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No Worries, US: China, Australia Agree to Currency Deal

When Australia’s Treasurer, Wayne Swan, heads to Beijing next week he’s expected to ink a deal to make the Australian dollar directly convertible with the Chinese yuan. If successful, Australia would become only the third country to negotiate such a deal, joining Japan and New Zealand.

Direct conversion reduces costs for importers and exporters by obviating the cumbersome need to transact deals in a third-party currency – usually the US dollar. From the Australian perspective this agreement makes a lot of sense given the centrality of the Chinese market to Australian trade flows.

But might it also presage a longer term move in the Game of Thrones? The Wall Street Journal expects China to reach more such agreements in the coming years:

Beijing aims to have 30% of foreign trade settled in yuan by 2015, a threefold increase from current levels, and has been working to establish international trading hubs beyond Hong Kong to increase global liquidity in its currency…

Bankers say it could also encourage more Chinese investment in Australia’s resources industry. China is Australia’s largest trading partner, accounting for about 60% of its exports, largely raw materials such as iron ore and coal.

China’s tightly controlled capital markets, including its restrictions on the yuan, have long been cited by economists as an impediment to future economic growth. As the country moves up the development ladder and its economy becomes increasingly sophisticated, a more liberal financial sector may come to be seen in Beijing as an imperative.

There are some analysts out there who see these moves by Beijing as signs of American decline or as threats to American power. This strikes us as a classic example of vulgar economics in geopolitical thinking. The relationship between currency and power is not a simple one, and the further cementing of the Chinese economy into the international system by the progressive internationalization of its currency is, we think, an asset rather than a liability for America’s core international goals.

The US has been urging China for many years to follow a less arbitrary currency policy and to make it more responsive to normal market forces. That is where these swap arrangements are headed.

The future of the dollar lies entirely in America’s hands. Managing our long term fiscal picture wisely and implementing policies at home that promote investment and growth will keep the dollar strong and make it welcome on world markets no matter what China does. Failing to manage our affairs will undermine our strength — not because a weak currency leads to a weak country, but because a weak national economy and irresponsible national finance will undermine the US economy.

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  • Luke Lea

    Many Wall Street executives say wrongdoing is necessary: survey

    This is the way doing business with China corrupts us.

  • Jim.

    So can we read China’s moves as a reaction to their slowing economy?

    It seems to me that the Chinese are moving towards liberalization of trade to try to juice their economy.

    Counterexamples would be welcome.

  • Kris

    “a weak national economy and irresponsible national finance will undermine the US economy.”

    Really going out on a limb there! 🙂

  • Jim.

    As far as the “weak currency – weak country connection goes… didn’t England’s economy first take off when Newton was Master of the Mint, and insisted on non-debased gold as the basis for coinage?

    Princes in other kingdoms made a regular practice of debasing coinage to fund the ambitions of their governments… it didn’t usually work out too well, Krugman’s vaporings notwithstanding.

  • Crocodile Chuck

    ‘..Vulgar economics’?

    Walter, do you have any idea of the significance of this?

    Remedial reading:

  • Corlyss

    “a weak national economy and irresponsible national finance will undermine the US economy.”

    The policy amateurs in the Democratic party don’t get the rather fundamental relationship between the goose and the golden eggs. They believe if they abuse the goose and parse out its food to all the barnyard riffraff, it will still produce golden eggs. They apparently don’t get the fundamental relationship between the absence of food and death. Reminds me of some silly git I heard about who got a canary and when that canary failed to sing, she starved it to teach it a lesson. Of course, it died.

  • Luke Lea

    I see where China has announced that Western hedge funds are now welcome to invest in China. Any suckers out there?

  • Mick The Reactionary


    “Managing our long term fiscal picture wisely”

    Yet another jobs Americans don’t want to do. Bring on immigrants.

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