The Crisis: The Legacy Of The G20 By Gareth Milliams

The G20 conference was always going to be success. This was preordained. Conversely, previous to the first day, China and France took clear positions that they either softened or were virtually ignored once the conference began. These pre-battle shots across the bow were local politics designed to appeal to their own respective electorates or more accurately in China's case, proletariat. It was merely theatre. Like all of these shindigs, most of the spade work was done by the advance negotiating teams, leaving the politicians to just craft nuance.

However, the positions taken by these major actors did emphasise the comparative weakness of the Anglo Saxon nations. Overly dependent upon our banking sectors we had sacrificed manufacturing real goods for esoteric financial instruments and brought the world down with us. President Lula of Brazil famously said that the crisis had, "white skin, blonde hair and blue eyes".

The big announcement was the $1.2tr donated to the IMF, but much of that was promised way before the G20 (such as the $100bn from Japan and $40bn from China). Requests from Britain and the United States for more radical European stimulus packages were refused by the French and Germans. It seems that the Europeans still believe that the price for their lukewarm support is that the US does all the hard work whilst they sit on the sidelines. They consider this crisis to be essentially Anglo Saxon and thus expect the Brits and Americans to do all of the heavy lifting (this is despite major exposure to SIV's and CDS's for Deutsche Bank, BNPP et al).

China did not make too much of the purported new reserve currency. It was (as I had said previously) pure political positioning. But don't be surprised if in the future, you see a repegging of the Yuan and a more aggressive use of the Renminbi as a regional currency or alternative to the US dollar. However, a global basket of currencies would be very difficult to achieve and would ratchet up the powers of the IMF to an unacceptable level. It helps its proponents that the present boss of the IMF is Dominique Strauss Kahn, an unreconstructed French socialist.

So what will happen to the Chinese currency?

According to Forbes:

China sets the yuan's value based on a narrow range of fluctuation against a basket of currencies, including the dollar, euro, yen and won, and does not disclose the different weights assigned to each currency. But, using new statistical methods that take into account concurrently the movements in exchange rates among the reference currencies, the change in the weighting of each foreign currency over time can be inferred. What Harvard economist Jeffrey Frankel has found is that, after Beijing de-pegged from the dollar in 2005, the yuan eventually became equally weighted between the dollar and the euro. In fact, the yuan's 20% appreciation against the dollar over the next three years to 2008 mostly reflected the euro's gain vis-a-vis the dollar.

But, as the global financial crisis unfolded and the dollar began to rebound against the euro, Beijing started by May 2008 to move the yuan back toward giving primary weighting to the dollar, a move that prevented the yuan from falling against the greenback. In fact, in the period from September 2008 to February 2009, Beijing's currency regime "has come full circle, virtually back to what it was in late 2005," said Frankel, who is the director of the Program in International Finance and Macroeconomics at the National Bureau of Economic Research. In the first two months of this year, in particular, the yuan apparently gave full weighting to the dollar. A report last Wednesday by Morgan Stanley similarly observed a "new renminbi [yuan] regime featuring a quasi-hard-peg to the U.S. dollar

This pragmatic repegging makes absolute sense for the Chinese as they look to protect their dollar assets against their own yuan.

China has unprecedented political strength right now. It is flexing its muscles, but it does not threaten, it negotiates. It looks not to dominate but to be accepted as an equal.

Much of the success of the G20 was due to the flexibility of their positions."At the summit, Hu Jin Tao said China was willing to work with other countries to deal with the crisis as a "responsible member of the international society". Hu said: "All countries are on board the huge boat of the world economy. When this boat is riding into the storm, all members on it must work together to steer it out of turmoil."

The world that we have left behind and the one that we journey toward are quite different. Anglo Saxon hegemony is coming to an end. The next ten years will define the west for the next century. The legacy of the G20 is that the global reformation began in London last week.