Collusion_How Central Bankers Rigged the World

by Nomi Prins

  That summer, a growing chorus of global private banks promoted the idea that corporations use the yuan instead of the dollar in trade deals with China. The benefit was having more choices in their currency dealings, which meant they could evaluate which currency was more cost-effective or profit-producing rather than be confined to the major existing currencies. HSBC and Standard Charter offered financial incentives to companies opting for such trade deals. Throughout the developed world, these and US banks, such as Citigroup and JPMorgan, accompanied PBOC officials on roadshows to promote the Chinese renminbi.65

  All of that focus on currency and trade levels served as a diversion from what was really important to China: becoming a superpower. To do so, it was imperative it maintain pressure on the current monetary system. On October 9, 2010, at the twenty-second meeting of the International and Monetary Financial Committee in Washington, DC, Zhou presented a detailed critique of the monetary policies of major countries such as the United States, United Kingdom, European Union, and Japan.66 According to him, they negatively affected the way emergent countries were supposed to deal with their own monetary policies. He lambasted money-conjuring policies. “Recovery in developed countries continues to rely heavily on unconventional stimulus policies, and private consumption and investment continue to be inhibited by high unemployment and insufficient credit.”

  He indirectly admonished US and Fed policy regarding handling of the aftermath of the financial crisis and the big US banks that had not been properly punished or restructured: “The countries concerned need to accelerate their disposition of toxic assets, restructure problem institutions, supplement bank capital, strengthen financial regulation, and rebuild sound financial systems.” He said, “The continuation of extremely low interest rates and unconventional monetary policies by major reserve currency issuers have created stark challenges for emerging market countries.” But the United States wasn’t listening to such critiques, certainly not those from China.

  Yet, around the world, central banks and finance ministers—implicitly or explicitly, depending on whether they hailed from G7 or G20 nations—became skeptical of the Fed’s policies and thus began taking China’s side on the matter. Brazil’s minister of finance Guido Mantega voiced his concerns on October 8, 2010.67 On November 8, Germany’s finance minister Wolfgang Schäuble waxed so openly critical in an interview with the German newspaper Spiegel68 that President Obama had to defend the Fed’s second round of QE at the G20 summit in South Korea.69

  On October 19, for the first time since December 2007, the PBOC raised rates by 25 basis points.70 The yuan had risen 2.5 percent against the dollar since August, its fastest appreciation since the 2005 revaluation. This was the opposite of Fed policy—and was not necessarily intended to appease US currency demands. That November, China hit a record in exports. Its trade surplus relative to the United States exceeded $20 billion for the fifth time in six months. Inflation rose to its highest level in twenty-eight months, at 5.1 percent.71

  In the United States, all continued as usual. Bernanke was reelected for a second term in the toughest chairman election in Fed history. In November 2010, the Fed began its second round of QE (QE2), purchasing $600 billion worth of US Treasury bonds in $75 billion per month increments. US unemployment had hovered above 9 percent all year, calling into question the effectiveness of US monetary policy to boost growth or job creation.

  On Christmas Day, in a one-sentence announcement, the PBOC raised rates another 25 basis points.

  YEAR OF THE RABBIT

  China continued its attack on the status quo. On January 17, 2011, President Hu Jintao told the US press that an international monetary system dominated by the US dollar is “a product of the past.”72 Nevertheless, he believed it would take time for the yuan to be accepted as a global reserve currency.

  Chinese banks, the third pillar of China’s power triangle along with government and central banks, were increasing their global presence in lending. Between 2009 and 2010, two major state-controlled Chinese banks, the Export-Import Bank of China and China Development Bank, lent more than the World Bank to developing countries, about $110 billion versus the World Bank’s $100 billion.73

  On February 9, the PBOC raised rates for the third time in four months.74 The move underscored concern over rising food and commodity prices in emergent countries. It came one week after the IMF’s deputy director John Lipsky expressed concern about emergent economies’ capacity to sustain growth even as many still had “expansionary” monetary policies. The cure is clear, he said: “Everybody is going to need to tighten monetary policy, reduce budgetary stimulus and continue with the process of structural reforms.”75 None of the world’s major central banks adhered to that advice, with the exception of China. The structural reforms part, or austerity, was the way the IMF and World Bank dealt with developing countries, pushing austerity in times of need, constricting citizens instead of speculative opportunists.

  On March 5, 2011, opening the annual National People’s Congress in Beijing, Chinese premier Wen Jiabao addressed more than three thousand party delegates. He said the government expected an 8 percent growth rate in 2011 and aimed to keep inflation at 4 percent, because he recognized that prices were increasing quickly. “This problem concerns the people’s well-being, bears on overall interests and affects social stability.”76 Inflation accelerated despite the rate hikes.

  The strategy highlighted differences between China, which juxtaposed monetary policies with concerns over social responsibilities, and Western central banks, which seemed less concerned about people’s protests or levying austerity measures. In the middle of 2011, Beijing, increasingly concerned about the social unrest that rising costs could cause, promised to assuage higher prices, such as of pork, a dietary staple, with government intervention.77 The Western central banks, on the other hand, were cheerleading a supposed recovery in the United States despite prevailing economic anxiety. In Europe, austerity measures were being levied across the so-called PIIGS countries of Portugal, Italy, Ireland, Greece, and Spain, to make up for budget shortfalls.78 Yet, these shortfalls were the direct results of the financial crisis and the European Central Bank supporting banks and investors through QE over social programs for people. In London, anti-austerity, antibank protestors smashed windows at multinational banks such as HSBC and Santander.79

  On May 18, 2011, Dominique Strauss-Kahn resigned his position as head of the IMF under the clouds of a sexual assault scandal. In contention for the role of managing director was former French finance minister and international lawyer Christine Lagarde. That was good news for China. In early June 2011, Lagarde visited China and spoke with several key officials there, including foreign minister Yang Jiechi, central bank governor Zhou Xiaochuan, finance minister Xie Xuren, and vice premier Wang Qishan.80 Prior to her visit, she had traveled to India and Brazil, in keeping with her views on supporting emerging countries.

  In Beijing, she told the press that it would be “very legitimate for Chinese representatives to be included at the highest level of the Fund’s leadership.” It was then that Lagarde and Zhou developed a friendly rapport based on mutual goals. She would have a strong ally in the East if she got the top IMF spot, and he would have an advocate for China in the IMF. In general, Lagarde was warmly received by the Chinese establishment as a supporter of China’s initiatives to take a more prominent role on the global stage. In terms of forging an East-West alliance for the twenty-first century, she was one of the most instrumental world leaders.

  On July 5, Lagarde was elected the eleventh managing director (and first female leader) of the IMF.81 Her only competitor, Mexican central bank chief and prior IMF deputy managing director Agustín Carstens, was supported by Australia, Canada, and Mexico. China supported Lagarde, who supported the inclusion of the yuan in the SDR. So did the United States, which, despite Lagarde’s support of China, stuck with the historical protocol of choosing a European leader over the emerging market candidate; also, as cen
tral banker, Carstens had focused more on inflation-related rather than money-conjuring policies.82

  The following month, the yuan crossed the 6.40 line against the dollar for the first time in seventeen years.83 Meanwhile, Europe was facing a growing debt crisis. The G7 held an emergency Eurozone meeting on August 7, 2011, to consider ways to provide liquidity to the region.84

  With a possible return to crisis, nothing could be left to chance. The Fed announced it would keep rates at zero. The ECB intervened in Italy’s and Spain’s bond markets.85 The Bank of England announced it would provide more stimulus if needed. The BOJ expressed concern about yen appreciation, and Switzerland announced an effort to contain an overvalued franc. They all worried about renewed global recession. In their post-meeting statement, the leaders promised they would “take all necessary measures to support financial stability and growth in a spirit of close cooperation and confidence.”86 Money-conjuring policy had not helped, yet it was the only item on the menu. China continued to stay out of that particular fray.

  Still, the credit situation in Europe worsened. On September 25, Lagarde warned that the IMF’s $384 billion emergency bailout fund was insufficient to support some countries’ current economic situation in worst-case scenarios.87

  Emerging countries called for solutions to the escalating Eurozone crisis. At the August IMF and World Bank meeting, Brazil’s finance minister Guido Mantega had said that Europeans had a responsibility “to ensure that their actions stop contagion beyond the euro periphery.”88 PBOC governor Zhou had echoed this sentiment, stating, “The sovereign debt crisis in the euro area needs to be resolved promptly to stabilize market confidence.”89

  Now China was cast into the position of helper. Europe in need was an opportunity to take a more long-term tack toward a tighter alliance. Zhou told reporters that the timing of China’s assistance to Europe depended on what the Europeans did next.90 He thought the IMF should safeguard the long-term sources of funds to meet the needs of member states to tackle the crisis while promoting international diversification of the reserve currency system.91 In that way, he was implicitly supporting the weaker European countries over the stronger ones and attacking the prevailing monetary system. Actions were being taken to forge tighter regional relationships, including with Vietnam, Pakistan, and Russia.92

  On Christmas Day in Beijing, Chinese premier Wen Jiabao met with Japanese prime minister Yoshihiko Noda as part of the Japan–People’s Republic of China Summit.93 In an unexpected decision, the governments announced that both countries would promote direct trading of the yen and yuan, reducing their dependence on the US dollar in these transactions. The agreement was accompanied by one between Japanese and Chinese banks to establish a $154 million fund to co-invest in environmental technology and energy-efficiency businesses.

  On New Year’s Eve 2011, Zhou told Chinese news agency Caixin that China would maintain a “prudent” monetary path to ensure stability in 2012. He reaffirmed his compromise to “deepen financial reform, accelerate the development of financial markets, and strengthen and improve foreign-exchange management.”94 The performance of the yuan in 2011 was the best since 2009, which highlighted the commitment of the Chinese government to yuan stability and Zhou’s plan to turn the yuan into an international reserve currency.

  YEAR OF THE DRAGON

  Money-conjuring policy had yielded no obvious results in global growth or stability. As a consequence of low economic activity, political and economic groups in Japan, Europe, and the United States divided into two camps: those that supported easy monetary policies and those that didn’t.

  But China—after three years of fiscal stimulus—was showing early signs of an economic slowdown as its use of the infrastructure it had constructed stalled.95 The trade surplus diminished, and the Eurozone crisis caused speculators to shed emerging markets’ assets.96 Assets had fallen to $2.18 trillion on December 31, 2011, from $3.2 trillion on September 30, 2011. The steep quarterly drop was the first since 1998, during the Asian financial crisis. On January 13, 2012, China’s foreign exchange reserves had decreased as investment from abroad moderated.

  Thus it become more important for China to encourage external investment. On March 12, amid high volatility, capital outflows, and China’s biggest global trade deficit in a decade, Zhou offered a carrot to external speculators saying, “We will allow and encourage market forces to play a bigger role, and the central bank’s participation and intervention in the market will decrease in an orderly manner.”97

  The rest of the world, as economically dependent as it was on China’s ongoing expansion, turned apprehensive. During the summer, for the first time since the 2008 crisis, the PBOC decided to cut rates in response to the reduction in economic activity.98

  Zhou always tried to show the press his concern with “market forces,” though some insiders thought that was his brand of marketing strategy. He was ambitious. Zhou was not only the chief monetary architect behind the yuan’s internationalization project (for which global acceptance was essential) but historically supportive of China’s social market ideology based on a mixture of state-owned enterprise and a desire for an open market economy. Despite that, he was committed to the Chinese way of doing things, supporting the party and the government.

  While Zhou attempted to show that China was opening more toward external investors and capital flows, in the United States, at a lecture at George Washington University on March 20, 2012, Ben Bernanke took another swipe at China, its currency, and gold in one go. He explained that the problems regarding establishment of a monetary system based on the gold standard could be seen by analyzing the current Chinese dollar peg.99

  Bernanke emphasized the flaws of a gold standard monetary system as exactly those faced by China. He both criticized China’s peg to the dollar and associated it with the gold standard to show that China’s problems would become the world’s if things were done China’s way—or if a gold standard was readopted. He wanted to keep the system as it was—not be the victim of a monetary system shake-up at the hands of China—by pointing out China’s weaknesses and dependence on the United States. “If the Fed lowers interest rates and stimulates the US economy, that means also that essentially monetary policy becomes easier in China as well. Those low interest rates may not be appropriate for China,” he said. “China may experience inflation because it’s tied to US monetary policy.”

  Bernanke wanted to make it clear that the old system would never return. In reality, a renewed gold standard would usurp the Fed’s power as the chief central bank of the world’s dominant currency. “Since the gold standard determines the money supply, there’s not much scope for the central bank to use monetary policy to stabilize the economy.” Bernanke’s real problem with gold, or any other standard, was that it diminished not the power of central banks in general but the power of his central bank.

  On April 13, 2012, China expanded the yuan’s trading band against the dollar, a measure indicating an attempt to diminish restrictions over its financial markets. The PBOC announced the yuan would be able to rise or fall 1 percent against the dollar on a daily basis, from a midpoint. Before that, the range of movement, established in 2007, was 0.5 percent.100

  Three days later, the yuan fell the most in a single week versus the dollar.101 The US government jumped to accuse Beijing of depreciating the yuan in order to hurt US manufacturers and contribute to a US trade deficit with China, which had risen 8 percent to $295 billion in 2011.

  The United States believed that if the yuan exchange rate value was artificially lowered, the cost of buying exported goods from China was also lower, rendering China more competitive on the global market relative to the United States. (These accusations were disingenuous because the trade deficit had widened before this when the yuan value versus that of the dollar was higher.)

  In early May 2012, Hillary Clinton, US secretary of state, and Tim Geithner, US secretary of the Treasury, traveled to Beijing. There they joined vice premie
r Wang Qishan and state councilor Dai Bingguo at the fourth joint meeting of the US-China Economic and Strategic Dialogue.102 At those talks, Geithner said yuan appreciation was important to aid China in reshaping its economy and opening its markets. He was relentless, as if the entire future of the US economy was contingent upon minute differences in the dollar-yuan exchange rate. He stressed, “The United States has a strong interest in the success of these reforms, as does the rest of the world.”103

  Geithner praised the fact that the yuan had gained 13 percent over the last two years. Zhou, meanwhile, noted that market forces would prove whether the yuan was imbalanced, and if so, the market would have the power to correct it.104 He was throwing US policy back at the United States.

  The United States wanted it both ways: open markets and a strong yuan, regardless of whether those open markets would support it. At the same time, the Eurozone debt crisis brought greater political problems. Risk aversion drove the dollar index to its highest level since September 2010. The dollar was appreciating regardless of what the PBOC did.

  The Chinese economic slowdown eventually reduced appreciation pressure on the yuan. As a result, on June 8, 2012, the PBOC announced its first interest rate cut since 2008.105 The one-year lending rate was reduced 0.25 percent to 6.31 percent, and the one-year deposit rate to 3.25 percent. A month later, the PBOC cut the one-year lending rate to 6 percent.106 To maximize the effect, it allowed banks to lend at 70 percent of that rate, down from 80 percent.