Power And Dollar

Did G20 End Unilateralism?

Many countries (Russia, India, China, …) talk about multi-polar world.  Some think this financial crisis marks the end of American unilateralism.  This G20 probably is not that marker.  However, this G20 is going toward the direction of containing political risks within America.


However, these countries did get some concessions from this G20.  The news release from this G20 news release gives us some ideas what concessions are:


More voting power will be allocated to the other countries, although the details of the future votes are unclear.  We will only know by 2011.01, says point 20.  The critical element will be if US will remain above 15%, since any vote of 15% against a resolution makes it a veto and US has 17% of the votes right now.  Russia has 2.74%, India has 1.91% and China has 3.72%.  Even Brown supports China’s quest for more votes (direct quote lacking).


One interesting China did in this G20 is that China insist on the new capital injection to be in bonds and not a loan.  Is China using some minute difference to make SDR more tradeable?  


If true, over the term, it will be a negative to companies like Merrill (NYSE:MER), Goldman (NYSE:GS), Citi (NYSE:C) etc.


China wants to weaken the dominance of USD.  To do so, China recently advocates a new global currency.  That is definitely not doable in this G20.  However, the direction is very clear.  And China has the time to wait for this objective.  Since China is not a democracy, its political objectives are not bounded by the election cycles.  China can wait for another one or two decades for this kind of things.  Making IMF’s loans more tradeable will facilitate the future steps (another 10 years) of making IMF’s SDR a financial product available to all, including the amateur day traders at home.  Remember how long it took Euro from an inter-government toy to become tradeable among banks and then in exchanges and then in print.  China has the time for this. 


Argentina and China recently signed a currency swap deal.  Such a swap helps Argentina’s currency stability or abates its currency devaluation, thus economic stability.  Why is China so into this matter?  Any international trade involving two non-US countries is still priced in USD.  Therefore, completing a trade actually involves two currency exchanges: currency A to USD and then USD to currency B.  Such a swap is to reduce these transactions.  Is it a big deal?  If a company operates 10% margin, currency exchange can easily eat up a 1% of the 10% margin.  So, in the very micro sense, a company can increase profit by 1%/ 10% (10%).  However, China is not simply looking at this bread crumb.  


When USD is this intermediary currency, USD has a lot more money in circulation than any other currency.  For that reason, USD is able to get a lot of it printed than it is actually needed domestically.  Internationally active entities end up having to keep a lot of its financial resources in USD.  What will they do with these US dollars?  Buy more US bonds, or even simply a DJ index for the day.  These actions make US government financing cheaper, US stocks higher P/E ratios.  All these ultimately gave Wall Street firms more experience in international finance.  American firms have been the drivers of the most large international mergers and acquisitions.


The positive spin of having a USD replacement to the global economy is it will contain a good portion of political risks within America. 


April 2, 2009 Posted by | Current Events, opinion, politics, US politics, wordpress-political-blogs, 中國 | Leave a comment