Don’t Copy the Plaza Accord

The recent Group of 20 leading rich and developing nations’ finance ministers’ and central bank governors’ meeting in Shanghai, contrary to every foreign bank’s expectations, has driven countries to take joint action to weaken the U.S. dollar, which actually means to strengthen the renminbi, as in the 1985 Plaza Accord. Mainland China also stated that it would not suddenly raise the RMB under pressure from other countries, nor would it devalue it for a temporary economic advantage. Christine Lagarde, managing director of the International Monetary Fund, stated that a new Plaza Accord is “not in the cards.”

Because mainland China is undergoing an economic transition from an investment-led to a consumer-led model, its exchange rate policy did not receive too much criticism in the G-20 meeting. Of course, it must realize that as the second largest economic body and the largest trading country (and, on top of that, the largest military country) in the world, compared to Japan 30 years ago, today’s mainland China has more say in the international economic system and monetary policy. Moreover, with Japan’s experience to learn from, how could mainland China agree to copy the Plaza Accord?

In 1985, in order to address the U.S. trade deficit, the Plaza Accord was signed, devaluing the U.S. dollar against the yen and German mark among other main currencies after finance ministers and central bank governors from the U.S., Japan, the U.K., France and West Germany, among other developed countries, held a meeting at the Plaza Hotel. As a result, not only did the yen skyrocket, the Taiwan dollar shot up to its highest value of 24.62 per U.S. dollar in 1990; one could say that the Plaza Accord not only made Japan’s economy suffer for 20 years, but also caused a shift in Taiwan’s economy.

After the RMB undergoes restructuring, its exchange rate will no longer focus only on the U.S. dollar, but rather refer to a multitude of currencies and create a management-style floating currency system, bringing elasticity to its operation.

Beside this, with the slowing of U.S. interest rates and restrictions on the U.S. dollar, there is not so much concern over the RMB losing value. However, every country has economic problems, and the competitive currency devaluation that the G-20 meeting fears may yet come true.