World Economic News

Clash at ADB Meeting; Asians Fear Dollar Crash

According to identical reports by Bloomberg columnist Andy Mukherjee and Financial Times columnist Martin Wolf May 10, there was a clash between the U.S. and Chinese representatives at last week's annual summit of the Asian Development Bank (ADB) in Hyderabad, India. After U.S. Treasury Secretary Timothy Adams again urged China to let the Chinese currency upvalue against the U.S. dollar—presumably the cure for the ever-rising U.S. trade deficit—there came a surprising response from the Chinese side. Yong Li, China's Vice-Minister for Finance, said he recently picked up "rumors that the U.S. dollar might depreciate by 25%." If true, he said, the consequences would be "shocking." The unspoken message of his remarks, according to Mukherjee, was, "Don't try to talk the U.S. dollar down." Not only due to their huge dollar reserves, but in particular in respect to their export-dependent economies, a dollar crash would be the very last thing any Asian country would hope for.

Martin Wolf, who also participated in the ADB discussions and moderated an ADB governors' seminar, notes also that Japanese Finance Minister Sadakazu Tanigaki was reacting to pressures to let Asian currencies upvalue. He warned that "overemphasizing realignments of exchange rates could invite market speculation, and deal a blow to the global financial markets." Wolf states that, in any case, we are heading towards "the day of reckoning," either by a sharp fall of the dollar now or a much stronger dollar crash later, leading to "global economic disorder" and potentially another "decade of monetary disorder" like that following the destruction of the Bretton Woods system in 1971.

The German economic daily Handelsblatt, in an extended feature on the $22 rise of gold May 9, when it hit above $700 for the first time since 1980, picked up statements by Chinese central bankers on plans to increase Chinese gold reserves from the current 600 tons to 2,500 tons, at the expense of U.S. dollar reserves. Tan Yaling, economist at the Bank of China, is quoted saying that a sharp increase of gold reserves would be needed "to be prepared for emergency situations, as an example due to international political and economic turbulences."

The Chinese Ministry of Land and Resources issued a statement on its website on May 10, announcing plans to set up strategic reserves for key minerals. Special emphasis is put on "rather ample" reserves of uranium, needed for nuclear power plants. Other minerals to be stockpiled include iron ore, copper, aluminum, manganese, chromium, and potassium. The statement notes that the mineral reserves are crucial for "adjusting the market, coping with emergencies, and guaranteeing the security of resource supplies."

Speculators Dump Dollar Debt

Speculators are dumping dollar-denominated debt, putting money into local-currency government bonds in developing countries, according to the Wall Street Journal May 10. Hedge funds, among others, are moving into local-currency bonds of Mexico, South Africa, Brazil, and Turkey, increasing the risk of a currency collapse not unlike that occurred in Iceland and New Zealand.