When Will the U.S. Dollar Collapse?

https://youtu.be/N8IyDSrMY3w

By Kimberly Amadeo

Updated October 28, 2018

A dollar collapse is when the value of the U.S. dollar plummets. Anyone who holds dollar-denominated assets will sell them at any cost. That includes foreign governments who own U.S. Treasurys. It also affects foreign exchange futures traders. Last but not least are individual investors.

When the crash occurs, these parties will demand assets denominated in anything other than dollars. The collapse of the dollar means that everyone is trying to sell their dollar-denominated assets, and no one wants to buy them. This will drive the value of the dollar down to near zero. It makes hyperinflation look like a day in the park.

Two Conditions That Could Lead to the Dollar Collapse

Two conditions must be in place before the dollar could collapse. First, there must be an underlying weakness. As of 2017, the U.S. currency was fundamentally weak despite its 25 percent increase since 2014. The dollar declined 54.7 percent against the euro between 2002 and 2012. Why? The U.S. debt almost tripled during that period, from $6 trillion to $15 trillion. The debt is even worse now, at $21 trillion, making the debt-to-GDP ratio more than 100 percent. That increases the chance the United States will let the dollar's value slide as it would be easier to repay its debt with cheaper money.

Second, there must be a viable currency alternative for everyone to buy. The dollar's strength is based on its use as the world's reserve currency. The dollar became the reserve currency in 1973 when President Nixon abandoned the gold standard. As a global currency, the dollar is used for 43 percent of all cross-border transactions. That means central banks must hold the dollar in their reserves to pay for these transactions. As a result, 61 percent of these foreign currency reserves are in dollars.

Note:  The next most popular currency after the dollar is the euro. But it comprises less than 30 percent of central bank reserves. The eurozone debt crisis weakened the euro as a viable global currency.

China and others argue that a new currency should be created and used as the global currency. China's central banker Zhou Xiaochuan goes one step further. He claims that the yuan should replace the dollar to maintain China's economic growth. China is right to be alarmed at the dollar's drop in value. That's because it is the largest foreign holder of U.S. Treasury, so it just saw its investment deteriorate. The dollar's weakness makes it more difficult for China to control the yuan's value compared to the dollar.

Could bitcoin replace the dollar as the new world currency? It has many benefits. It's not controlled by any one country's central bank. It is created, managed, and spent online. It can also be used at brick-and-mortar stores that accept it. Its supply is finite. That appeals to those who would rather have a currency that's backed by something concrete, such as gold.

But there are big obstacles. First, its value is highly volatile. That's because there is no central bank to manage it. Second, it has become the coin of choice for illegal activities that lurk in the deep web. That makes it vulnerable to tampering by unknown forces.

Economic Event to Trigger the Collapse

These two situations make a collapse possible. But, it won’t occur without a third condition. That's a huge economic triggering event that destroys confidence in the dollar.

Altogether, foreign countries own more than $5 trillion in U.S. debt. If China, Japan or other major holders started dumping these holdings of Treasury notes on the secondary market, this could cause a panic leading to collapse. China owns $1 trillion in U.S. Treasury. That's because China pegs the yuan to the dollar. This keeps the prices of its exports to the United States relatively cheap. Japan also owns more than $1 trillion in Treasurys. It also wants to keep the yen low to stimulate exports to the United States.

Japan is trying to move out of a 15-year deflationary cycle. The 2011 earthquake and nuclear disaster didn't help.

Would China and Japan ever dump their dollars? Only if they saw their holdings declining in value too fast and they had another export market to replace the United States. The economies of Japan and China are dependent on U.S. consumers. They know that if they sell their dollars, that would further depress the value of the dollar. That means their products, still priced in yuan and yen, will cost relatively more in the United States. Their economies would suffer. Right now, it's still in their best interest to hold onto their dollar reserves.

Note: China and Japan are aware of their vulnerability. They are selling more to other Asian countries that are gradually becoming wealthier. But the United States is still the best market (not now) in the world.

When Will the Dollar Collapse?

It's unlikely that it will collapse at all. That's because any of the countries who have the power to make that happen (China, Japan, and other foreign dollar holders) don't want it to occur. It's not in their best interest. Why bankrupt your best customer? Instead, the dollar will resume its gradual decline as these countries find other markets.

Effects of the Dollar Collapse

A sudden dollar collapse would create global economic turmoil. Investors would rush to other currencies, such as the euro, or other assets, such as gold and commodities. Demand for Treasurys would plummet, and interest rates would rise. U.S. import prices would skyrocket, causing inflation.

U.S. exports would be dirt cheap, given the economy a brief boost. In the long run, inflation, high interest rates, and volatility would strangle possible business growth. Unemployment would worsen, sending the United States back into recession or even a depression.

How to Protect Yourself

Protect yourself from a dollar collapse by first defending yourself from a gradual dollar decline.

Important:  Keep your assets well-diversified by holding foreign mutual funds, gold, and other commodities.

A dollar collapse would create global economic turmoil. To respond to this kind of uncertainty, you must be mobile. Keep your assets liquid, so you can shift them as needed. Make sure your job skills are transferable. Update your passport, in case things get so bad for so long that you need to move quickly to another country. These are just a few ways to protect yourself and survive a dollar collapse.

US Trade Deficit With China and Why It's So High

The Real Reason American Jobs Are Going to China 

By Kimberly Amadeo 

Updated November 21, 2018

The U.S. trade deficit with China was $375 billion in 2017. The trade deficit exists because U.S. exports to China were only $130 billion while imports from China were $506 billion.

The United States imported from China $77 billion in computers and accessories, $70 billion in cell phones, and $54 billion in apparel and footwear. A lot of these imports are from U.S. manufacturers that send raw materials to China for low-cost assembly. Once shipped back to the United States, they are considered imports.

In 2017, China imported from America $16 billion in commercial aircraft, $12 billion in soybeans, and $10 billion in autos. In 2018, China canceled its soybean imports after President Trump started a trade war. He imposed tariffs on Chinese steel exports and other goods. 

Current Trade Deficit

As of July 2018, the United States exported a total of $74.3 billion in goods to China. It imported $296.8 billion, according to the U.S. Census Bureau. As a result, the total trade deficit with China is $222.6 billion. A monthly breakdown is in the chart.

Monthly U.S. Trade Deficit With China From January to July 2018

NOTE: All figures are in millions of US$

Exports Imports Balance

US$211.1

Jul 18

US$202

Jan 18

US$205

Feb 18

US$210

Mar 18

US$210

Apr 18

US$214

May 18

US$213

Jun 18

US$211

Jul 18

Chart: The Balance Source: United States Census Bureau

Causes

China can produce many consumer goods at lower costs than other countries can. Americans, of course, want these goods for the lowest prices. How does China keep prices so low? Most economists agree that China's competitive pricing is a result of two factors:

1. A lower standard of living, which allows companies in China to pay lower wages to workers.
2. An exchange rate that is partially fixed to the dollar.

If the United States implemented trade protectionism, U.S. consumers would have to pay high prices for their "Made in America" goods. It’s unlikely that the trade deficit will change. Most people would rather pay as little as possible for computers, electronics, and clothing, even if it means other Americans lose their jobs.

China is the world's largest economy. It also has the world's biggest population. It must divide its production between almost 1.4 billion residents. A common way to measure standard of living is gross domestic product per capita. In 2017, China’s GDP per capita was $16,600. China's leaders are desperately trying to get the economy to grow faster to raise the country’s living standards. They remember Mao's Cultural Revolution all too well. They know that the Chinese people won't accept a lower standard of living forever.

China sets the value of its currency, the yuan, to equal the value of a basket of currencies that includes the dollar. In other words, China pegs its currency to the dollar using a modified fixed exchange rate. When the dollar loses value, China buys dollars through U.S. Treasurys to support it. In 2016, China began relaxing its peg. It wants market forces to have a greater impact on the yuan's value. As a result, the dollar to yuan conversion has been more volatile since then. China's influence on the dollar remains substantial.

Effect

China must buy so many U.S. Treasury notes that it is the largest lender to the U.S. government. Japan is the second largest. As of September 2018, the U.S. debt to China was $1.15 trillion. That's 18 percent of the total public debt owned by foreign countries.

Many are concerned that this gives China political leverage over U.S. fiscal policy. They worry about what would happen if China started selling its Treasury holdings. It would also be disastrous if China merely cut back on its Treasury purchases.

Why are they so worried? By buying Treasurys, China helped keep U.S. interest rates low. If China were to stop buying Treasurys, interest rates would rise. That could throw the United States into a recession. But this wouldn’t be in China's best interests, as U.S. shoppers would buy fewer Chinese exports. In fact, China is buying almost as many Treasurys as ever.

U.S. companies that can't compete with cheap Chinese goods must either lower their costs or go out of business. Many businesses reduce their costs by outsourcing jobs to China or India. Outsourcing adds to U.S. unemployment. Other industries have just dried up. U.S. manufacturing, as measured by the number of jobs, declined 34 percent between 1998 and 2010. As these industries declined, so has U.S. competitiveness in the global marketplace
.

What's Being Done

President Trump promised to lower the trade deficit with China. On March 1, 2018, he announced he would impose a 25 percent tariff on steel imports and a 10 percent tariff on aluminum. On July 6, Trump's tariffs went into effect for $34 billion of Chinese imports. China canceled all import contracts for soybeans.

Trump's tariffs have raised the costs of imported steel, most of which is from China. Trump's move comes a month after he imposed tariffs and quotas on imported solar panels and washing machines. China has become a global leader in solar panel production. The tariffs depressed the stock market when they were announced.

The Trump administration is developing further anti-China protectionist measures, including more tariffs. It wants China to remove requirements that U.S. companies transfer technology to Chinese firms. China requires companies to do this to gain access to its market.

Trump also asked China to do more to raise its currency. He claims that China artificially undervalues the yuan by 15 percent to 40 percent. That was true in 2000. But former Treasury Secretary Hank Paulson initiated the U.S.-China Strategic Economic Dialogue in 2006. He convinced the People's Bank of China to strengthen the yuan's value against the dollar. It increased 2 to 3 percent annually between 2000 and 2013. U.S. Treasury Secretary Jack Lew continued the dialogue during the Obama administration.

The Trump administration continued the talks until they stalled in July 2018.

The dollar strengthened 25 percent between 2013 and 2015. It took the Chinese yuan up with it. China had to lower costs even more to compete with Southeast Asian companies. The PBOC tried unpegging the yuan from the dollar in 2015. The yuan immediately plummeted. That indicated that the yuan was overvalued. If the yuan were undervalued, as Trump claims, it would have risen instead.

Source: The Balance

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Global currencies weaken in currency war against super US dollar; exporters gain

Central banks making moves to check appreciating currencies against US dollar

A number of central banks have been making moves to shake up their currencies over the past few months.

Faced with slowing global growth and lower inflation – disinflation or deflation in a number of countries – central banks started taking action primarily by cutting interest rates or injecting liquidity into the system.

From Japan increasing its monetary stimulus to Singapore putting the brakes on its currency’s appreciation against a trade-weighted basket of currencies, stemming currency appreciation has led to talk that a currency war could be brewing.

Using the value of currencies to boost trade-heavy economies has been the flavour, as global economic growth slows.

The International Monetary Fund cut its global growth outlook from 3.8% to 3.5% this year and with growth easing in China, Europe and a number of emerging economies, giving support to such economies has been the focus of governments.

The European Central Bank instituted its own quantitative easing (QE) policy on Jan 22 to get growth going in the European Union.

The effectiveness of that policy has been questioned, but the immediate result was that the euro, which has been weakening against the US dollar, continued to fall against the greenback.

With Japan flooding the market with liquidity to get growth and inflation going with its own QE, the result has been a marked weakness in the currency.

The yen’s steep depreciation against the dollar, according to reports, is causing uneasiness in South Korea, which competes almost head-to-head with Japan in the export markets.

What is allowing countries that have taken action to cut their interest rates has been the slowing inflation.

The steep fall in crude oil prices since June last year to below US$50 a barrel has eased inflationary pressure worldwide, as energy is usually the biggest component of inflation. It’s been reported that over the past six months, 18 out of 50 MSCI countries have cut rates.

The Reserve Bank of India, which has an inflation targeting policy, cut interest rates this month. India, along with Denmark, Switzerland, Canada, Egypt and Turkey, has cut interest rates this month itself.

That was followed by Singapore’s move to slow its rise against a basket of currencies, which saw the Singapore dollar continue its recent drop against the US dollar.

Falling inflation was the primary reason for the Monetary Authority of Singapore (MAS) to make its pre-emptive move to slow down the appreciation of its currency by reducing the pace of increase. But quite a number do not pin that move as a significant competitiveness boost.

“The adjustment does not translate into a massive competitiveness impact,” says Saktiandi Supaat, Malayan Banking Bhd’s head of foreign exchange (forex) research based in Singapore.

MAS’ next policy statement will be due in April where it could give some clarity on the competitiveness angle, but the drop in the Singapore dollar against the greenback does help to boost inflation, which is expected to be lower than had been earlier estimated. The previous outlook was for a -0.5% to 0.5% rise in inflation.

A slower rate of appreciation would also help Singapore’s economy, which is already dealing with cost pressures from a tight labour market where the unemployment rate was a meagre 1.6%.

Furthermore, with non-oil domestic exports reportedly dropping for the past two years, a weaker Singapore dollar will help, especially when exports to China and the United States have fallen on a year-on-year basis.

Pressure is also emerging in Thailand, where the stronger baht is also not helping with exports, which dropped 0.4% last year.

Finance Minister Sommai Phasee was recently reported to have said that the Thai central bank should “in theory” lower borrowing costs, and that exports are under pressure from a stronger baht.

Fundamentals back appreciation

The Philippine peso and the baht are two currencies in this region that have in recent months seen an appreciation against the dollar. The reason for this is that the fundamentals of these economies have improved.

“The Philippines is not reliant on commodities as much as Malaysia, Indonesia and Thailand and that is the biggest driver of its currency,” says a currency strategist in Singapore.

“It just registered its strongest gross domestic product (GDP) growth over three years since the 1950s.”

The Philippine economy grew by 6.1% last year after expanding by 7.2% in 2013.

Thailand, recovering from floods and political unrest, has also been a flavour for foreign investors since stability returned.

Its stock market in US dollar terms is now bigger than Bursa Malaysia and one of the reasons for the currency’s rise is the drop in oil prices.

The fall in crude oil prices is expected to have the biggest economic benefit to Thailand and the Philippines among countries in this region, according to Bank of America Merrill Lynch.

“Lower oil prices have not resulted in any sizeable GDP growth upgrade as yet for emerging Asia, in part because of slowing global growth outside the United States.

“Lower oil prices have, however, improved the trade surplus significantly, supporting the current account balance and FX reserves positions.

“Lower oil prices have also resulted in a sharp drop in inflation, particularly in Thailand, the Philippines and India, which has allowed central banks to stay accommodative. Emerging Asian countries will likely see a boost to GDP growth in the range of +10bp to +45bp with every 10% fall in oil prices, if the oil price drop was purely a supply shock,” it says in a note.

The low-inflation environment will also allow central banks in this region to become more accommodative.

“Lower crude oil prices and loose global monetary policy will likely keep inflation lower in 2015 with rising probability of rate cuts in Asean,” says Morgan Stanley in a note.

How low will the ringgit go?

The past three months have been a volatile period for global currencies and no more so when it comes to the ringgit, which is the second-worst performing currency in Asia against the US dollar over the past 12 months after the yen.

Directly, the drop in crude oil prices has affected the fundamentals of Malaysia and carved a chunk out of government revenue, as receipts from crude oil production account for slightly less than 30% of income.

With revenues depleted, the Government has revised its budget for this year to take into account crude oil averaging US$55 a barrel in 2015 from an earlier projection that it would average US$105 a barrel when the budget was announced last October.

The revised budget also led to a slight increase in the fiscal deficit to 3.2% of GDP from an earlier projection of 3%.

That percentage is lower than the 3.5% target for 2014.

Apart from fiscal discipline, the ringgit’s fortunes have been loosely linked to the price of crude oil.

With this July marking the 10th year when the ringgit peg to the US dollar was lifted, the decision to remove the RM3.80 to the US dollar peg was to ensure that the ringgit reflected the fundamentals of the economy.

Prior to that decision, the price of crude oil had started to rise, delivering valuable additional revenue to the Government.

When the peg was lifted, brent crude oil was trading at US$55.72 a barrel, and over the years, the ringgit loosely tracked the value of crude oil, often appreciating against the dollar when crude oil prices were high and weakening when crude oil prices dropped.

Anecdotally, the ringgit gained strength against the dollar when oil prices soared and approached the RM3 to the dollar mark when crude oil hit more than US$140 in 2008.

It dropped in value as crude oil prices retreated from there, and as crude oil prices went up again and stayed at elevated levels for a prolonged period, the ringgit then crossed the RM3 level into the RM2.90 range.

Forex strategists say sentiment does affect the movement of a currency, but it moves in parallel with the fundamentals of an economy. With Malaysia’s fortunes closely linked to the price of crude oil, it is inevitable that the thinking of the country’s fundamentals will also change.

“If energy prices continue to drop, then it will hurt the ringgit,” says a forex strategist based in Singapore.

Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz recently said the ringgit, which is currently trading at multi-year lows against the US dollar, did not reflect Malaysia’s strong underlying fundamentals.

“Once the global events settle down and stabilise, the ringgit will trend towards our underlying fundamentals,” Zeti told reporters at an event.

Apart from lower crude oil prices, the ringgit has also been hurt by capital outflows.

Malaysia’s forex reserves in the first two weeks of January were at its lowest level since March 2011 and foreign investors held 44% of Malaysian Government Securities (MGS) as of the end of last year.

Analysts say while foreigners have sold off a chunk of government debt, the remaining are not expected to do so as long as they are making a decent return on their holdings. The rise in the value of the 10-year MGS will give support to their holdings.

A number of forex analysts think the ringgit will not slip below RM3.70 to the US dollar, but some do admit they did not think it would be trading at the current level of around RM3.63 a few months ago.

“If it does go to RM3.80, then people will get panicky,” says one forex analyst.

By Jagdev. Singh Sidhu The Star/ANN

Semiconductor and rubber glove makers to gain from weak ringgit

Kenanga Research believes that the semiconductor industry will stay resilient with the global sales continuing to show healthy momentum.

THE decline of the ringgit is generally viewed as a problem for the economy but there are always two sides to the story.

Exporters with high local ringgit-denominated content and strong external demand are the obvious winners as they are expected to benefit from the weakening ringgit.

The winners are said to be the semiconductor and technology, rubber gloves and timber-based sectors. The share prices of a number of those companies have already factored in the benefits to their business from the weaker ringgit after the currency started its decline,which was more pronounced since the beginning of the fourth quarter of last year.

On the semiconductor front, Kenanga Research says believes that industry will stay resilient with the global sales continuing to show healthy momentum. Bottom-fishing is recommended as a strategy especially with the current risk-reward ratio less favourable following rich valuations in some counters.

“Typically, first and last quarters of a calender year, the earnings for the semiconductor players are seasonally weaker.

“That said we see any price weakness in these stocks as opportunities to accumulate as the earnings shortfall could be made up by the seasonally stronger second and third quarters on the back of the resilient industry prospects,” it says in a recent report.

Screening through the semiconductor value chain, Kenanga Research sees Vitrox Corp Bhd, being the leading solution providers of automated vision inspection systems to continue benefiting from the increasing complexity of semiconductor packages, which requires enormous inspection.

The research house is sanguine over OSAT (outsourced chips assembly and testing) players such as Unisem (M) Bhd. Inari Amertron Bhd is among the research house’s top pick.

PIE industrial Bhd managing director Alvin Mui says the group would see its sales rising this first quarter.

“But this is due to the new box built products we are doing for the medical equipment segment.

“The weakened ringgit will of course boost our revenue and bottom line,” Mui says.

Meanwhile, Elsoft Research Bhd chief executive officer CE Tan says the weak ringgit has boosted orders for its LED test equipment for the first quarter of this year.

“We expect to perform by a strong double digit percentage growth over the same period last year,” he says.

Tan says the LED testers the group produces are niche products with competitive pricing.

Rubber gloves players have seen strong price appreciation since late last year. Maybank IB Research likes Kossan Rubber Industries Bhd due to its stronger earnings growth in financial years 2015 and 2016, underpinned by the full contributios of its latest three plants.

Meanhile, JF Apex Securities mentions Latitude Tree, Poh Huat and Heveaboard among the timber-based industry stocks that can benefit from strengthening US dollar against ringgit.

The US market is the biggest for the industry which will gain from cheaper ringgit-denominated local content and stronger US economic growth.

The losers from a weaker ringgit, JF Apex Securities Bhd senior analyst Lee Cherng Wee mentions, are automotive players which import a lot of parts especially for completely-knocked down vehicles.

Lee says counters such as Tan Chong Motors and UMW Holdings are likely to be affected.

RHB Research in a recent report says about 60% of Tan Chong’s manufacturing cost of sales is transacted in foreign currency (80% in US dollars) which RHB sees as a risk.

“Continued US dollar strength will crimp margins that will not be offset by a weaker Japanese yen,” it says.

Lee also predicts the consumer sector players with high imported content in dollar terms could risk slimmer margins coupled with sluggish consumer sentiment due to goods and services tax.

MIDF Investment Research analyst Kelvin Ong said he foresees banking groups with higher foreign shareholdings like CIMB Group Holdings Bhd, Alliance Financial Group Bhd, AMMB Holdings Bhd and Public Bank Bhd as banks that can be impacted by the weaker ringgit.

“Foreign shareholding may slip if the domestic currency continues to weaken. The Fed’s tightening of the interest rate turns out to be more aggressive than expected, and crude oil prices continue to be on a downward trend. This will impact valuations of banks, but on the flip side, it will present buying opportunities for investors on a more attractive valuation,’’ he says.

By Sharidan M. Ali and David Tan The Star/ANN

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Global bank profits hit US$920bil, China accounted for 1/3 total; Globalized RMB to stabilize world economy

LONDON: China's top banks accounted for almost one-third of a record US$920 billion of profits made by the world's top 1000 banks last year, showing their rise in power since the financial crisis, a survey showed on Monday.

China's banks made $292 billion in aggregate pretax profit last year, or 32 percent of the industry's global earnings, according to The Banker magazine's annual rankings of the profits and capital strength of the world's biggest 1,000 banks.

Last year's global profits were up 23 percent from the previous year to their highest ever level, led by profits of $55 billion at Industrial and Commercial Bank of China (ICBC). China Construction Bank, Agriculture Bank of China and Bank of China filled the top four positions.

Banks in the United States made aggregate profits of $183 billion, or 20 percent of the global tally, led by Wells Fargo's earnings of $32 billion.

Banks in the eurozone contributed just 3 percent to the global profit pool, down from 25 percent before the 2008 financial crisis, the study showed. Italian banks lost $35 billion in aggregate last year, the worst performance by any country.

Banks in Japan made $64 billion of profit last year, or 7 percent of the global total, followed by banks in Canada, France and Australia ($39 billion in each country), Brazil ($26 billion) and Britain ($22 billion),The Banker said.

The magazine said ICBC kept its position as the world's strongest bank, based on how much capital they hold - which reflects their ability to lend on a large scale and endure shocks.

China Construction Bank jumped to second from fifth in the rankings of strength and was followed by JPMorgan , Bank of America and HSBC .

ICBC, which took the top position last year for the first time, was one of four Chinese banks in the latest top 10.

Wells Fargo has this year jumped to become the world's biggest bank by market value, after a surge in its share price on the back of sustained earnings growth. Its market value is $275 billion, about $75 billion more than ICBC.

The Banker said African banks made the highest returns on capital last year of 24 percent - double the average in the rest of the world and six times the average return of 4 percent at European lenders.- Reuters

Globalized RMB to stabilize world economy

BEIJING, June 27 (Xinhua) -- The globalization of the yuan, or renminbi (RMB), will not only benefit the Chinese economy, but generate global economic stability, a senior banker has said.

The yuan did not depreciate during the 1997 Asian financial crisis or the 2008 global financial crisis, helping stabilize the global economy, Tian Guoli, chairman of the Bank of China, said at a forum in London last week, according to the Friday edition of the People's Daily.

China's economy ranks second in the world and its trade ranks first, so it is thought that use of the RMB in cross-border trade will be a mutually beneficial move for China and its trade partners.

The yuan has acquired basic conditions to become an international currency as China's gross domestic product took 12.4 percent of the world's total and its foreign trade 11.4 percent of the world's total in 2013, Tian said.

According to the central bank, RMB flow from China hit 340 billion yuan (55.74 billion U.S. dollars) in the first quarter of 2014, replenishing offshore RMB fluidity. The balance of offshore RMB deposits hit 2.4 trillion yuan at the end of March, 1.51 percent of all global offshore deposits. Offshore trade between the yuan and foreign currencies doubled in the first quarter from the fourth quarter of last year.

Analysts widely forecast five steps in RMB internationalization: RMB used and circulated overseas, RMB as a currency of account in trade, RMB used in trade settlement, RMB as a currency for fundraising and investment, and RMB as a global reserve currency.

Already, some neighboring countries and certain regions in developed countries are circulating RMB, indicating the first step has been basically achieved.

Data provider SWIFT's RMB tracker showed that in May, 1.47 percent of global payments were in RMB, a tiny amount compared to the global total but up from 1.43 percent in April. This indicated progress in the second and third steps.

Some countries in southeast Asia, Latin America and Africa have or are ready to take RMB as an official reserve currency. It indicated the fourth and the fifth steps are burgeoning.

Investors are also optimistic about RMB globalization. Bank of China's global customer survey shows that over half of the respondents expect RMB cross-border transactions to rise by 20 to 30 percent in five years. And 61 percent of overseas customers say they plan to use or increase use of RMB as a settlement currency.

Li Daokui, head of the Center for China in the World Economy under Tsinghua University, said RMB internationalization is a long-term process and should be made gradually based on China's financial reforms, including freeing interests and reforms on foreign exchange rates.

Dai Xianglong, former central bank governor of China, forecast that it will take about 10 to 15 years to achieve a high standard of RMB internationalization.

Among the latest moves toward RMB internationalization is the naming of two clearing banks to handle RMB business overseas.

The central bank announced last Wednesday that it has authorized China Construction Bank to be the clearing bank for RMB business in London, and the next day named the Bank of China as clearing bank for RMB business in Frankfurt.- Xindua

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The euro crisis just got a whole lot worse

With Europe plunging back into recession and unemployment soaring, Francois Hollande, the French president elect, is calling for growth objectives to be reprioritised over the chemotherapy of austerity. 

Riot policemen lead away a protester holding a placard reading 'Let's get out of the Euro' during May Day demonstrations in Neumuenster, Germany Photo: Reuters

Angela Merkel, the German Chancellor, has meanwhile continued to insist that on the contrary, Europe must persist with the hairshirt. What's needed is political courage and creativity, not more billions thrown away in fiscal stimulus. Stick with the programme, she urges, as the anti-austerity backlash reaches the point of outright political insurrection.

Hollande and Merkel are, of course, both wrong. What Europe really needs is a return to free-floating sovereign currencies. Only then will Europe's seemingly interminable debt crisis be lastingly resolved. All the rest is just so much prancing around the goalposts, or an attempt to make the fundamentally unworkable somehow work.

The latest eurozone data are truly shocking, much worse in its implications both for us and them than news last week of a double-dip recession in the UK.

Even in Germany, unemployment is now rising, with a lot more to come judging by the sharp deterioration in manufacturing confidence. For Spanish youth, unemployment has become a way of life, with more young people now out of a job (51.1pc) than in one. In contrast to the US, where the unemployment rate is falling, joblessness in the eurozone as a whole has now reached nearly 11pc. Against these eye-popping numbers, Britain might almost reasonably take pride in its still intolerable 8.3pc unemployment rate.

There is only one boom business in Spain these days – teaching English and German. No prizes for guessing where these students are heading.

Hollande's opportunism in calling for a growth strategy he must know cannot be delivered looks like being answered only by intensifying recession. Maybe Mario Draghi, president of the European Central Bank, will surprise us after Thursday's meeting with a rate cut and a eurozone-wide programme of quantitative easing. But even if he did, it wouldn't fix the underlying problem, which is one of lost competitiveness manifested in ever more intractable levels of external indebtedness.

To think these problems can be solved either by fiscal austerity or, as advocated by Hollande and others, by its polar opposite of fiscal expansionism is to descend into fantasy.

By reinforcing the cycle, and thereby exacerbating the slump, fiscal austerity is proving self-defeating. Far from easing the problem of excessive indebtedness, it is only making it worse.

But it is equally absurd to believe that countries in the midst of a fiscal crisis can borrow their way back to growth. Who is going to lend with the certainty of a haircut or eurozone break-up to come?

I've been looking at the comparative numbers on fiscal consolidation, and they reveal some striking differences. The hairshirt prescribed for others is most assuredly not being donned by austerity's cheerleader in chief, Germany.

In fact, German government consumption is continuing to rise quite strongly, even in real terms, and the fiscal squeeze pencilled in by Berlin for itself for the next three years is marginal compared with virtually everyone else. Germany is requiring others to adopt policies it has no intention of following itself. What's so odd about that, you might ask?

Right to spend

Germany has earned the right to spend through years of prior restraint. It's got no structural deficit to speak of and, in any case, isn't that the way things are meant to work, with those capable of some fiscal expansionism compensating for the squeeze imposed by others?

All these things are true, but there is something faintly hypocritical about a country prescribing policy for others that it wouldn't dream of imposing on itself. Germany's supposed love of self-flagellation is actually something of a myth.

By the way, despite the rhetoric, Britain is hardly an outrider on austerity either. Now admittedly, the Coalition's plans for fiscal consolidation have been somewhat derailed by economic stagnation. We were meant to be further along than we are. But in terms of what's left to do, the UK is no more than middle of the pack.

On current plans, by contrast, the fiscal squeeze in the US, land of supposed fiscal expansionism, ratchets up substantially to something quite a bit bigger than what the UK has pencilled in for the next two years. It remains to be seen what effect that's going to have on the American recovery. Will renewed growth melt away as surely as it did in early 2011, or is it self-sustaining this time?

Back in the eurozone, the stand-off between creditor and debtor nations shows few, if any, signs of meaningful resolution. During the recession of the early 1990s, there was a famous British Property Federation dinner at which the chairman introduced the then chief executive of Barclays Bank, Andrew Buxton, as "a man to whom we owe, er, more than we can ever repay". It was a good joke, but it also neatly encapsulated what happens in all debt crises.

When the debtor borrows more than he can afford, the creditor will in the end always take a hit. The only thing left to talk about is how the burden is to be shared. The idea that you can force the debtor to repay by depriving him of his means of income is a logical absurdity, yet this is effectively what's going on in the eurozone.

When such imbalances develop between countries, they are normally settled by devaluation, which provides a natural market mechanism both for restoring competitiveness in the debtor nation and establishing the correct level of burden sharing.

Least tortuous form of default

It's default in all but name, but it is the least tortuous form of it. Free-floating sovereign exchange rates also provide a natural check on the build-up of such imbalances in the first place.

The reason things got so out of hand in the eurozone is that investors assumed in lending to the periphery that they were effectively underwritten by the core, mistakenly as it turned out. Interest rates therefore converged on those of the most creditworthy, Germany, allowing an unrestrained credit boom to develop in the deficit nations.

None of this is going to be solved by austerity. For now, there is no majority in any eurozone country for leaving the single currency, but one thing is certain: nation states won't allow themselves to be locked into permanent recession. Eventually, national solutions will be sought.

The whole thing is held together only by the fear that leaving will induce something even worse than the current austerity. This is not a formula for lasting monetary union.

By Jeremy Warner - Telegraph  

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What Are We To Do by LIN SEE-YAN

 Link between joint liability of debts and good behaviour is missing

AP Photo  A beggar sits in Via Montenapoleone shopping street in downtown Milan, Italy, Tuesday, Dec.13, 2011. Further signs of stress emerged Tuesday to indicate that Europe's most recent summit agreement to get the euro countries to bind their economies much closer together has only made limited progress in pulling the continent out of its debt crisis. While figures showed that Europe's banks parked more money at the European Central Bank than they have at any other time this year, Italy's borrowing rates in the markets ratcheted even higher and back towards the levels that forced Greece, Ireland and Portugal into seeking financial bailouts.

The euro “Merkozy” deal agreed last weekend targeting deeper euro-integration was a step in the right direction but did not offer the big bazooka that could really ease market tension. It's only part of the solution Europe badly needed: it's not even the solution markets are waiting for.

So far, wanting “more Europe” has come slowly, and grudgingly; but crucially, lacked proper leadership to deal with a truly systemic crisis. What's paralyzing the euro-zone is a flaw buried deep within the monetary union's structure what one writer identified as “the unresolved conflict between the needs of the euro and the independence of its members.” Put differently, the link between joint liability of debts and good behaviour is missing.

Looking back, all those wasted years of skirting the underlying problems, causing rising budget deficits and building massive debt exploded in late 2009 when Greece first toppled into crisis. The euro-zone tried to stanch the problem with a bailout in May '10 to no avail because Greece is bankrupt; and did nothing to squelch contagion. By this summer, Ireland and Portugal had collapsed into bailouts as well; with Italy and Spain now at risk of default.

Leaders had pressured countries into gut-wrenching austerity and reform arrangements to stabilise their debt and cut deficits in the hope of rebuilding investor confidence. That strategy failed. Other agreements have also drifted. The 2nd Greece bailout in July came to naught, while the plan to boost the firepower of EFSF (European Financial Stability Facility) has since faltered.

Frustration is building. It culminated in last week's summit, with high hopes to marshal the might of the entire euro-zone a US$13bil economy to provide an extinguisher powerful enough to put out the debt fire. But all it did was inject more painkillers; not a cure.

The new deal bears the hallmark of yet another in the series of half-measures that doesn't address increasingly vulnerable banks; or go far enough to instil confidence in the euro-zone's battered debt markets; and certainly didn't convince S&P from putting the debt of 15 European economies, including Germany, on negative credit watch, and Moody from cutting the credit ratings on France's top three banks. Sure, there has been progress but not enough to provide a defining resolution. Leaders are flirting with risk as Europe is going into recession. We have seen this movie before. The deal involves a promise by everyone to be a little more German about their spending and debt. The consensus now is that the 17-nation euro-zone bloc's GDP growth will contract by up to 1% in 2012, sharply below this year's already poor growth of 1%.

There was little in the deal to address the drastic loss of investor confidence. Euro-zone borrowing costs have resumed rising this week. Stock markets have retreated after an initial relief rally as optimism faded. The euro had since sunk below US$1.30, some 12% from its peak in May. The new “comprehensive” set of measures making-up the euro-zone's “fiscal compact” failed to calm markets; it included the following:-

•  Constitutional amendment to balance the fiscal budget. The European Union's (EU) Court of Justice would verify that each country had a compliant debt brake in its laws, but with no oversight from Brussels.
•  The new “stability union” will adopt a “golden rule” to ensure structural deficits (i.e. adjusted for boom and bust of economic cycles) below 0.5% of GDP. For breaching the 3% of GDP deficit limit, nations will suffer “automatic consequences,” unless member states vote to block them.
•  The 500-billion-euro European Stability Mechanism (ESM) to replace the existing bailout fund (EFSF) will be set up in March '12 (instead of 2013).
•  A 200-billion-euro contribution to the IMF (International Monetary Fund) for on-lending to enhance the firepower of ESM to help Europe.
•  No more “hair-cuts” for private holders of dodgy euro-zone sovereign debts.
•  New treaty to change EU's foundational pacts. With UK's rejection, 17 euro countries and up to 9 of 10 EU nations not using the euro will form a separate pact outside the EU structure.

Prior to the summit, ECB took two decisive steps to shore up the euro-zone: cutting interest rate to a record low of 1% to soften the looming recession, and crucially extending longer-term liquidity to Europe's cash-starved banks. Reserve ratios were also lowered. But ECB managed to avoid mounting pressure to buy more troubled states' bonds.



As I see it, on the moral hazard side, there is no multi-trillion bail-out funds and no promise by ECB to become lender of last resort to monetise everyone's debt, at least for now. However, the use of the European Court of Justice as final arbiter of rectitude is far from persuasive. Much of the new deal is reflective of the failed “stability and growth pact” that was around when the euro was launched, and which both Germany and France breached shortly thereafter.

Such rules will inevitably be broken because when it comes to fundamental rights to tax and spend, governments will always follow the dictates of national electorates rather than Brussels. No court has the political legitimacy to confront Italian or French unions when there is social unrest in the streets over budget cuts; the court won't have the stomach to enforce its decisions. When German rectitude faces Italian or Spanish politics, we know who will get the upper hand.

Yet, for me, the irony is that EU had already agreed less than three months ago to rules that do much of what the new deal is now seeking to accomplish. They did so without having to endure the ordeal of changing EU treaties. The “six pack” arrangements were approved after nearly a year of tortuous negotiations. In broad strokes, they would have already established the framework of a more integrated EU.

How to revive confidence? The big problem lies in economic growth, or the lack of it. Most Europeans still believe in the direct linkage between spending and economic growth. So, the balanced budget requirement will work only with tax increases eternally matching higher spending. This implies a “long-term austerity gap.” As of now, Europe needs major spending cuts and fiscal reform. But politicians outside Germany are hoping ECB will eventually come to the rescue. At present, the ECB stands firm and won't play ball. So the political pressure mounts.

The new deal simply means continued austerity in the euro-zone's periphery without any offsetting impact of devaluation or stimulus at the core. Unemployment already at 10.3% will continue to rise, placing pressure on households (and youths in Spain, youth unemployment approaches 50%), governments and banks. Anti-European sentiment will continue to grow, and populist parties will prosper. Violence and social unrest will prevail.

Unfortunately, the new deal has no place for institutional changes to avert such a scenario. I am afraid if such changes are politically not possible, then the euro is doomed. It's a matter of time. As post '08 record shows, the biggest deficit in Europe these days is in ideas to spur growth and in the lack of political will to enact them. Already, in France, its Socialist Party presidential candidate is picking up on this undue emphasis on austerity; stressing Europe's need for growth to get out of the crisis: “if there is no growth, none of the objectives will be reached.” Alas, Europe's present leadership seems to have no stomach for this option. So I am afraid we are stuck with more summit sequels and the certainty of more uncertainty. Investors' confidence will not return.

Looks like the euro-zone firewall still looks inadequate. As of now, plans to leverage the EFSF are mired in technical details. The combined size of EFSF and ESM is capped at an insufficient 500 billion euro. An infusion of 200 billion euro through the IMF is not game changing. Even so this measure is controversial.

ECB has indicated that earmarking is illegal. Moreover, IMF's shareholders aren't uniformly keen about directing cash to rich Europe. The US has parliamentary problems; so do Germany, Austria, Czech, Poland and Ireland, not to mention Holland and Finland. Pressure by S&P to downgrade and by Moody's, including denying the likes of France AAA rating, has been priced-in to some markets. Nevertheless, there is still potential to shake prices. Further definite downgrades will take another leg down. Moreover, euro-zone is facing significant risk of a recession next year and a credit crunch. Another shock may be needed to get European politicians to all read from the same page.

Already, euro-zone also faces imminent acute funding problems. Member states need to repay over US$1.2 trillion of debt in 2012, mostly due in first half-year. In addition, European banks, heavily dependent on state largesse, have US$665bil of debt coming due by June '12.

On Germany's insistence, ECB won't be allowed to unleash US-style quantitative easing or heavily buy up bonds or even issue euro-zone bonds which I consider critical. Many believe Germany will eventually relent. Its Chancellor has political problems. So, euro-zone's big test still lies ahead. One thing is clear. The market is weighing in. So long as Spanish/Italian bonds cost more than 6%, the crisis is not fixed; confidence has not yet returned. The refinancing calendar of Europe's sovereigns is onerous. Pressure will continue to be daunting as long as ECB is not lender of last resort.

The real problem is Europe's banks remain locked-out of traditional funding markets, leaving them reliant on ECB which is playing it cool. Faced with funding freeze, banks will shrink their balance sheets and strangle growth by not lending. The situation is serious. Euro-zone banks can't raise cash and won't lend to each other because of counter-party risk. On top of it all, last week's “stress tests” suggested Europe's banks are short of 115 billion euro (up from 106 billion euro in October). No one knows who is really solvent anymore.

For Asia, the growing uncertainty is killing. The series of sequels following each European summit leaves a trail of deals, but not the cure. Investors are growing more nervous in the face of rising risk of recession. As the economic outlook for Europe worsens, Asia's exporters will experience and expect continued weakening demand. Most exposed will be trading hubs like South Korea, Hong Kong, Taiwan & Singapore. In 2010, Korea's exports were equal to 45% of GDP, with Europe as its second largest importer. But regional powerhouses, China, Japan and India, are also taking a hit. China is most exposed. Exports accounted for 36% of GDP in 2010 and Europe is its biggest destination (19%). So far, their huge domestic market has shielded them from Europe's lack of growth, more than their smaller neighbours.

Export focus also matters. European slowdown is already affecting services exports from Hong Kong and Singapore. More cautious consumers in Europe undermine demand for Korean and Taiwanese consumer electronics. China's dominance at the lower end of the value chain is largely immune to shifts in the economic cycle. But what's worrisome is the continuing kick-the-can-down-the-road attitude of Europeans which works to prolong the crisis, and translates into reduced investment and employment in manufacturing capacity. The longer the crisis is left unresolved, the worse the impact on Asia.

Lord Keynes wrote in 1921: “about these matters the prospect of a European War, the price of copper 20 years hence there is no scientific basis on which to form any calculable probability whatever. We simply do not know.” And Keynes is right. While the euro enjoys widespread support, spending more money to save it doesn't.

Germans resent seeing their hard earned cash diverted to rescue Greeks, perceived to be irresponsible. Recent polls show that more than 50% of Germans reject euro-bonds, and 59% oppose further bailouts. We are now stuck with the classic dilemma with austerity politics bringing no growth and no framework for common financing, continuing political intransigence has left politicians with the option to continue kicking-the-can-down-the-road. Like Keynes, we just don't know how and how far euro-zone politicians will go towards assuming joint liability for debts (euro bonds). At some point, Europeans have to make the fateful choice between national sovereignty and the euro's well being. Time is of the essence for a real breakthrough. In his recent book, Harvard's psychologist Steven Pinker argues that mankind is becoming steadily less warlike and predicted that “today we may be living in the most peaceable era in human history.” For now, Pinker offers comfort that we won't go to war over it he is right.

> Former banker, Dr Lin is a Harvard educated economist and a British Chartered Scientist who now spends time writing, teaching & promoting the public interest. Feedback is most welcome; email: starbizweek@thestar.com.my