Commutalist :The Communist-Capitalist

The reasons why I think the Chinese empire will rule the world ousting American hegemony. The whole world has already accepted that China is emerging as one of the next world´s power. After 60 years with the communist in the power the last week celebration was “an extravaganza showing off a rapidly growing arsenal of sophisticated made-in-China weaponry. It was also intended to show the Communist Party’s own strength at a time of global economic crisis” The Economist said in (Art.1).

But this hegemony not only affects the military field, in the economic context is clear that China is no longer an underdog power “Today, a socialist China geared to modernization, the world and the future has stood rock-firm in the east of the world,” Mr. Hu said in a brief speech (Art. 2).

Right now China is projected to overtake Japan soon and have the second largest economy in the world. (Art.3) As it is show in the IMF graph, China´s GDP evolution over the past three decades has been spectacular.

One of the key to this tremendous growth has been its currency; the Yuan is today a possible successor to the dollar´s hegemony. According to recent reports, China is trying to internationalize its currency with a series of maneuvers to ensure that the Yuan will become the main currency in the world. Some analysts believe that in 2012 $2 trillion of trade flows can be resolved by the “Redback”. An example of this appears in the Times article “China is using a $50 billion bond deal with the International Monetary Fund (IMF) to expand the global reach and influence of its currency in what analysts say could be a potentially huge development in Beijing’s campaign to internationalize the “redback” (Art.4).

But the problem to the Yuan’s development is that Chinese government policy restricts the Yuan from trading freely and being fully convertible. But this step must be taken with caution because, as Alan Greenspan said in a letter to the US Senate “…step to allow a currency to float freely, could cause an outflow of deposits from Chinese banks, destabilizing the system and would present a risk to the global economic outlook," he warned.

To finish this new entry in Financial Raindrops, there are a number of difficult structural problems in the Chinese economy that will need to be dealt with in order for growth to be sustainable and for China to achieve its potential. Starting by reforms in the banking and state companies system will have to be combined with measures to tackle unemployment or poverty that still remains widespread.

China also needs to decrease its exposure to dollar assets by shifting their reserves from long-term to shorter term in U.S. Bonds. That will give them more flexibility and be more dependent on themselves. As we can see in the table below, China is the United States’ largest creditor by far.

But what really impresses me is the growth that China has experienced over the last decade. It was unthinkable that a Communist government could achieve and maintain power for 60 years supported by an almost dictatorial-government control, a large population with the lowest labor in the world and an army to prove their greatness.

Sources:

(Art.1) http://www.economist.com/opinion/displaystory.cfm?story_id=14569466

(Art.2) http://www.nytimes.com/2009/10/02/world/asia/02china.html?_r=1

(Art.3) http://www.nytimes.com/2009/10/02/business/economy/02yen.html

(Art.4) http://business.timesonline.co.uk/tol/business/economics/article6822804.ece

www.businessweek.com/globalbiz/content/may2009/gb20090522_665312.htm

www.nuwireinvestor.com/articles/what-happens-if-the-yuan-replaces-the-dollar-as-the-53636.aspx

www.washingtonpost.com/wpdyn/content/article/2009/03/13/AR2009031300703.html?hpid=topnews

and daily press.

Gold hits a New high record... Gold reached at a record $1,033.45
At least the Gold is a tangible asset that does not burst.

See the evolution of Gold in
http://www.bloomberg.com/markets/commodities/cfutures.html

The G-20 Summit and Conclusions (1º Assignment)

From September 24th to the 25th the meeting of the world’s 20 largest economies (The G20) takes place at Pittsburgh for the third time since the financial crisis started. The reasons remain the same, as the London summit made five main aims

1. Restore confidence, growth and jobs
2. Restore lending
3. Strengthening financial regulation and restoring trust
4. Fund and reform banks to prevent “future crises”
5. Promote global trade and investment and reject protectionism

http://www.londonsummit.gov.uk/en/summit-aims/summit-communique/


The first aim will take some time until we regain the employment levels of the past, as the LEX Team of the FT says in the newspaper in September 23th “To be sure, things are less bad. But it will be years before growth and jobs return to pre-crisis levels, certainly in developed economies.”(Art.1)

For the second objective there are not signs of change, where the U.S. consumer credit falls a record US$21.6B in July (Art.2). This is a big issue that should be managed by governments, forcing the banks to start lending money so the economy starts to reactivate.

Point third and forth have been one of the few changes on which authorities have started working. Claiming for greater regulatory capital for financial institutions around the world, this means that it will increase the savings rate determined by law. As the Treasury Secretary Timothy Geithner pointed to the increase in the U.S. savings rate as an “encouraging sign.” (Art.3)

But is this actually fair for all?

At least, this benefits to institutions that have received public capital and represents an injustice to those who have not had the public aid. For example, the Spanish banks.

Such aid amounted the saving ratios for the rescued entities to well above the safest banks. Now, the G-20 summit will not only enshrine this imbalance, but also will require the entities that have ´not´ received public aid to meet higher capital standards similar to the rescued ones. A tough punishment for those who acted correctly.

Point fifth refers to the global trading and investment, trying to avoid protectionism for blinding the international transactions. It seems like an easy assumption to face off in theory but, are they actually acting like they preach?

It has been questioned after President Obama decided to impose a 35% tariff on Chinese made tires. Predictably China's Ministry of Commerce said in a statement early Saturday that the move violated WTO rules. "China strongly opposes this serious act of trade protectionism by the U.S," the ministry said, according to the Associated Press. (Art.4)

These types of actions do not seem like the way out for the international recession. “Protectionism is up slightly this year, but no more than is normal in a downturn”, says the World Trade Organization. The latest IMF forecast also predicts that recovery is about to start but will be slow as it shows in (Art.5).

In Conclusion

What we can get from the 3rd year´s meeting of the G20 is that, the course of the world economic order will be decided by the twenty most powerful nations rather than the group of eight (G8). This makes it fairer for the share of emerging economies (on the International Monetary Fund (IMF) definition including developing countries) that could rise to just over half (50.5%) of world GDP in purchasing power parity (PPP) terms, up from 43.7% in 2007. (Art.6)

Among these proposals, participants in the summit have reached an agreement to limit bonuses paid to executives; this should be a good measure if they make sure that instead of the bonuses short-term performance contributed to the financial crisis. "We will tie executive pay to long-term performance so that sound decisions are rewarded instead of short-term greed," said Obama.

In the final declaration, the countries recognize that, despite a recovery has begun; we must not fall into the "complacency", but should also advance in the necessary reforms to achieve "sustained and balanced growth." "We want growth without extreme cycles and markets to encourage responsible, not reckless," say the leaders of the G20.

References:

(Art.1) http://www.ft.com/cms/s/0/b1b75e64-aa12-11de-a3ce-00144feabdc0.html
(Art.2) http://www.financialpost.com/story.html?id=1972879#ixzz0S28iy9Nj
(Art.3) http://www.bloomberg.com/apps/news?pid=20601068&sid=aVpPMKLa50rc
(Art.4) http://www.washingtonpost.com/wpdyn/content/article/2009/09/11/AR2009091103957.html
(Art.5) http://www.imf.org/external/pubs/ft/survey/so/2009/RES100109A.htm
(Art.6) http://www.pwc.com/gx/en/press-room/2009/emerging-economies-global-recession.jhtml
http://www.bloomberg.com/apps/news?pid=20601080&sid=aaYi4yKjBZ.U
http://www.economist.com/world/unitedstates/displayStory.cfm?story_id=14460542&source=hptextfeature
http://www.ft.com/cms/s/0/d3680126-a472-11de-92d4-00144feabdc0.html
http://www.reuters.com/article/GCA-G20Pittsburgh/idUSTRE58G34Z20090925
and daily Financial Times and Wall Street Journal in paper.