Focusing On The Outcome Of The G20 Conference In Shanghai Is Expected By The Outside World.

The meeting of G20 finance ministers and central bank governors will be held in Shanghai on the 26-27 th of this month. This is the first time that China has hosted the most important international financial conference as host, especially in the context of deflation in the global economy and the turbulent exchange rate and commodity market in the financial market.

The author suggests that China should take advantage of this opportunity to promote the coordination of global macro financial governance, especially in promoting the "new Plaza Accord" strategy for the weaker dollar.

After all, this will not only help to reduce the pressure of shorting the renminbi, prevent financial risks, but also contribute to global financial stability and enhance China's global financial discourse power.

Global stocks, commodities and other risky assets have been sell-off. Japan's stock market and European stock market have suffered the biggest decline. Investors' risk aversion has been greatly raised. During the same period, the yields of us and Japanese bonds continued to decline, and the US dollar index dropped to 95.2 from 100 in the beginning of the year, while gold and silver soared. The Japanese yen as a safe haven currency rose two weeks to 7%.

Why do I support China's initiative to promote the new Plaza Accord in the meetings of G20 finance ministers and central bank governors? The reasons lie in the following points:

First, the US dollar has been the end of the battle, guiding the weaker dollar to follow the trend.

I have accurately predicted that the US dollar will weaken after the Fed raised interest rates.

The earlier mainstream view agreed that the Fed's interest rate increase would affect capital inflow from the perspective of interest rate change and push up the US dollar index trend based on the theory of interest rate parity.

However, by combing the historical data of the Federal Reserve raising interest rates over the years, the author found that after the 7 rate hike cycle was opened in 70s, the US dollar showed four weakness and a range concussion. Although there were two strong gains, they all belonged to the wrong tightening policy. A year later, the US economy fell into recession and the US dollar collapsed.

Considering that the historical rate hike does not necessarily lead to a stronger dollar, on the contrary, the pressure on the US Federal Reserve to resist deflation is still relatively large, and the US dollar has been forced to overdraft the anticipation of raising interest rates.

Today, the US dollar has dropped to nearly 96.6 of the current rate before the rate hike is 100.

Second, the weakening of the US dollar is not a bad thing for the United States itself.

The author finds that despite the recovery of early US economic indicators and the beauty of employment data, it is well known that employment indicators are lagging behind.

Since the Fed's interest rate boots have dropped, economic data are not optimistic.

The fourth quarter GDP is only 0.7%.

There has been a gradual decline in corporate profits, especially in the sharp fall of energy sector, the decline in aviation and automobile industry, and the worst year for corporate profits since the financial crisis.

At the same time, manufacturing and exports in the us seem unable to withstand the impact of a strong dollar.

For example, in terms of exports, although the US trade deficit has declined in 2007 compared to the previous financial crisis, the main reason is that the shale gas revolution led to a sharp reduction in the energy trade deficit, and the non energy trade deficit reached the highest level in three months or even higher than before the crisis.

In terms of manufacturing, the US ISM manufacturing index in January was 48.2 lower than expected. The proportion of US manufacturing added value to GDP is lower than that of the financial crisis, indicating that the US re industrial process is slow.

In addition, this year, the Fed's position has been biased towards doves, and also shows concern about economic data and global financial risks, which will also lead to a slower pace of interest rate hike.

Third, weakening the US dollar will help stabilize the financial turmoil in emerging markets.

As I mentioned in the column at the beginning of the last century, since the early 70s of last century, the ups and downs of the US dollar usually triggered the global economic and financial turmoil in the same period.

In particular, the arrival of the strong appreciation cycle of the dollar is often accompanied by a serious financial crisis in developing countries, such as the Latin American crisis in the 80s of last century and the Asian financial crisis in the late 90s of last century, which has hit the economies of the crisis for ten years or more.

It can be seen that since the US Federal Reserve raised interest rate expectations last year, the US dollar has opened a new round of strong rising trend. The US dollar index has risen from less than 80 to about 100 of the previous period, or more than 25%. In the same period, the currencies of the emerging market countries depreciated, and the RMB and Hong Kong dollar also suffered massive shorts, and the risk of global financial turbulence increased.

The strong dollar will have an impact on the emerging market countries. If the dollar weakens at this time, it will undoubtedly help to reduce the pressure of capital outflow in the above-mentioned countries, and is a good thing for stabilizing the global financial market.

Fourth, the weak dollar supports weak commodity markets, which is good for Europe and Japan to resist deflation.

It can be seen that since the beginning of this year, the monetary policy of the developed countries has been divided. The Fed's interest rate policy has been tightened, and Europe and Japan have opened the negative interest rate era.

We can see that the trend of US dollar and commodity movements has been widely confirmed by practical data.

When the former Federal Reserve quantified the long-term weakness of the US dollar, the international commodity price, which was denominated in US dollars, continued to rise.

The strength of the current US dollar is also highly correlated with the weakening of commodities.

Today, the Baltic Dry Index (BDI), which has been seen as a barometer of Global trade, falls below 300 points, the lowest level since the index was founded in January 1985, and is obviously lower than the lowest point of 509 in the subprime crisis. It indicates the deflation dilemma facing the global economy.

If the weaker dollar can be achieved, it will also promote the rebound of commodity prices to a certain extent, making it better for global resistance to deflation.

Fifth, the weak dollar is a callback of excessive appreciation in the early stage, and a certain degree of depreciation is not unacceptable.

In my view, the US dollar has risen strongly earlier. At this point, a certain degree of depreciation is also an action to overestimate the value of a basket of currencies and correct overestimation of currency.

According to the parity purchasing power index of the organisation for economic co operation and development (OECD), as of December 2015, the US dollar was overvalued by 10% against the euro in Germany, overvalued by 22% in Spain, overestimated by 33% in Greece, and by 8% in the yen.

In the light of the current situation, European countries are "

According to the EU draft, the EU called for the G20 meeting of the world's major powers to be held in Shanghai on 26-27 February, and the financial ministers and central bank governors of all the world's great powers should undertake to intensify their efforts to boost global economic growth.

From the perspective of Japan, after the Fed raised interest rates, Japan also implemented negative interest rates, but the Japanese stock market subsequently suffered heavy losses. The yen appreciated sharply and assumed a certain degree of hedging currency function, indicating that the global financial risk has increased.

A stable global financial market is also in Japan's interest.

In turbulent times, risk appetite will rise, and the yen will be stronger.

In short, although there is a demand for currency appreciation in Japan and Germany when compared with the 1985 Plaza Accord, at the time, the Central Bank of Europe and Japan generally adopted a relaxed policy. It is difficult to find a strong currency.

But considering the excessive appreciation of the US dollar in the early period, the Japanese yen was about 100-110 against the US dollar, and the euro was against the US dollar (1.2-1).

3, it can also be expected.

Sixth, the weak dollar benefits the RMB exchange rate policy from its predicament.

At the beginning of the year, the surging tide of RMB has made RMB exchange rate policy the most important and urgent choice for China's policymakers.

During the Spring Festival, President Zhou Xiaochuan conveyed the intention of the central bank to stabilize the exchange rate through the form of media interviews. After a clear statement, the strength of the renminbi was weakened after the Spring Festival.

When President Zhou made the statement whether the situation of European debt crisis was severe in 2012, Delagi, the president of the European Central Bank, was able to turn the tide of the war.

It can be imagined that if the weakening of the US dollar can occur, it will undoubtedly help to reduce the pressure of RMB devaluation, and the external environment will be much easier if the RMB depreciates along with the US dollar against other major currencies.

Seventh, strive for time for domestic reform.

There is no doubt that the reduction of uncertainty in financial risk is precisely the necessary conditions to support China's economic stabilization and implementation of the new supply reform, and to maintain the achievement of a rare international status since China's accession to the SDR.

Further, for example, the price of many high-end consumer goods in China is obviously higher than that in foreign countries, and the low end consumption and service prices are still cheap, which reflects to a large extent.

The distortion of the structure is not that the RMB exchange rate is overvalued, and that the exchange rate is even closer to the equilibrium exchange rate. It can alleviate structural distortions through reform, but not through nominal depreciation.

For example, through the promotion of anti-corruption, it helps to release the high price bubble of high-end goods and services; through the adjustment of tariff and consumption tax, strengthening the supervision of domestic commodity quality will help to reverse the situation that most of the high-end consumption flows overseas; moreover, the low wage labor force has risen, but it is still significantly lower than that of the United States, and there is still room for improvement, which can coordinate the reform of income distribution and improve the low end labor welfare.

To sum up, the author thinks that it is not only the United States own needs, but also the counterattack against the renminbi, to mention the weak dollar in line with the global interests.

From this perspective, it is necessary for China to play more initiatives in guiding the weakening of the US dollar.

In my view, the following strategies are worth considering:

On the one hand, we should actively guide international public opinion through the opportunity of G20 host to weaken the US dollar.

This year's global financial market turmoil shows that it is indeed necessary for the global central bank to increase exchanges and coordinate attacks.

Through the above analysis, we can see that the weak dollar is in line with the interests of all parties. If China can take advantage of the favorable circumstances and take advantage of the next meeting of the G20 finance ministers and central bank governors, we should take advantage of the host country and consolidate consensus and guide us dollar devaluation.

It will also help to enhance China's right to speak in global financial matters and kill two birds with one stone.

On the other hand, we should make reasonable allocation of foreign exchange assets and reduce the proportion of US dollar in reserves.

China, the second largest economy, enjoys the world's highest foreign exchange reserves of US $3 trillion and 330 billion, and is the largest external holder holding US Treasury bonds of US $1 trillion and 250 billion.

Taking into account the substantial appreciation of the dollar in the early period, the RMB exchange rate is in a predicament. Under the background of the increasingly frequent game between China and the United States, China can appropriately adjust its foreign exchange reserve asset allocation, reduce some of its US dollar assets, and increase some non US dollar assets, so as to lock in the profit of the US dollar appreciation, which will affect the relative price of the currency. It will act as a powerful signal to influence the market behavior so as to guide the weakening of the US dollar and reduce the pressure of RMB depreciation.

Recently, media reports reported that Zhu Guangyao, Vice Minister of finance of China, warned that the yield curve of US Treasury bonds was flat, which may reflect the near recession of the US economy or the brink of financial crisis.

The author speculated that whether this represents the efforts of the "new square agreement" of the weak dollar led by China has already begun?

In view of the increasing panic in global financial markets, there are suggestions that global policymakers should cooperate at this time to develop a Multi Country Cooperative intervention market similar to the 1985 Plaza Accord agreement to promote the depreciation of the US dollar and stabilize the global economic and financial markets.

In my view, in the face of the fact that the RMB is still linked to the US dollar, guiding the weaker dollar in line with the interests of all parties will not only help to alleviate the turbulence in the emerging market countries, alleviate the pressure on the depreciation of the RMB, support commodity prices, but also be beneficial to prevent the us from recession.