China and the US do not share a currency, but that is sometimes hard to tell. Beijing does not allow its currency to float freely. It holds down the value of the yuan by selling it to buy US dollars. Washington takes a dim view of the strategy, believing it amounts to 'currency manipulation', although realpolitik has so far prevented that accusation being publicly aired. Between 2005 and 2008, China allowed its currency to appreciate – gradually – against the dollar by 21 per cent. The financial crisis put that policy on hold for two years until it was reinstated in 2010. In the last 12 months, the yuan has been allowed to strengthen once again, edging up from 6.83 to 6.46 yuan to US$1, an appreciation of less than 6 per cent.
Without the constant intervention of the People’s Bank of China there can be little doubt that the yuan would be far stronger. A consistently large trade surplus and a high 6.56 per cent benchmark interest rate would have taken a freely floating currency to the skies. Look how the Brazilian real has strengthened by 60 per cent against the dollar in the same time it has taken the yuan to rise less than 30 per cent.
The US government dare not complain more loudly about China because that is where it gets a large part of its money. China is by far the biggest foreign buyer of US treasury bonds and America needs that money because it has maxed out its credit card. Back in 1917 congress imposed a control on how much the administration could borrow. At the time the limit was US$8bn. After multiple revisions over the years the debt ceiling currently stands at US$14.3 trillion. The money runs out on 2 August. Without congressional approval of an increase in the debt ceiling the government will have no option but to default on its debts.
No home comfort
Default is on the menu in the eurozone too. Analysts are lining up to predict that, whatever the result of the negotiations for Greece’s second bailout, the country will go bust sooner rather than later. They are also asking serious questions of Portugal, and bond rates in Spain and Italy keep rising. The pound, meanwhile, is the third most heavily traded currency after the US dollar and the euro. At the moment, that is a disadvantage because low interest rates and a faltering economic recovery are putting off investors.
This means we have three currencies (four, if you include the yuan) that investors dislike. They sometimes like the Swiss franc, the Australian dollar and the NZ dollar, but they are all relatively small currencies – buy too many and the price will disappear into the unaffordability zone. Investors have to make a decision about which is least bad: chunks of the eurozone are heading for sovereign default, although interest rates are going up; the US has low interest rates and a faltering recovery; likewise the UK.
On the ground, those who trade between the three (four) economic blocs are unaffected. Exporters from the eurozone, the UK and the US enjoy increased margins as their produce becomes cheaper to sell outside their boundaries, but importers in these areas suffer because imports become more expensive. If investors want to sell all of those ropey-looking currencies at the same time, they have to put their money into other investments such as food, precious metals, international equities and oil. And in the last year or so that’s exactly what they have been doing.
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