This information involves the secret ‘Shanghai Accord’ reached on the sidelines of the G-20 central bankers meeting in Shanghai, China, on Feb. 26.
The situation confronting the central bankers was the following: China needs to devalue its currency to rescue the Chinese economy. But the last two times China devalued against the U.S. dollar (August 2015 and January 2016), the U.S. stock market sank like a stone. This threatened to set off global financial contagion that could lead to a repetition of the 2008 panic, except worse. The challenge was to find a way to give China some currency relief without igniting a global stock market collapse.
The solution is to recognise that the US dollar and the Chinese yuan are not the only two currencies in the game. China has a larger combined trading relationship with Japan and Europe than it does with the U.S. The secret plan devised by the central banks has three parts: Tighten in Europe and Japan, ease in the U.S. and maintain the U.S.-China peg.
By maintaining the US-China peg, markets would not panic about Chinese devaluation. In fact, by easing the US dollar, China could ease the yuan and still maintain the peg. It’s just a case of follow the leader.
Meanwhile, the stronger euro and yen gave China competitive relief in its trading relations with those trading giants.
Voilà! The Chinese got currency devaluation, and the world hardly noticed.
How do we know this? After all, this plan was never publicly disclosed.
The secret summit took place on 26 February. Our hypothesis was that a plan to give China some relief was on the front burner. What subsequent facts enabled us to update the hypothesis (as Bayes’ theorem requires) to confirm or contradict the hypothesis?
We used the following:
From an analytic perspective, the case is overwhelming. We had four powerful confirmation points and no contrary evidence. The odds of these four critical events happening in a short time frame without coordination are miniscule. The odds in favour of the existence of the Shanghai Accord are high. There has been no official denial.
The International Monetary Fund just slashed its global growth forecast for the fourth time in a year, underscoring just how much policymakers around the world are struggling to get the economy back to a stronger footing, and offering another red flag for investors, who have shown signs of caution even as U.S. stocks have rebounded from February lows.
The IMF reduced its forecast of the growth rate by 0.2 percentage point to 3.2% and warned the world economy is increasingly at risk of stalling. The IMF said an exit of the U.K. from the European Union risks “severe” regional and global damage, highlighting yet another risk for the global outlook. A referendum is scheduled this June for the U.K., and market analysts have warned about broad ripples should the U.K. vote to bolt.
Too few pigs are headed to markets in pork-loving China, leading to soaring domestic prices and a rush of pork imports from the U.S. and elsewhere to fill the gap. As WSJ’s Lucy Craymer reports:
