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China's take on a lesson from history .....

August 17, 2018

 

ref :- "Chinese Media Warns of Japan's Plaza Accord Lessons" , Bloomberg Markets

 

Remember the Plaza Accord ? We've had occasion to bring the subject up now and again and it remains a seminal moment in the history of foreign exchange markets. It also remains a font of very lively memories for anyone who happened to be trading currencies in 1985, but that's another story ..... 

 

A long-term result of President Reagan's fight against inflation, the rampant US Dollar (particularly against the Japanese Yen) was cutting US exporters off at the knees and leaving the US with a huge and very worrying current account deficit. When Washington had decided that enough was finally enough, the Finance Ministers of the G5 nations as it then was  (US, Japan, West Germany, UK, France) gathered in a New York hotel  --  the Plaza, of course  --  to put together a plan to devalue the dollar and level the playing field somewhat against those export behemoths Japan and West Germany. It was the first such coordinated action, certainly on such a scale, and not only did it involve massive direct intervention in foreign exchange markets but it even had the participants adjusting their domestic economic policies to fit in with the accord's aims.

 

By laying all their cards on the table up front, the G5 largely avoided any market disorder and the agreement was extremely effective  --  so effective in fact that they had to cobble together another deal little more than two years later (the Louvre Accord) to send things back the other way again.

 

Forward to 2018 and we have a US administration (rightly or wrongly) railing against a competing power for allowing their currency to depreciate against the dollar in order specifically to gain an unfair trade advantage. The protectionist noises in the US that so scared global policy-makers back in 1985 are even more prevalent now, with President Trump initiating trade conflict and threatening to wage a full-on trade war with China. The details may be different but it's not in the least surprising that comparisons are being made between then and now.

 

Just at this moment, the official Chinese authorities are ostensibly avoiding any ratcheting-up of the rhetoric, having secured some admittedly low-level talks with US trade negotiators for the first time in two months. The 1985 / 2018 comparison is being made instead by a media "outlet". But since the outlet in question is state-run, we can probably assume that what they have to say reflects official thinking fairly closely ..... and what they have to say is essentially this : "It's all very well Mr Trump expecting us to meekly comply with all his demands, but that's what Japan did at the Plaza accord and look what happened to them !"

 

Perhaps it's worth reminding ourselves what did happen to Japan. As seen through the eyes of the Xinhua News Agency, the sharp upward adjustment in the value of the Yen, combined with some pretty ropey policy decisions, ultimately brought on Japan's "lost decade", which most people might argue should more accurately be known as the lost two decades.

 

Er .... explain please. Well, as we've said the rally in the Yen was so extreme that before long it needed to be reversed. That required aggressive rate-cutting in Japan, which in turn sparked an asset price bubble and fuelled a boom in debt (which in fact was promoted by the Bank of Japan). When the bubble burst in late-1991, Japan was thrown into a low-growth, the deflationary spiral from it has still not properly recovered.

 

Naturally, the Xinhua article interpretation of events is somewhat tailored to back China's cause, and their assertion that the US "always, again and again, looks for scapegoats" may not stand up to the very closest scrutiny. But the argument that fundamental issues of trade imbalance cannot be solved on any long-term basis by manipulating exchange rates, however much the US cries "foul" , will have its supporters.

 

What the Xinhua News Agency doesn't admit, and presumably never will, is that whatever you think of the way Donald Trump has acted , he has a solid case when claiming that China has not been playing fair even if that doesn't include the currency manipulation that he accuses them of. Evidence of such manipulation is inconclusive at best in recent times, even if China was repeatedly prone to such action in the past. But unfair practice by China regarding issues such as IP rights and market access is pretty much undeniable.

 

According to some, it may not matter much anyway. There is a growing body of opinion in China that President Trump's actions are less concerned with the desire to level any playing fields, and much more about him trying to block China's path to becoming the world's foremost superpower. That's not a view that we've yet heard from Chinese officials, which is just as well ..... if it should become any part of China's policy-making process then prospects for trade conflict, which have been marginally more optimistic in the last couple of days, would become very bleak indeed.

 

 

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