A harsh editorial by Xin Hua was the answer to the USA’s downgrading by Standard&Poors. The news agency was blatant in its simple language: the USA should learn “the commonsense principle that one should live within its means”. There is no need to visualize charts and graphics to understand it. It is sufficient to give more value to savings. On the contrary, fostering private consumptions requires staking to the future. In conclusion, the USA should forget their “addiction to credit”.
This position reflects a bunch of components, as expected in every complex setting. It is easy to find a mixture of concern, nationalism, and propaganda useful to negotiate. National accountability allows Beijing to act as a severe professor and deliver lectures. Its debt-to-GDP ratio was officially put at 17% in 2010, well below the other capitals’: Washington 87%, London 80%, Tokyo 210%. This performance, combined with strong foreign assets and the perspectives of an easy landing for the economy, were good enough for S&P and Moodys to upgrade their rating on China. But the real size of the nation’s debt is very uncertain. All the analysts, although with different measures, disagree with the official version, unanimously considered much lower than the reality. If the debts of the local governments and the non-performing loans of the banks are taken into accounts, the debt-to-GDP ratio might reach 80%. Even with this correction, China could handle the situation, given its growth and, more importantly, its tax revenues, which increases in the order of 30% every year.
This conundrum causes concern, and the dollar’s value is its most blatant epitome. After the agreement reached at the US Congress, it is possible that a new quantitative easing will take place. Fresh money, a Q3, should land on the society in order to underpin the internal demand. Short-term interest rates are near to zero while banks give loans more prudently than in the past. Moreover, this money should be useful to the State, not to the families or to the companies. In a pre-electoral year and with a high unemployment rate, Washington has only few options left.
But a new wave of dollars in the markets will have negative repercussions for China. The inflation, lingering above the country, will be even more dangerous, mainly for the rise on the commodities’ prices. The country will probably answer with tighter monetary policies, probably followed by other emerging countries. Global growth will be penalized where is more robust. Finally, and more importantly, the dollar’s value will be hit. It is well known that China holds more than half of its reserves in Usd and is extremely feared to see their value diminishing. As in the 2 previous quantitative easings (+2bln Usd) Beijing will be forced to buy dollars, to safeguard its savings. An innovative option should be to let the Rmb freely revaluate, as it did recently to a historical height. A growing voice in China is now calling for reducing the excessive accumulation of dollars, letting the Rmb to perform against the other currencies. In this case, inflation would be controlled without any further monetary restriction. In both cases, Beijing knows well the economic competition is not enough to win the race. The new pacific battleground will be political. It is not coincidental that Xin Hua’s editorial concludes with a strong and direct message: “International supervision over the issue of U.S. dollars should be introduced, and a new stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country”. As unusual it might appear, the proposal is less unrealistic than it was just few years back.