October 2014: Navigating the tempest

The contours of the word monetary order are evolving, and it is China and its allies who are moving them. The Bundesbank, which OMFIF visits again in October for our Fifth Main Meeting in Europe, once sought to prevent the D-mark from becoming an important reserve currency, for fear of losing monetary control – and ended up with the euro, a currency over which Germany has too little control for its own liking, yet too much in the eyes of some Europeans. By contrast, the Chinese authorities are now actively seeking a widespread international trade and investment role for the renminbi, including in official assets. The UK Treasury, which tends to take a conservative line over international monetary affairs, has helped the Chinese buttress their own global currency credentials by announcing that it will borrowing in renminbi and hold the proceeds in the British official reserves. With a wide range of underlying motivations, China and other leading emerging market economies (Brazil, Russia, India, South Africa) back the notion of gradually dislodging the US from its primary position in today’s unipolar world. This shift in polarity, and the repercussions for the US, Europe, Japan and the emerging market economies, are all expounded in this month’s Bulletin. The Brics are actively challenging the status quo by launching their own development bank. Graham Hacche writes that the rationale is much more complex than simply competition with the World Bank and International Monetary Fund. Meghnad Desai describes the institutional manoeuvrings as part of a much broader transition in the world economy. All these changes can only be incremental. Julia Leung says the experiments in Shanghai’s Free Trade Zone offer some key indications of China’s future, but notes that the renminbi liberalisation practised there won’t open the floodgates. Jonathan Fenby investigates the political strain on Beijing’s relationship with its other great financial centre, Hong Kong, which continues to enjoy the legal system inherited from the UK, but is worried about never winning the democracy that the city’s former rulers and its citizens believed was still more important for its future. The British narrowly avoided losing another territory in September. Scotland chose not to separate from the UK, but the Yes-No gap was a mere 10 points. The UK is not the only EU member with a clouded outlook. Stefan Bielmeier dissects into four scenarios the future of Russo-German economic relations. The most likely outcome, he suggests, is not the most optimistic; a political and economic stalemate that restrains German growth for 2014-15. Ruud Lubbers and Paul van Seters are more optimistic, offering some praise for the European Commission’s plan for a European energy union that can champion renewable energy and exert influence over gas purchases, reducing carbon emissions and tackling energy dependence on Moscow. Shumpei Takemori compares the three-pronged plan for European economic revival championed by Mario Draghi, the European Central Bank president, with the vision of Prime Minister Shinzo Abe for achieving the same goal in Japan. One evident similarity: Abenomics, like the plan put forward by Draghi, offers more questions than answers. Abe, too, is behind the proposal for Japan’s GPIF, the $1.3tn public pension behemoth, to shift assets out of debt and into equities, a move that we compare with that undertaken some years ago by another giant, but much more globally active, public investment institution, Norway’s NBIM. We also focus on another instructive debt equity-comparison, between China and Germany, the world’s No.2 and No.3 creditor nations.

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