Brussels Economic Forum – Global Imbalances
I spent the last day of May in Brussels attending the 8th Brussels Economic Forum. This year the topic was Global adjustment and EMU.
Below I put together few thoughts which emerged after the first day of the conference, in particular the first session which focused on global imbalances.
John Lipsky, IMF first deputy Managing Director, who chaired the multilateral consultations on global imbalances stressed that they are medium-term challenge, not the short-term urgency. He documented that global growth remained, and is expected to remain robust, and at the same time it became much more simultaneous than in the past. However the simultaneity argument does not apply to domestic demand.
He showed that there was a huge growth of cross border flows, and equity contributed to this trend, with equity share in many funds portfolios rising from 2 to 16-fold in the past 15 years. He also said that US households saving rate should rise amid reduced expectations of further sharp rise of asset prices.
Then Wu Xiaoling, deputy governor of the PBoC took the floor. She definitely spoke English, but she chose to speak in Chinese, and gave the translator hard time. I was also surprised by a poor quality of slides, she used word document with a font size probably below 12, could not see anything. But governor Wu made a number of very interesting statements, here is my subjective perception:
global imbalances are normal and inevitable phenomenon in a global economy. Interestingly during the discussion Wilem Buiter, former EBRD chief economist now advising Goldman Sachs and teaching at LSE said essentially the same. Relax, be complacent, this is normal in a global economy. Some would fret at this, I would ponder.
Governor Wu stated that special dollar status as a settlement currency also fuelled global imbalances, I would definitely agree;
She said that PBoC now has 1247bn dollars of reserves, which implies 45bn increase in April alone, wait a moment and Brad Setser will tell you how much are inflows and how much are valuation changes.
China plans the following policy measures:
Increase FX regime flexibility, but treats this as an issue of secondary importance. Mrs. Wu said that had China revalued massively it would have shifted trade surpluses to other Asian countries and the overall picture would not change (debatable, isn’t it);
China will try to boost consumption by building social safety net, rising household incomes, changing foreign trade policy to encourage imports, enhance environmental standards, and, I stress, encourage Chinese enterprises with surpluses to invest in other emerging markets. If anything it appears that China has embarked on a decisive captive offshoring path, watch out;
During the panel Mrs. Wu made few comments on China investment strategy. She was very careful with the wording, she said what we already know: China will not become net dollar seller, but with growing euro importance in world financial markets its importance will also be growing in central bank’s coffers.
She also said, and I find it quite important, that it be beneficial for the world to have several global settlement currencies. I bet that in the long term Chinese authorities would see three such currencies: dollar, euro and … asian.
Next speaker was OECD chief economist Jean Philippe Cotis. He made many interesting points, but let me share with you three:
Good national policies that worsen global imbalances problem should not be discouraged (e.g. labor reforms in Europe);
Do not recommend policies that are good for solving global imbalances, but bad for particular country (e.g. Japan increasing fiscal deficit to reduce excess saving);
Structural reforms may help global imbalances in the short-run, but will be neutral in the long run.
Cotis spend long time discussing labor market reform in Europe, which is needed for Europe reasons, but if implemented may not help global imbalances, as precautionary saving may rise and may offset higher consumption driven by expected potential output rise (sounds complicated but trained economists will know what I mean). Cotis suggested that services market deregulation will have a much stronger positive implications for global imbalances, as it will boost output without generating jobs insecurity and a possible rise in precautionary saving. I agree, but look what politicians did to services directive proposed by the European Commission, and optimism fades immediately.
Mohammad Al.-Jasser, deputy governor of SAMA (Saudi Arabia Monetary Authority) had a very interesting speech, but let me focus on two statements. First, he defended oil exporters strategy to run counter-cyclical fiscal policy, which means building large reserves when oil prices are high, and running them down when oil prices fall. He than stated that Saudis will continue to invest in US securities because US markets are biggest and most liquid, and the central bank focus should be on stability and liquidity. I challenge this view in my paper on Global Reserves Management.
The second panel was more on economic theory and less on policy issues, but I did like Wilem Buiter presentation titled: “Mundell on his head: Asymmetric shocks are good for you – thanks for EMU in Europe”. To sum up Buiter’s several slides with equations I would say the following. Home bias has fallen, so many households now hold a European portfolio. In finance it is good when returns on particular assets are negatively correlated, because it will help you to diversify risk and achieve better risk return tradeoff. So if asymmetric shocks hit EMU, it means by definition negatively correlated returns on EMU assets portfolio held by households, so the household will be better off, in comparison with scenario where there are no asymmetric shocks. Of course this is in the case of capital income, the story is different with respect to labor income, where mobility is the best hedging strategy.
Let me sum up. The panel confirmed my view, that New Bretton Woods is well and alive. IMF seams relaxed seeing the medium term risk, Europe structural reforms can’t do much good (labor reforms are imbalances-neutral, and services liberalization was killed by politicians), oil exporters will continue to finance US deficits, and they do not require weaker dollar or higher US bond yield to find it attractive. China will move very slowly on all fronts, maybe one trend will accelerate, which is higher Chinese FDI (definitely in Africa, but I would also bet on Chinese plans to buy assets in developed world, see Blackrock as the headline case).
It does appear, that absent unexpected shocks (protectionism, US Senate FX intervention legislation, global viral disease etc.) global markets will continues to be awash with liquidity and global imbalances will persist. This is confirmed by recent forecasts of IMF, OECD and EC, all point to continued global imbalances.
Someone commented at the end that it was a panel of one handed economists. I agree.