China: The Yuan Dance
China may be running out of excuses not to revalue the Yuan
Wed, Oct 13 2010, 09:52 GMT
by Ivan Delgado Egea
FXstreet.com | View company's profile
Mounting trade tension between the US and China have been escalating over recent weeks, as American policymakers alongside EU forces, continue to show a notorious opposing stand against the value of the Chinese Yuan, calling every time more publicly blunt, and with louder critical comments a Renimibi (Yuan) appreciation, arguing the currency has long been kept artificially low against the Dollar.
Over recent years, US/EU threats towards China has transitioned from indirect and gentle warnings, to gradually grow in a more direct contentious approach, as western decision-makers seem now willing to use a more aggressive rhetoric to raise awareness on China's malpractices. The restrictive Yuan gravitation against its main rivals, only helps to increase discontent in the US and Euro-zone, while the Asian country continues to cultivate a great deal of external demand favoured by its weak currency.
The complex equation to resolve encompasses a rather pitiful US economy, world's reigning economic power now trapped in a dark maze, convalescent from the big slump of 2008 in intensive care treats by its Federal Reserve, which still tries to figure out the right call to stop the bleeding, as the strive to heal the deep wounds on its increasingly precarious jobs market - the engine on any healthy recovery - continues. Then comes the tricky element, where we find a consolidated Chinese economy starving to devour wealth, eagerly ready to leave far behind turbulent living standards of the past, to dream for an upcoming era of prosper's growth following its rebellion to the outside world as a true candidate to take over a swaying US as the first worldwide economy.
While positions taken by struggling western hemisphere actors, especially the US, aim to counter gigantic-sized trade deficits, and work towards re-balancing global monetary imbalances, China export-driven economy continues to turn a deaf ear to all threats sent, refusing to play a submissive role in the international scene. Despite forecasts suggest China may reach an astonishing $200 billion trade surplus this year (as could be read in Businessweek), which will only provide more ammunition to US/EU on its quest for fairer trading conditions, they remain adamant to come to means on its dirty tricks.
However the threats, Chinese Prime Minister Wen Jiabao has been differing from this western posture, fighting tooth and nail to defend his unmoved position on this issue. Recently, on a long-week tour across Europe and US, he showed once more his disagreement, as it was explained in an article on CNN, by saying that "a China Yuan rise would lead to disastrous consequences for the world", on the basis that such measures will proliferate social upheaval in China, exacerbating unemployment, and possibly putting in jeopardy the global recovery.
Meanwhile, U.S. Treasury Secretary Timothy F. Geithner, Luxembourg Prime Minister Jean-Claude Juncker, who also chairs the Euro-zone finance ministers panel, have been strengthening ties on their shared common outcome of a stronger Yuan at the International Monetary Fund meeting last week, reiterating from any public angle a much-needed appreciation on the currency. Even German Bundesbank president Axel Weber, over Reuters newswires on Oct 12, commented in a surprisingly blunt way that “China has a current account surplus because its authorities manipulate their currency”.
The most worrisome aspect for western nations is the kind of responses Chinese officials are projecting, a style far from being fearful, with People’s Bank of China Chief Mr. Zhou stating that "adjustments in currency exchange will take place in a gradual manner". This follows previous challenging remarks saying: "Pressure cannot solve the issue. Rather, it may lead to the contrary". A troubling aspect of this unaltered jargon on this changing economic landscape, is that China may feel the need to resort to harsher and more provocative comments in order to suppress resistance from the west, which may prove counter-productive to gain global acceptance.
Unless international coordination efforts to bridge palpable huge differences speed up, and economic fundamentals in China commence to be reflected in its exchange rate accordingly, countries running huge trade deficits, like the US, seem poised to continue on this vicious cycle of saving more and consuming less. Only in a small proportion, the situation may be softly offset should rising consumer debt in China keep up, which may contribute to reduce trade surplus as domestic consumption rises, which implies less need to exporting.
Currencies war
Media repercussion over the so called 'currency war' is resounding louder and louder in all corners of the market as weeks go by; This cyclical phenomenon, coupled with US Senate considering legislation aimed at higher duties on imports from China, suggest interesting outcomes are in the brewing as politicians get ready for the battle. In this context, between 2005 and 2008 similar threats spooked Chinese officials, allowing its currency to appreciate over 17%, yet in 2008 Yuan uptrend came to an abrupt halt.
Despite China adopted a more flexible currency regime earlier this year - a new 17yr low at 6.6610 was just reached on Oct 11 - the pace of the appreciation has been too slow - it has gained over 2% since the Chinese government agreed in June on more flexibility - , especially if considering some studies flag up the currency may be undervalued well over 25%, as it's explained in roubini.com.
From a Chinese standpoint, they may still be holding the conviction the US is unable to compete with its efficiency and low production costs, so Americans want to offset these factors with an unjustly disproportionate hasty change to the exchange rate. Another theory is that USD/CNY rate discrepancies is just a tactical excuse from a heavily indebted US economy, intending to cover up the real intention, which has its root cause on having China as its closest partner to overcome the excruciating financial deficit caused by the Treasury bond crisis, which sums in the scale of up to $3.5 trillion.
Putting aside the great audacity from China to take full advantage of its weak currency by fair means or foul, under its western opponent eyes, this rather unmanageable approach to agree on new economic policies has inevitably forced them to act decisively. China's strategies have been undoubtedly heating up global market anxiety, as the US witness helplessness the tricks and manipulative practices carried out by China not to let the Yuan fluctuate freely according to market demand, to instead continue artificially subsidizing its exports.
Legendary trader George Soros, on an interview at BBC on Oct 9, also criticized this misconduct from China for deliberately manipulating its currency, stating that "China had a 'huge advantage' over international competitors because it can control the value of its currency". Mr. Soros went further quoting that "Chinese chronic trade surplus means they have a lot of foreign currencies. They control not only their own currency but actually the entire global currency system". Moreover, on another piece of information obtained from the Financial Times, Mr Soros added: "Whether it realizes it or not, China has emerged as a leader of the world. If it fails to live up to the responsibilities of leadership, the global currency system is liable to break down and take the global economy with it."
Irrespective of the complexity on designing a road map for a peaceful and more flexible exchange rate reform on the Yuan, the next upcoming G20 and IMF meetings will serve as a window of new opportunities for negotiations and face to face time amongst US/EU and China. In this line of action, politicians have a historical benchmark parallelism on the Plaza Accord of 1985, when the world's major economies gathered to devalue the dollar and rise up the Japanese Yen.
Moreover, since the idea of diplomatically isolate the second largest world power is simply not viable, and at best absurd and far from being constructive, whatever happens in the near future, either China carrying on its pig-headed defensive role which may just produce further stir for the recovery of the global economy, or in the contrary, they finally give in to a more conciliatory stance that would help to settle the dust, the nation looks set to face an unstable future on its fake currency value, as the cost of maintaining the order on its manipulative practices will rise as the merits of its system's economic fundamentals force them to stark new challenges.
China should be unhesitatingly prepared to play the moral high ground in major financial markets, as adherence to a newly adjusted international set of rules to free-up Yuan exchange rate becomes a must. As the nation shows no respite from its fast-growing expansion, the responsibility for managing Yuan's exchange rate extends now far beyond the leadership in Beijing, to become a global political issue. In this context, it looks as though Chinese ambitions and greed towards themselves acts as a blockage not allowing them to see the big picture, where rigor and responsibility towards the rest should grow in importance.
http://www.fxstreet.com/fundamental/market-view/china-the-yuan-dance/2010-10-13.html
China may be running out of excuses not to revalue the Yuan
Wed, Oct 13 2010, 09:52 GMT
by Ivan Delgado Egea
FXstreet.com | View company's profile
Mounting trade tension between the US and China have been escalating over recent weeks, as American policymakers alongside EU forces, continue to show a notorious opposing stand against the value of the Chinese Yuan, calling every time more publicly blunt, and with louder critical comments a Renimibi (Yuan) appreciation, arguing the currency has long been kept artificially low against the Dollar.
Over recent years, US/EU threats towards China has transitioned from indirect and gentle warnings, to gradually grow in a more direct contentious approach, as western decision-makers seem now willing to use a more aggressive rhetoric to raise awareness on China's malpractices. The restrictive Yuan gravitation against its main rivals, only helps to increase discontent in the US and Euro-zone, while the Asian country continues to cultivate a great deal of external demand favoured by its weak currency.
The complex equation to resolve encompasses a rather pitiful US economy, world's reigning economic power now trapped in a dark maze, convalescent from the big slump of 2008 in intensive care treats by its Federal Reserve, which still tries to figure out the right call to stop the bleeding, as the strive to heal the deep wounds on its increasingly precarious jobs market - the engine on any healthy recovery - continues. Then comes the tricky element, where we find a consolidated Chinese economy starving to devour wealth, eagerly ready to leave far behind turbulent living standards of the past, to dream for an upcoming era of prosper's growth following its rebellion to the outside world as a true candidate to take over a swaying US as the first worldwide economy.
While positions taken by struggling western hemisphere actors, especially the US, aim to counter gigantic-sized trade deficits, and work towards re-balancing global monetary imbalances, China export-driven economy continues to turn a deaf ear to all threats sent, refusing to play a submissive role in the international scene. Despite forecasts suggest China may reach an astonishing $200 billion trade surplus this year (as could be read in Businessweek), which will only provide more ammunition to US/EU on its quest for fairer trading conditions, they remain adamant to come to means on its dirty tricks.
However the threats, Chinese Prime Minister Wen Jiabao has been differing from this western posture, fighting tooth and nail to defend his unmoved position on this issue. Recently, on a long-week tour across Europe and US, he showed once more his disagreement, as it was explained in an article on CNN, by saying that "a China Yuan rise would lead to disastrous consequences for the world", on the basis that such measures will proliferate social upheaval in China, exacerbating unemployment, and possibly putting in jeopardy the global recovery.
Meanwhile, U.S. Treasury Secretary Timothy F. Geithner, Luxembourg Prime Minister Jean-Claude Juncker, who also chairs the Euro-zone finance ministers panel, have been strengthening ties on their shared common outcome of a stronger Yuan at the International Monetary Fund meeting last week, reiterating from any public angle a much-needed appreciation on the currency. Even German Bundesbank president Axel Weber, over Reuters newswires on Oct 12, commented in a surprisingly blunt way that “China has a current account surplus because its authorities manipulate their currency”.
The most worrisome aspect for western nations is the kind of responses Chinese officials are projecting, a style far from being fearful, with People’s Bank of China Chief Mr. Zhou stating that "adjustments in currency exchange will take place in a gradual manner". This follows previous challenging remarks saying: "Pressure cannot solve the issue. Rather, it may lead to the contrary". A troubling aspect of this unaltered jargon on this changing economic landscape, is that China may feel the need to resort to harsher and more provocative comments in order to suppress resistance from the west, which may prove counter-productive to gain global acceptance.
Unless international coordination efforts to bridge palpable huge differences speed up, and economic fundamentals in China commence to be reflected in its exchange rate accordingly, countries running huge trade deficits, like the US, seem poised to continue on this vicious cycle of saving more and consuming less. Only in a small proportion, the situation may be softly offset should rising consumer debt in China keep up, which may contribute to reduce trade surplus as domestic consumption rises, which implies less need to exporting.
Currencies war
Media repercussion over the so called 'currency war' is resounding louder and louder in all corners of the market as weeks go by; This cyclical phenomenon, coupled with US Senate considering legislation aimed at higher duties on imports from China, suggest interesting outcomes are in the brewing as politicians get ready for the battle. In this context, between 2005 and 2008 similar threats spooked Chinese officials, allowing its currency to appreciate over 17%, yet in 2008 Yuan uptrend came to an abrupt halt.
Despite China adopted a more flexible currency regime earlier this year - a new 17yr low at 6.6610 was just reached on Oct 11 - the pace of the appreciation has been too slow - it has gained over 2% since the Chinese government agreed in June on more flexibility - , especially if considering some studies flag up the currency may be undervalued well over 25%, as it's explained in roubini.com.
From a Chinese standpoint, they may still be holding the conviction the US is unable to compete with its efficiency and low production costs, so Americans want to offset these factors with an unjustly disproportionate hasty change to the exchange rate. Another theory is that USD/CNY rate discrepancies is just a tactical excuse from a heavily indebted US economy, intending to cover up the real intention, which has its root cause on having China as its closest partner to overcome the excruciating financial deficit caused by the Treasury bond crisis, which sums in the scale of up to $3.5 trillion.
Putting aside the great audacity from China to take full advantage of its weak currency by fair means or foul, under its western opponent eyes, this rather unmanageable approach to agree on new economic policies has inevitably forced them to act decisively. China's strategies have been undoubtedly heating up global market anxiety, as the US witness helplessness the tricks and manipulative practices carried out by China not to let the Yuan fluctuate freely according to market demand, to instead continue artificially subsidizing its exports.
Legendary trader George Soros, on an interview at BBC on Oct 9, also criticized this misconduct from China for deliberately manipulating its currency, stating that "China had a 'huge advantage' over international competitors because it can control the value of its currency". Mr. Soros went further quoting that "Chinese chronic trade surplus means they have a lot of foreign currencies. They control not only their own currency but actually the entire global currency system". Moreover, on another piece of information obtained from the Financial Times, Mr Soros added: "Whether it realizes it or not, China has emerged as a leader of the world. If it fails to live up to the responsibilities of leadership, the global currency system is liable to break down and take the global economy with it."
Irrespective of the complexity on designing a road map for a peaceful and more flexible exchange rate reform on the Yuan, the next upcoming G20 and IMF meetings will serve as a window of new opportunities for negotiations and face to face time amongst US/EU and China. In this line of action, politicians have a historical benchmark parallelism on the Plaza Accord of 1985, when the world's major economies gathered to devalue the dollar and rise up the Japanese Yen.
Moreover, since the idea of diplomatically isolate the second largest world power is simply not viable, and at best absurd and far from being constructive, whatever happens in the near future, either China carrying on its pig-headed defensive role which may just produce further stir for the recovery of the global economy, or in the contrary, they finally give in to a more conciliatory stance that would help to settle the dust, the nation looks set to face an unstable future on its fake currency value, as the cost of maintaining the order on its manipulative practices will rise as the merits of its system's economic fundamentals force them to stark new challenges.
China should be unhesitatingly prepared to play the moral high ground in major financial markets, as adherence to a newly adjusted international set of rules to free-up Yuan exchange rate becomes a must. As the nation shows no respite from its fast-growing expansion, the responsibility for managing Yuan's exchange rate extends now far beyond the leadership in Beijing, to become a global political issue. In this context, it looks as though Chinese ambitions and greed towards themselves acts as a blockage not allowing them to see the big picture, where rigor and responsibility towards the rest should grow in importance.
http://www.fxstreet.com/fundamental/market-view/china-the-yuan-dance/2010-10-13.html