It is a measure of the nervous mess of world financial markets that when the Financial Times reported last week that China was reviewing its assets denominated in euros, the markets promptly plummeted; the very next day when China denied any such euro-review, there was a massive rally in equities and commodities and a sell-off of bonds.
And this occurred in the week when the Organisation for Economic Co-operation and Development forecast returns to healthy growth in the rich industrialised countries of 2.7 per cent for this year and 2.8 per cent next. Overall global growth is now expected to be 4.6 per cent after a fall of 0.9 per cent last year.
There are good reasons why the nervous Nellies should be twitchy. Looking at the real economic world of 2010, there is a lack of balance. Too many countries are pursuing the same objectives, in which they can't all succeed. Indeed, in many cases there is an internal conflict between policies pursued inside countries. Politicians in countries as diverse as Greece, Germany and China have not realised that only in an Alice in Wonderland world is it possible for everyone to do impossible things.
China boldly chases impossible dreams. It wants to keep exports growing as the engine of economic growth and jobs, and is reluctant to see the yuan appreciate because this will make exports less competitive. Its foreign exchange reserves will continue to grow, but this makes their real value ever vulnerable to a fall in the US dollar's value, or of other reserve assets that Beijing chooses.
The fall in the euro, from US$1.49 in November to US$1.22 today, highlights some of the difficulties over foreign exchange rates. Beijing complains it has suffered a 13 per cent revaluation against the euro this year, threatening the competitiveness of exports to euroland. If, as some currency specialists predict, the euro falls closer to parity with the dollar, Beijing's headaches will grow.
The currency and reserves demonstrate China's limited options. China has the biggest pile of reserves in the world, accounting for about a third of the world's reserve assets, excluding gold. Whether they really total US$2.4 trillion or US$3 trillion, it is tempting to ask what the real profit is in such a hoard.
