match its national strength and influence.” Western ‘China hawks’ –who can be wolfish themselves– would say there is more to it than that as the Endless Frontiers Act progresses through Congress; Australia and Japan accelerate defence spending; and the UK sends an aircraft carrier to sail the South China Sea.

The Global Times then quotes a Beijing-based expert on international relations: “it’s easy for China to fix China-US ties immediately. As long as China announces it gives up 5G technology, space exploration, all advanced weapons and economic development, all struggles between China and the US would disappear. To stay weak and obey, and accept Western narrative hegemony in the international field of public opinion is the key for a non-Western country to keep the ties with the US friendly. It’s never about democracy and freedom; it’s about strength and autonomy.”

And it continues by quoting a senior Chinese media professional and European studies expert based in France, who states: “…many countries’ political elites and people in regions like Africa, Southeast Asia and Middle East are defending or supporting China’s stance and image in the international arena. This is an optimistic trend…It’s impossible for China to convince every single country and make all Western countries friendly, but it’s possible for China to win the support from the majority of the international community.”

In other words, unlike the Bloomberg spin, the broader thrust seems to be towards China building PR ‘market share’ *outside* the West – which it is already successfully doing with its exports.

Meanwhile, shift or spin is very much the issue for central banks too. The RBA did nothing yesterday, but next month is decision time: will it stick to a 3-year policy for yield curve control, or start to allow this to roll down the curve? Likewise, the ECB saw May Eurozone CPI above its “below but close to 2.0%” inflation target yesterday, months ahead of its target date: and all it took was a massive ‘bullwhip’ supply-chain shock that it had entirely failed to forecast!

Will the ECB shift towards slightly tighter monetary policy earlier than had been expected as well? More likely, this entirely accidental success on inflation will see central-bank spin that such price hikes are “transitory” – as global oil prices rise again as demand picks up, and all US JBS meat-packing plants were briefly shut down under a new Russian cyberattack; and that the ECB fully understands the supply-chain issues they did not predict a few months ago. (Which obviously also run through US/Western-China relations, and USD/CNY, by the way.)