Baseball91's Weblog

October 10, 2011

Gradual Appreciation

Filed under: China,currency,Moneyball — baseball91 @ 11:11 PM

Monetary wars: On Tuesday the U.S. Senate considered a vote on al bill which threatens China, unless it revalues its currency, with broad-ranging sanctions, while ignoring a whole host of other factors in the Chinese economy which distort price signals, beyond currency. Some here, like Senator Charles Schumer, apparently think that the US still has the broad power which the national economy provided following World War II. Proposed by New York Senator Chuck Schumer, the motivation in this legislation has more to do with an upcoming national elecction of the ongoing recession, and less to do with Chinese inaction. Over the past twelve months, China actually has allowed the renimbi to gradually appreciate by 5.2% which means Chinese goods are at least 10% more expensive than one year ago. The intent of the Senate bill was directed at persistent high unemployment in the States. The Senate bill would likely damage U.S. relations with Beijing, said China’s Vice Foreign Minister Cui Tiankai.

The yuan appreciated to 6.3486 per dollar, the strongest level since China unified the official and market exchange rates at the end of 1993. With mounting concerns about China’s growth, fears of yuan depreciation could spark outflows of speculative funds. Setting the official yuan-dollar exchange rate at a record high signals a commitment to letting the currency rise, forestalling destabilizing capital flight. Amidst speculation policy makers will tolerate gains after the United States accuses China of undervaluing its currency, at moments like this Beijing often will attempt to guide the yuan higher to take the ire out of complaints from trade partners – in a little exchange-rate diplomacy. When you sat on billions in reserves, you had a few monetry moves to make from your quiver.

The strategy in Beijing was one of gradual appreciation. Tom Orlik of the Wall Street Journal writes, don’t bet on a change in China’s exchange-rate strategy. Since the the end of June, the Hang Seng China Enterprises Index has fallen 35 percent. “Yes, China heads into the possibility of a second global downturn with more problems than it did the first,” writes Orlik, “but markets have gotten ahead of themselves.” China’s main weaknesses are its dependency on exports and a real-estate bubble.

A weaker dollar does continue to boost investment demand in commodities. The yuan’s rebound came after data earlier this month showed a continued expansion in manufacturing activity in China. The strength in the yuan comes despite the Chinese central bank’s efforts to guide its currency slightly weaker after a week-long public holiday, with mounting Chinese domestic inflation. The larger-than-expected increase in Sep U.S. payrolls reduced recession concerns. After a week-long holiday, with resumption of trading, the Shanghai Stock Index fell to its lowest level in sixteen months on speculation the government will maintain tighter monetary policy. The euro rose to a one-week high against the dollar after German Chancellor Merkel said European leaders will do “everything necessary” to ensure that banks have enough capital, and after the European Commission said it will make proposals in the coming days on possible coordination of bank recapitalization in the EU. One day after German Chancellor Merkel and French President Sarkozy said they will deliver a plan to recapitalize European banks and find a “durable” solution for Greece’s debt load by the November 3rd Group of 20 summit, no details have been provided. Promises, promises, by those new Romantic European leaders who were supposed to be expanding the bailout fund for those in the euro zone, who use the euro. That had been the content of the July 2011 agreement by leaders who now were in largely inconclusive talks. The July agreement did require unanimous approval from member state parliaments, though Slovakia, along with Malta, had yet to approve it. With a vote on the matter due in the Slovakian parliament Tuesday, on Monday the Slovakia governing coalition failed to reach a compromise on an endorsement.

Relationship issues. In the age of divorce, the G20 nations, seeing but not knowing what the commitment issues involved. Other Asian stock markets advanced on optimism that European leaders will resolve the region’s debt crisis and boost the earnings outlook for Asian exporters, despite Fitch Ratings downgraded of Italy’s and Spain’s credit ratings at the close of the Friday’s market.

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1 Comment »

  1. Comment by baseball91 — March 22, 2012 @ 8:47 PM | Reply

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