G-20 is over but the acrimony is not. Bloomberg reports China Assails Monetary Easing, Citing Inflation, Bubble Risks

China renewed an attack on quantitative easing, citing the risk of increased prices in emerging economies, a day after the Group of 20 nations said the markets can adopt regulatory steps to cope.



China “doesn’t support” the monetary easing that causes “imported” inflation in developing countries, Commerce Minister Chen Deming told a forum today in Macau, a Chinese special autonomous region. The capital inflows increase the risk of “asset bubbles,” Jin Zhongxia, deputy director general of the international department at the People’s Bank of China, said at the same forum.



“Major reserve-currency issuing countries excessively print money to get out of their own economic difficulties, posing a policy dilemma for emerging economies,” Jin said in Macau today, without naming any countries. “That will impose greater pressure on capital inflows, bigger bubbles in asset markets and inflationary pressure.”



Capital flows into emerging markets are running at $575 billion a year, 20 percent higher than before the world financial crisis, Goldman Sachs Group Inc. said in September. The U.S. dollar has weakened over the past three months against all 16 major market currencies tracked by Bloomberg.



Steps to impose restrictions on capital have increased as emerging-market currencies strengthened, with Brazil’s real climbing 21 percent against the dollar in the past 18 months, Chile’s peso up 18 percent, Thailand’s baht rising 16 percent and South Korea’s won appreciating 10 percent.



China plans to boost cross-border yuan-denominated trade with other countries 10-fold to 20 percent of total trade, or more than 2.5 trillion yuan, to reduce reliance on a few reserve currencies, Jin said, without specifying a target date.

More Regional Yuan Trading Proposed

Prime Minister Abhisit Vejjajiva, fearful of the effects of the soaring baht due to massive capital inflows, has proposed the use of the Chinese yuan as a major regional trading currency.



"The G20 did not make any progress on the matter and it is difficult to get the United States and China to express their clear stances on the issue. But what we can do is try to cooperate in the region and reduce the impact from currency volatility," Mr Abhisit said before leaving for the Asian Games in China and an Asia-Pacific Economic Cooperation (Apec) leaders' meeting in Yokohama, Japan, this weekend.



Only vague "indicative guidelines" were set for measuring imbalances between their multi-speed economies. Leaders called a timeout to let tempers cool and left details to be discussed in the first half of next year.



Mr Abhisit echoed a call made by the Asian Development Bank (ADB) to use China's yuan as a major trading currency in the region to reduce the impact of currency volatility, especially linked to the weakening of the US dollar. He said he was the one who proposed the idea to the ADB.



Donald Tsang, chief executive of the Hong Kong Special Administrative Region, said the regional private sector should brace for high volatility in the currency and securities markets as economies were increasingly linked.



The most pronounced problem to result from capital inflows, stemming from US funds seeking returns in Asia, would be an unsustainable rise in asset prices, Mr Tsang said.



"The imbalance is unique. I have never seen it in my working life," he said.



An Attack on US$ Hegemony?

UN Proposes to Scrap Dollar as Sole Reserve Currency

A new United Nations report released on Tuesday calls for abandoning the U.S. dollar as the main global reserve currency, saying it has been unable to safeguard value.



But several European officials attending a high-level meeting of the U.N. Economic and Social Council countered by saying that the market, not politicians, would determine what currencies countries would keep on hand for reserves.



"The dollar has proved not to be a stable store of value, which is a requisite for a stable reserve currency," the U.N. World Economic and Social Survey 2010 said.



The report says that developing countries have been hit by the U.S. dollar's loss of value in recent years.



"Motivated in part by needs for self-insurance against volatility in commodity markets and capital flows, many developing countries accumulated vast amounts of such (U.S. dollar) reserves during the 2000s," it said.



The report supports replacing the dollar with the International Monetary Fund's special drawing rights (SDRs), an international reserve asset that is used as a unit of payment on IMF loans and is made up of a basket of currencies.



"A new global reserve system could be created, one that no longer relies on the United States dollar as the single major reserve currency," the U.N. report said.



Russia and China have also supported the idea.



But Paavo Vayrynen, Finland's Foreign Trade and Development Minister, told reporters that he doubted it was possible "to make any political or administrative decisions how to formulate the currency system in the world."

The Market Dictates Reserve Currencies

Function of Math

Why Are Countries Piling Up US$?

Mathematically, whoever has the biggest trade deficit and hot money outflows on a sustained basis will see the biggest amount of reserves pile up elsewhere. It's as simple as that. Thus, all this talk about SDRs and using the Yuan or the Yen as major reserve currencies is complete silliness.