Much noise was made in August on the so-called "undervaluation of the renminbi", so as to overshadow even the third European bailout of Greece, whic...

Much noise was made in August on the so-called "undervaluation of the renminbi", so as to overshadow even the third European bailout of Greece, which also contains substantial innovations to reshape the relationship between austerity and growth, in favour of this latter. It is understandable that journalists, driven by sales targets, overdramatise the fact of the day. After all, Greece has been in the spotlight for too long not to have bored the readers, as it would have happened even to the poor victims of hope, that turns every day into a tragedy in our Mediterranean, if Angela Merkel, as a true stateswoman, had not determined a gear change for almost all Europe, and surely for the entire euro-zone.
The modest exchange rate adjustment of the renminbi was presented as the cause of the collapse in prices in Shanghai, which on the contrary was due to the previous euphoria. The main contradiction of the neo-liberal globalization, which lacks macro-economic and financial-banking regulation (overt and covert), is mostly evident in the financial market, as we now know all too well. The capital has no boundaries. Only people encounter barbed wire. The total world debt, as denounced by the Bank for International Settlements, continues to grow. Of course it corresponds to the total credit. What do creditors finance, given that households and companies complain about the credit crunch? They finance speculation, an (hopefully) easy enrichment, by transferring losses - catastrophic when they occur - to taxpayers. Much of the world savings is run by Wall Street. When it is so decided by the few banks that meet every Monday morning, all the world credit can be poured out or withdrawn from the stock market of a single country. These facts are now the subject of a vast literature. Only the Nobel Prize Paul Krugman, although too busy to read up, continues to write articles in newspapers around the world, peppered with the usual anti-Chinese and neo-liberal clichés, in contrast (as it is functional to prolong the international privilege of the dollar) with the Keynesian faith proclaimed by the Author.

What really happened? On July 22, the Executive Board of the IMF concluded the consultations with the Republic of China under Article. 4 of the Statute for all member countries. The minutes of the meeting (IMF - Press Release N ° 15/380 - August 14, 2015) take note of the slowdown in growth and the need to proceed to a more sustained and distributed growth in domestic consumption. In 2014, investments already represent 46% of GDP, and are covered by a national savings equal to 48.1% of GDP. The excess of savings, that is 2.1%, corresponds (equivalence of national accounts) to the current account surplus (in goods and services) of the balance of payments with foreign countries, which fell by half compared to 2010, and much more with reference to the pre-crisis levels. These numbers show that China did make the famous "homework" to help reduce the "fundamental disequilibria" (Chinese surplus /vs. American deficit). The minutes then report the usual recommendations on economic policy and domestic reforms, in particular with regard to the banking and financial system. Here it is interesting to report the recommendations made by the Fund Directors to the Chinese representatives in terms of currency policy (brackets and italics are mine).

“Directors underscored that further structural reforms are needed to make the Chinese economy more open and market-based and promote further internal rebalancing. These include moving to a more market-based financial system and monetary policy framework, including completing interest rate liberalization and eliminating implicit guarantees; reforming state-owned enterprises; moving to an effectively floating exchange rate; and strengthening the fiscal framework, including local-central government relations, the social security system, and tax policy. (Directors) noted that these reforms are in the (Chinese) authorities’ agenda and welcomed the steps that have been taken. Looking ahead, they urged steadfast and timely implementation of the envisaged reforms.
[…] (Directors) agreed that this highlights the need for continued reforms to further reduce excess savings and achieve a sustainable external balance. They also noted the staff assessment that the substantial appreciation of the renminbi in real effective terms this year has brought the exchange rate to a level that is no longer undervalued. A few Directors (a minority) pointed out that further exchange rate adjustment could further facilitate external adjustment (reduction of the Chinese surplus). Directors welcomed the steps taken to liberalize the capital account and recommended carefully sequencing these efforts.”

No sooner said than done! Returned home from Washington, in early August, even before the minutes of the meeting were made public, the Chinese tried to float the renminbi as it had been recommended to them by the priests of global capitalism, resulting in a modest depreciation (for now about one-tenth of appreciation made in previous years and a little more than nothing compared to the loss in value of the euro or the yen). The outcry raised by much of the world for this small depreciation convinced the People's Bank of China to purchase its own currency to avoid a major devaluation. At this point Krugman should have fallen into confusion, so that in the same article attacked China both for allowing renminbi depreciation and for thinking of being able to order the market what to do. (Krugman’s) language beats where the tooth (the future of the dollar) aches.

The fact is that since February, China has reduced its reserves of $ 243 billion, with a strong intensification of sales in August, and that probably this "relief" must be continued. What does China sell, Asian or BRICs currencies? To be excluded. Gold? Absolutely unlikely. Euros? Very unlikely. China needs to sell US Treasury Bonds which is overloaded of. The US budget deficit, albeit reduced, is still significant and grows year after year in addition to the debt already accumulated. Who will buy the US debt? China is selling it, Japan is not going too well, Europe, as a whole, is trying to proceed without an excessive surplus, oil exporting countries are struggling with a reduction in price to $ 40 a barrel, with even worse prospects. It is the Fed that will have to buy additional US debt, monetizing it. The legitimacy of the dollar as an international currency, founded in 1944 on the convertibility into gold and, from 1973, on the convertibility into oil, now rests only on the dynamite. Can the globalization of the world economy proceed with the dollar as the main reserve currency, with the terror that a spark detonate the dynamite it is based on?

China’s behaviour, in compliance with the Fund’s recommendations, is part of the process of de-dollarization of the world economy, of the spontaneous trend toward a multi-currency international monetary system - which the renminbi aspires to be part of - and of the project of reducing risks through a world monetary anchor, i.e. the basket represented by special drawing rights on the IMF, reinforced by the inclusion – currently under consideration – of the Chinese currency. The planets that revolved around a single Sun, the dollar, are being gradually reorganized into smaller systems. The way was paved by the euro, which became a Sun itself, and is now followed by the emerging countries. What is still missing is a Sun of Suns.

In 2010, the G20 decided, among other things, to initiate a reform of the IMF governance, still dominated by the United States (whose share allows them to have a veto right) and Europe. A modest shift of 6% of the voting rights from developed to emerging and developing countries had been planned, but not even this small step has been realized, because the US Congress refused to cooperate. Consequently, after signing a number of bilateral and multilateral agreements aimed at completely eliminating the use of the dollar in transactions among themselves, on 15 July last year the BRICs - Brazil, Russia, India and China, with the addition of South Africa - met in Fortaleza to launch two new financial institutions. The first, the New Development Bank (NDB), based in Shanghai with a first president from India, joins several regional or national development banks, whose total funding in 2013 exceeded the 52.6 billion dollars disbursed by the World Bank. The capital of the NDB, initially fixed at 50 billion dollars, will be increased to 100 billion. The other institution, the Contingency Reserve Arrangement (CRA) is not a fund, but a mechanism: a set of bilateral promises to make foreign exchange reserves available to the country in need. These liquid assets are insured for $ 41 billion by China, for 18 billion each by Brazil, Russia and India and 5 billion from South Africa. China is participating in another similar mechanism agreed with some ASEAN countries.

Europe has been a model and the engine for other regional integration processes. At the same time the impetuous process of globalization, that the neo-liberal dogma has abandoned to the alleged perfection of the market, emphasized issues requiring, instead, global policies. The United States alone can no longer provide the necessary public goods (such as monetary stability and security) so that this process can be continued without even more serious disruption than the one already in place. On the other hand, the more balanced distribution of economic power between the different areas of the world prevents predicting any passing of the baton from one hegemonic power to another one, as happened, for the last time and limited to the Western world, from the United Kingdom to the United States. Only international cooperation and its democratization can pave the way to the governance of globalization. The "federalism in one country" is precarious, may be inclined to the empire (as in the American case) or to the national fragmentation (a risk not yet averted in Europe). Overcoming realpolitik at the global level is a necessary condition for the establishment of stable regional federations. Every step in this direction contributes to the implementation of the value aspect of federalism: peace. There should be no difficulties, remaining attentive, in recognizing the wisdom inspiring China to promote an international reserve currency-basket, just while the renminbi is getting ready to support the euro and the dollar in the current multi-currency system. Their message is: we are strong, but willing to share our strength. Obama has understood that, but what about the Congress? A European initiative would be decisive, as Juncker has proved to be aware of, when he included in the Commission programme the issue of the Eurozone unitary representation in the IMF.