It's the Economy...

[rogerluli]

With both Europe and the US demanding that China allow it's undervalued currency to rise, inflation running at a 10 year high, the stock market rocketing through the roof, asset appreciation in the major cities at unsustainable levels, China has signalled that it will move to a "tight" monetary policy in 2008 hopefully to keep the lid from blowing off the top of the teapot...

 

 

 

 

China Plans `Tight' Monetary Policy Next Year to Cool Economy

 

China plans to shift to a ``tight'' monetary policy in 2008, signaling the government may raise interest rates further and allow quicker currency appreciation as the economy heads for its fastest expansion in 12 years.

 

The central bank changed its stance from the ``moderate tightening'' bias of recent months and ``prudent'' policy of the preceding decade, in a statement released today at the end of a three-day meeting of China's top leaders and financial officials.

 

The change underscores the government's failure to cool the world's fastest-growing major economy after five interest rate increases this year. China's economy grew 11.5 percent in the third quarter, inflation is running at a decade high and the benchmark stock index has more than doubled in 2007, as an export boom pumps cash into the financial system.

 

``China needs to take tougher monetary policy measures including continued rate increases to tame inflation, control fixed-asset investment expansion and damp asset prices,'' said Tao Dong, chief Asia economist at Credit Suisse Group in Hong Kong. ``The central banks' rate increases this year have been outpaced by surging inflation.''

 

The so-called Central Economic Work Conference is held annually before the end of the year to set policies and targets for next year. Before this week's conference, the Communist Party's ruling Politburo highlighted economic overheating and sustained inflation as key risks in the economy in 2008.

 

Consumer prices in China rose 6.5 percent in October from a year earlier and fixed-asset investment in urban areas increased 26.9 percent through October from a year ago, up from 24.5 percent in all of 2006.

 

`Forceful Measures'

 

In response to the government's policy announcement, the People's Bank of China said today it will ``use a combination of monetary policy tools'' and ``take forceful measures to strengthen liquidity control,'' according to a statement on the central bank's Web site.

 

The central bank has pushed the key one-year lending rate to a nine-year high of 7.29 percent since January. It has ordered lenders to set aside more money as reserves on nine occasions this year, raising the proportion of deposits to 13.5 percent, the highest since at least 1987.

 

``The government has already shifted from the `prudent' monetary policy set at last year's work conference to gradual tightening throughout this year, and today's announcement is a confirmation of that shift,'' said Ma Jun, an economist at Deutsche Bank AG in Hong Kong.

 

Bank Lending

 

The government will ``strictly'' control bank lending growth next year, the state-run Xinhua News agency said in a report today following the meeting, without elaborating.

 

Chinese banks extended 3.5 trillion yuan ($471 billion) of new loans in the first 10 months, taking the total to 26 trillion yuan, a 15.6 percent increase from loans outstanding at the end of last year, according to central bank data. The banking regulator, over the past month, has frequently ordered commercial lenders to limit loan growth or cut existing debt as bank lending grew more than desired.

 

The People's Bank of China today also reiterated its pledge to improve the nation's exchange-rate system, without providing further details.

 

A stronger yuan would help cool the economy by slowing inflows of cash from record exports. Premier Wen Jiabao last week reiterated a policy of ``gradualism'' in currency changes.

 

Hong Kong newspaper Ta Kung Pao reported Nov. 27 that the People's Bank of China had proposed widening the yuan's daily trading band or making a big one-off revaluation. The central bank later said it wasn't aware of such suggestions.

[rogerluli]

I see that Sec. Paulson wasted no time in jumping on the new "tightening" bandwagon announced by Beijing. Is a fast and large jump in the Yuan in the cards??? In the past China has revalued overnight from say 4 - 1 to 5 -1 (RMB - USD). They could do the same thing now in the other direction.... If anyone has any spare change they are planning on sending over to convert to RMB it might be better sooner done than later... JMHO

 

 

US Treasury Secretary Henry Paulson called Wednesday for an immediate revaluation of the Chinese currency after Beijing announced moves to tighten monetary policy for the first time in a decade.

 

He said that allowing flexibility of the tightly-controlled yuan was critical to cool the world's fastest growing economy battling serious inflationary pressures.

 

"A more flexible currency is especially important now, when the risks of inflation are clearly rising in the Chinese economy," Paulson said ahead of high-level talks between Washington and Beijing on key economic issues.

 

Paulson, speaking at a US-based Asia Society forum, said increased currency flexibility would allow China's central bank to "use the powerful tool of monetary policy for China's financial and price stability."

 

Economists have partly blamed Beijing's market intervention to contain the yuan's rise as a factor for fuelling inflation, overheating growth and asset-price bubbles in China.

 

Some of the yuan sold to mop up incoming foreign money to keep the Chinese currency weak has found its way into stocks and other investments, they say.

 

Paulson's concerns over the Chinese economy came ahead of his China trip to attend the US-China Strategic Economic Dialogue on December 12-13.

 

Beijing said Wednesday it would tighten monetary policy in 2008 for the first time in 10 years, as it battles to rein in a soaring stock market and a red-hot economy at risk of overheating.

 

The shift to "tight monetary policies" was announced after the three-day Central Economic Work Conference, a closed-door meeting of top decision-makers from the Communist Party and government, Xinhua news agency said.

 

The conference, the most important economic gathering of the year, also made it a priority for 2008 to prevent overheating and curb inflation.

 

Paulson said the yuan might have appreciated by six percent in the past year but "the pace is still not fast enough to reduce China's global trade surplus, its internal imbalances, or foreign exchange market pressures."

 

The yuan exchange has become "more than an economic parameter" in US-China ties, he said. "It has become a touchstone for broader anxieties about competition from China."

 

Washington has led the international push for a rapid yuan appreciation, saying its artificially low value gives Chinese exporters an unfair edge on world markets.

 

China's economy expanded at a blistering rate of 11.5 percent in the third quarter of 2007, with inflation at a decade high.

 

Consumer prices are expected to shoot to a 10-year high of 4.5 to 4.6 percent this year, due mainly to soaring food prices, state media said.

 

Paulson cited Chinese Premier Wen Jiabao's recent remarks at an East Asia summit in Singapore, emphasizing that China must now undertake comprehensive measures to control mounting inflation, growing asset bubbles, and an overheating economy.

 

"We share the concerns of China's top leaders on this issue," he said.

 

Noting the rise of economic nationalism both in the United States and China, Paulson said some in China were suspicious that Washington's push for yuan appreciation and financial market liberalization was an attempt to gain trade advantages and generate profits for US firms while slowing China's economic expansion.

 

"They mistakenly believe that yen appreciation during the mid-1980s caused Japan's weak economic performance in the 1990s," he said.

 

Japan's economic difficulties then were caused by the growth, and then collapse, of a huge stock and property price bubble, and the failure to use monetary policy to prevent the emergence of deflation after the bubble burst, he said.

 

US Trade Representative Susan Schwab, who will also attend the economic dialogue, highlighted what she called China's continued signs of slowing or even backsliding in market-oriented economic reforms.

 

"Protectionism and isolation from market forces only yields inefficiency, corruption, and trade frictions -- and that is not the path to a more harmonious society," she said.

[LeeFisher3]

Paulson is an opportunist, the trading world would love nothing more than to have the yuan placed on the trading floor so they could artificially manipulate it for their own benefit.

 

I personally believe China is wise to tie it's value to a basket of currencies if for no other reason than to protect their economy from foreign raiders who have no concern about devastating a nations economy for their own benefit.

 

Wal-Mart alone has the funds to artificially manipulate the market so that China would be paying them for taking their goods, much less leave it to the integrity of the open market.

 

China has enough problems without trusting a market that has in the past shown themselves to be less than trustworthy.

[rogerluli]

Paulson is an opportunist, the trading world would love nothing more than to have the yuan placed on the trading floor so they could artificially manipulate it for their own benefit.

 

I personally believe China is wise to tie it's value to a basket of currencies if for no other reason than to protect their economy from foreign raiders who have no concern about devastating a nations economy for their own benefit.

 

Wal-Mart alone has the funds to artificially manipulate the market so that China would be paying them for taking their goods, much less leave it to the integrity of the open market.

 

China has enough problems without trusting a market that has in the past shown themselves to be less than trustworthy.

 

Lee I would personally like nothing better than to see the Yuan permanently pegged at the old 8.28... But it isn't going to happen... China is now a major player in global trade and has to get along with it's trading partners and the Europeans are crying foul just as loud as Paulson...

 

 

http://news.bbc.co.uk/2/hi/business/7114554.stm

[LeeFisher3]

Paulson is an opportunist, the trading world would love nothing more than to have the yuan placed on the trading floor so they could artificially manipulate it for their own benefit.

 

I personally believe China is wise to tie it's value to a basket of currencies if for no other reason than to protect their economy from foreign raiders who have no concern about devastating a nations economy for their own benefit.

 

Wal-Mart alone has the funds to artificially manipulate the market so that China would be paying them for taking their goods, much less leave it to the integrity of the open market.

 

China has enough problems without trusting a market that has in the past shown themselves to be less than trustworthy.

 

Lee I would personally like nothing better than to see the Yuan permanently pegged at the old 8.28... But it isn't going to happen... China is now a major player in global trade and has to get along with it's trading partners and the Europeans are crying foul just as loud as Paulson...

 

 

http://news.bbc.co.uk/2/hi/business/7114554.stm

You'll notice those who have outsourced much of their supply needs to China to get things made cheaper and turn a larger profit are screaming the loudest and blaiming their trade deficit on China. They got what they wanted, now they want it cheaper.

 

Just think, if the workers in China made more money they could afford to buy that nice new Mercedes and help the trade deficit.

[I love Sunshine]

China's government's main concern is the jobs. If the yuan would go to 5 RMB/$1, products made in China would be much more expensive. This would reduce the trade deficit but put tens of thousands of people out of a job. And those unhappy people out of a job threaten the stability of China, which is the government's big worry.

 

This would be the equivalent of taking your five-year-old child, who is learning to ride a bike with training wheels, removing the training wheels, and making him fend for himself in the fast lane of a busy street. What are his chances?

 

China believes that the brunt of its workers should develop valuable world-class skills first (at the expense of western firms) then it can begin to hone its internal policies. That will take years.

[DMikeS4321]

China's government's main concern is the jobs. If the yuan would go to 5 RMB/$1, products made in China would be much more expensive. This would reduce the trade deficit but put tens of thousands of people out of a job. And those unhappy people out of a job threaten the stability of China, which is the government's big worry.

 

This would be the equivalent of taking your five-year-old child, who is learning to ride a bike with training wheels, removing the training wheels, and making him fend for himself in the fast lane of a busy street. What are his chances?

 

China believes that the brunt of its workers should develop valuable world-class skills first (at the expense of western firms) then it can begin to hone its internal policies. That will take years.

 

This is a good analysis and I think you have nailed the primary concern of CCCP.

 

As for Lee's above post, the free market doesn't MANIPULATE values (as separate from some traders), it SETS values. Wal-Mart pushes for lower prices so they can sell for less than their competitors. They increase their bottom line through volume, not margin. "Discovering" that formula is what made Sam Walton rich.

[LeeFisher3]

China's government's main concern is the jobs. If the yuan would go to 5 RMB/$1, products made in China would be much more expensive. This would reduce the trade deficit but put tens of thousands of people out of a job. And those unhappy people out of a job threaten the stability of China, which is the government's big worry.

 

This would be the equivalent of taking your five-year-old child, who is learning to ride a bike with training wheels, removing the training wheels, and making him fend for himself in the fast lane of a busy street. What are his chances?

 

China believes that the brunt of its workers should develop valuable world-class skills first (at the expense of western firms) then it can begin to hone its internal policies. That will take years.

 

This is a good analysis and I think you have nailed the primary concern of CCCP.

 

As for Lee's above post, the free market doesn't MANIPULATE values (as separate from some traders), it SETS values. Wal-Mart pushes for lower prices so they can sell for less than their competitors. They increase their bottom line through volume, not margin. "Discovering" that formula is what made Sam Walton rich.

We could only wish that Ole Sam was still around, unfortunately his offspring have demonstrated a major lack of his values and integrity.

If they thought for a moment that using their fortune could influence the monetary market in China they wouldn't hesitate to use it to their advantage no matter who it harmed.

[Guest Mike and Lily]

In the 1980's Japan caved in to US pressure and let it's currency appreciate rapidly and their economy paid the price for decades. I don't think the Chinese will play into that. The US seems to be depreciating the value of the dollar which will have some of the same effects except that the dollar will be lower against every other currency as well. That must be inflationary in the long term. Gold and oil are already near historic highs (vs the dollar), many of the markets already see it coming (except the bond market). China will continue to adjust policy to fit their own interests, which is exactly what we should be doing. Instead of playing the world's policeman, we should be concentrating on reducing government spending and the national debt as well as creating an environment more conducive to business. Otherwise, we are destined to lose our position as the premier economic power of the world.

[IllinoisDave]

In the 1980's Japan caved in to US pressure and let it's currency appreciate rapidly and their economy paid the price for decades. I don't think the Chinese will play into that. The US seems to be depreciating the value of the dollar which will have some of the same effects except that the dollar will be lower against every other currency as well. That must be inflationary in the long term. Gold and oil are already near historic highs (vs the dollar), many of the markets already see it coming (except the bond market). China will continue to adjust policy to fit their own interests, which is exactly what we should be doing. Instead of playing the world's policeman, we should be concentrating on reducing government spending and the national debt as well as creating an environment more conducive to business. Otherwise, we are destined to lose our position as the premier economic power of the world.

 

Very insightful and well said. B)

[Don]

In the 1980's Japan caved in to US pressure and let it's currency appreciate rapidly and their economy paid the price for decades. I don't think the Chinese will play into that. The US seems to be depreciating the value of the dollar which will have some of the same effects except that the dollar will be lower against every other currency as well. That must be inflationary in the long term. Gold and oil are already near historic highs (vs the dollar), many of the markets already see it coming (except the bond market). China will continue to adjust policy to fit their own interests, which is exactly what we should be doing. Instead of playing the world's policeman, we should be concentrating on reducing government spending and the national debt as well as creating an environment more conducive to business. Otherwise, we are destined to lose our position as the premier economic power of the world.

 

Very insightful and well said.

 

Europe is the main area pushing China right now. China pegs their Yuan to the dollar, so as the dollar drops vs Euro so does the Yuan. This has Europe very upset. They say China's money is strong why drop its value vs Euro. They want China's money to float on normal world markets not peg to the dollar.

 

Europe is larger than the US market, but more protected. If China could get a better connection into the EU than maybe it might move in that direction.

 

I personally do not see much value in this for China (EU has many poor area for manufactering plants), they are doing good with the current system of the low yuan vs dollar. They will continue to make small changes in their currency vs the dollar and try to let that be enough. China needs the jobs and they know that the US companies will switch to India in a minute if it cost less. I am sure Walmart and others are already seting things up to jump to Vietnam or India if China's prices rise a little. Many of these US imports can be made anywhere, we do not have to use China.

[rogerluli]

What surprising news on the US-China trade negotiations...

 

 

No yuan deal at US-Chinese talks

China and the US have ended two days of trade negotiations with very little apparent progress on their key issues of dispute.

China agreed to increase safety standards on exports to the US, prompting Chinese Vice Premier Wu Yi to declare the talks a "complete success".

 

US Treasury Secretary Henry Paulson said the meetings in China provided a foundation for further co-operation.

 

Yet there was no deal on the yuan and China's giant US trade surplus.

 

Mr Paulson added that the US had also got agreement from Beijing that China would make it easier for American firms to work in the country.

 

Yuan appreciation

 

Washington has long been angered that China does not allow the yuan to float freely, saying the artificially low currency makes Chinese exports unfairly cheap.

 

 

We also both recognize the need to fight economic nationalism in our two nations

US Treasury Secretary Henry Paulson

 

Although Beijing has allowed the yuan to appreciate by 6% this year, analysts say it still remains below its true market level.

 

As a result, Chinese exports to the US have soared in recent years, and China's trade surplus with America is on track to hit a record $233bn (£114bn) this year.

 

Despite the lack of a breakthrough on these two key issues at the talks in Beijing, Mr Paulson said progress had been made.

 

He said both sides understood "the importance of balanced growth in both our nations".

 

"We also both recognise the need to fight economic nationalism in our two nations," he added.

 

Ms Wu said the China could not be blamed for US consumer demand for inexpensive Chinese products.

 

Beijing has long maintained that it cannot increase the value of the yuan any faster, for fear of unsettling its export-dominated economic boom.

[LeeFisher3]

The Trade surplus is over inflated when you consider that everything leaving the port of Hong Kong for the US is considered China trade goods, no matter the country of origin. Most of Asia ships their goods to the US via Hong Kong, some place it around 30% of the total trade goods leaving Hong Kong.

 

Anyone old enough to remember the US crying about a trade surplus with Japan after we outsourced electronic manufacturing years ago? Their currency floated freely but they didn't really want the poor quality goods the US manufactured.

[rogerluli]

Us non-economists may not have been following this debate over purchasing power parity versus market exchange rates... But the bottom line is that it seems that China's economy is smaller than previously thought, and in turn the RMB is NOT as undervalued as the US and Europe have insisted...

 

 

Economists divided over World Bank data on China's output

 

New calculations by the World Bank, suggesting that the Chinese economy may not be as large as previously thought, are setting off a debate among economists over whether the calculations are accurate and what they should mean for the West's currency policies toward China.

 

The World Bank issued preliminary figures Monday that recalculated what would be the economic output of 146 countries - including China - after excluding differences in domestic prices and currencies.

 

The so-called purchasing power parity calculations, which compare the buying power of citizens around the world, showed that China's output was 40 percent smaller than previous World Bank estimates.

 

The World Bank had previously calculated China's output was worth $8.8 billion in 2005 at purchasing power parity. It was revised this week to $5.3 billion.

 

China's economic output in 2005 was worth $2.24 trillion at market exchange rates, the calculation most commonly used and the best indicator of a country's output of internationally traded products, from oil to steel to computers. Purchasing power parity figures are often a better indicator of living standards, however.

 

The World Bank declared Monday that prices in China were closer to world levels than it had previously assumed. So the bank calculated that the purchasing power parity of China's economy was closer to the market exchange value than previously thought.

 

But some economists, including the former head of the China division at the International Monetary Fund, question whether the World Bank has now overstated prices in China. While describing the estimates as an important step toward making international comparisons of economies, they point out that the bank looked mainly at affluent Chinese cities in coastal provinces with big export industries.

 

Even with the revision, China is still the world's second-largest economy in purchasing power parity terms, after the United States. At market exchange rates, China also trails Japan.

 

Purchasing power parity estimates are often used to figure whether currencies are undervalued or overvalued, and to compare poverty in countries.

 

The World Bank cautioned that it did not calculate its figures as a guide to currency values. The bank's new figures nonetheless strengthen somewhat Beijing's contention that China's currency, known as the yuan or renminbi, is not seriously undervalued and does not need to be allowed to rise sharply against Western currencies.

 

Jeffrey Frankel, the James Harpel professor of capital formation and growth at Harvard University, has been one of the most outspoken advocates of yuan appreciation. He has cited the World Bank's purchasing power parity calculations to justify his position.

 

Frankel acknowledged in a telephone interview Thursday that the new World Bank figures badly damaged that argument. "I would have to retract that based on these latest numbers," he said.

 

But Frankel said that many other economic indicators still show that the yuan is undervalued and should be allowed to rise.

 

He cited China's massive and growing trade surplus, its ever-rising foreign-exchange reserves, market speculation on yuan appreciation and signs that the Chinese economy may be overheating as exports soar.

 

Other economists who see a need for a stronger yuan are questioning the World Bank calculations. The most notable is Eswar Prasad, who was the China division chief at the IMF until last January and is now the Tolani senior professor of trade policy at Cornell University.

 

Prasad described the calculations as a "heroic effort." But he voiced misgivings about how the bank accounted for price differences between urban and rural areas and among regions of China.

 

The bank used data that the Asian Development Bank had obtained from the Chinese government's National Bureau of Statistics, which in turn gathered data in the administrative regions of 11 large, mostly prosperous Chinese cities.

 

The World Bank calculated prices for the three-fifths of China's population who live in rural areas by using prevailing prices in agricultural areas at the fringes of the 11 cities and administered by these cities.

 

While the World Bank made some adjustments, Prasad questioned whether the final figures still overstated average rural prices across all of China. This would then understate the true size of China's economy.

 

"The notion that China is suddenly a much smaller part of the world economy should be taken with a huge degree of caution," he said.

 

But Prasad acknowledged that the World Bank needed to update its purchasing power parity figures for China. The bank's figures had previously been based on prices first calculated by two Chinese economists in 1986 and only crudely updated for inflation since then.

 

Fred Vogel, the World Bank economist who oversaw the purchasing power parity estimates, said that the China calculation "depends on a basic assumption that prices from the rural areas of the 11 administrative areas are representative of rural China." But he noted that most countries, including the United States, mainly measure prices in urban areas, so international comparisons are still valid.

 

Vogel also said that the World Bank was fully aware that regional differences in prices in China are wider than in many countries. He mentioned that the figures released Monday were preliminary and could be subject to further revision this winter, but added that, "the data we provided this time really form a benchmark."

 

The best-known calculations of purchasing power parity outside of the World Bank's are performed at the University of Pennsylvania. Alan Heston, a professor emeritus of economics at the university and co-director of the group that assembles the statistics, said that the university's figures for China were slightly below the old World Bank estimates and far above the new figures.

 

But Heston cautioned that the university was reviewing its figures and was likely to lower them. The revised estimate will show the Chinese economy to be at least as large as the new World Bank calculation and quite possibly larger, he said.

 

China's National Bureau of Statistics declined to comment Thursday on the World Bank calculations. But the Chinese government has contended for years that China is poorer and economically weaker than many Western critics have suggested.

[DMikeS4321]

In the 1980's Japan caved in to US pressure and let it's currency appreciate rapidly and their economy paid the price for decades. I don't think the Chinese will play into that. The US seems to be depreciating the value of the dollar which will have some of the same effects except that the dollar will be lower against every other currency as well. That must be inflationary in the long term. Gold and oil are already near historic highs (vs the dollar), many of the markets already see it coming (except the bond market). China will continue to adjust policy to fit their own interests, which is exactly what we should be doing. Instead of playing the world's policeman, we should be concentrating on reducing government spending and the national debt as well as creating an environment more conducive to business. Otherwise, we are destined to lose our position as the premier economic power of the world.

 

Very insightful and well said.

 

 

I agree...