China’s Inflation and Currency Problem
December 28th, 2009
Chicago, Illinois
Andrew B. Busch
Global Currency and Public Policy Strategist
(312) 845-2879
1-800-438-0434
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With Chinese Premier saying no to yuan appreciation and US holiday retail sales better than expected, the greenback is marginally lower against most major currencies in thin trading. The US dollar index is down .12 at 77.60. Australia, UK, Germany, and Canada (and others) are out for Boxing Day……I’ll do the OIS tomorrow when everyone gets back.
10:30 Dallas Fed Manufacturing Outlook
12:00 PM ChicagoFedMidwestManufacturing Index
1:00 PM Results of $44B, 2-Year Note Auction
4:30 PM Money Supply
4:30 PM Fed Balance Sheet
Not many are open, but global equities are mainly positive with the US S&P 500 is up 1.6 pts at 1123.10. Commodities are mainly higher with Gold at $1110.10. Crude is $78.40, nat. gas is at $5.80, and home heating oil is at $2.05. The CRB is at 282.20. Wheat is at 5.34 and corn is at 4.1675. Ahead of $118 billion in auctions this week, the US 10 yr note yield is at 3.83% and the 2yr note at 0.99% with the spread to 282. Freddie Mac’s deputy chief economist said interest rates were going a full point to 6.0% on 30 year mortgages in 2010. The TED spread non-fear factor is at 18.67, the VIX is at 19.54, and the CVIX closed at 13.49. TED and VIX and curve are all pointing towards continued equity market strength.
Another holiday, Another Charlie Sheen Arrest…… Unlike Tiger Woods, Sheen’s commercials are still running…..
Interest Rates: Our Justin Hoogendoorn writes, “As the Treasury prepares to auction $118 billion in 2-, 5-, and 7-year notes this week into a skeleton market, higher rates are on the minds of many with the 10-year Treasury having moved 64 basis points higher in December. While the current 3.84% on the 10-year note is not problematic, forecasts of a 5 handle on this rate should stir extra vigilance into Ben “One More Term” Bernanke. Such a large increase in rates would have the potential to disrupt the recovery; however, we view it as very unlikely in an environment with low capacity utilization and high unemployment and would look to stay involved in the fixed income markets in 2010.”
China’s Inflation and Currency Problem
In an exclusive interview with Xinhua News, Chinese Premier Wen Jiabao discussed two key issues that are the economic equivalent of the immovable object meeting the irresistible force.
First, Wen said that the government would maintain order in China’s property market. “As the property market is recovering rapidly this year, housing prices in some cities are rising too fast, which deserves the ‘great attention’ of the central government.” Wen said the government would stabilize real estate prices with economic tools of taxes, interest rates and land policies according to Xinhua.
Next, he address the international pressure to allow the Chinese yuan to appreciate. “A stable Chinese currency is good for the international community.” Some countries demanded the Yuan’s appreciation while practicing trade protectionism against China, said Wen, adding that this in essence was aimed at checking China’s development according to the article. “China will work together with other countries to curb trade protectionism and push forward with the Doha Round trade negotiations,” Wen said.
The world is not happy with the Chinese currency policy due to the currency weakening alongside the US dollar. This means that the economic adjustment process from a US recession has fallen on countries that have free floating currencies. What makes this particularly onerous is that the Far East and in particular China have weathered the downturn extremely well, but have not had their currency appreciate.
With China’s currency not appreciating, there is another way that trade partners have addressed the issue. 19 countries and regions have launched 103 trade related investigations against Chinese products and both the number of the cases and the money involved was at record high.
The ironic twist to this story is that a strong currency with a loose fiscal policy (tax cuts) would mean consistent growth for the country. It would also increase the purchasing power of Chinese consumers and increase foreign direct investment. It would also help cool inflation for consumers which is likely a critical concern for Chinese leaders. A stronger currency would also allow tighter monetary policy as FDI brings in flows to offset the increased cost of capital.
So far, the Chinese have not had to make a choice between the benefits of a weak currency and the disadvantages of inflation. With soaring home prices and trade related investigations, they will soon have this Faustian choice foisted upon them.
Tags: China, currency, inflation, Wen Jiabao