Category Archives: China

China Central Bank says Fed easing ineffective, dangerous

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I suspect they know better but continue to play us for the fools we have proven to be.

Fortunately they want to net export…

China c.bank says Fed easing ineffective, dangerous

January 30 (IBTimes) — Quantitative easing by the Federal Reserve and other central banks cannot address fundamental economic problems but may lead to excessive global liquidity and competitive currency depreciation,China’s central bank said on Sunday.

In its monetary policy report for the final quarter of 2010, the People’s Bank of China (PBOC) also confirmed that it would target 16 percent growth of the broad M2 measure of money supply this year, down from the 19.9 pct growth recorded at the end of 2010.

The central bank said the Fed’s monetary easing was pushing up international commodity prices and asset prices in emerging markets, including China.

“Quantitative easing policy cannot fundamentally address economic problems, and it may cause excessive liquidity on a global scale as well as risks of competitive currency depreciation,” the Chinese central bank said in its 59-page report.

“It is creating imported inflation and short-term capital inflows, pressuring emerging markets,” it said.

As a result, China needed to work hard to soak up liquidity from foreign exchange inflows in order to minimize the impact on the domestic economy, it added.

The central bank reiterated that it would keep the yuan CNY=CFXS basically stable while making the exchange rate regime more flexible.

The central bank said it would continue to use different tools, including interest rates, bank reserve requirements and open-market operations, to rein in money supply and bank credit growth as a way of handling inflationary pressure.

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Inflation Slowing China’s Export Engine

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This is the force that ‘naturally’ brings the currency into line, and then can make it a lot weaker.

And the only way China knows to ‘fight it’ is probably with moves that will will result in a recession.

Inflation Slowing China’s Export Engine
Published: Sunday, 30 Jan 2011 | 10:46 PM ET

Inflation is starting to slow China’s mighty export machine, as buyers from Western multinational companies balk at higher prices and have cut back their planned spring shipments across the Pacific.

Markups of 20 to 50 percent on products like leather shoes and polo shirts have sent Western buyers scrambling for alternate suppliers. But from Vietnam to India, few low-wage developing countries can match China’s manufacturing might — and no country offers refuge from high global commodity prices.

Already, the slowdown in American orders has forced some container shipping lines to cancel up to a quarter of their trips to the United States this spring from Hong Kong and other Chinese ports.

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Clinton presses OAS solution to Haiti impasse

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So we send our Secretary of State to Haiti at the height of the Egyptian crisis?

Maybe it’s to highlight that we can’t even get it anywhere near right with Haiti, so don’t expect anything out of the US with regard to promoting human rights and representative government in Egypt.

Nor, of course, do we have any idea regarding improving the lives of majority of the citizens of the world, including our own, as we continue to believe the US govt. has run out of money and is dependent on borrowing from the likes of China and leaving the tab to the grandchildren.

Meanwhile, the risk of oil and trade disruption from the Egyptian crisis remains, however markets are today telling us they don’t think it will be much of an economic event, as the world watches to see if it spreads to other ‘non democratic’ regimes in the region.

Clinton presses OAS solution to Haiti impasse
Published: Sunday, 30 Jan 2011 | 9:27 PM ET

 
PORT-AU-PRINCE – Secretary of State Hillary Clinton urged Haiti’s leaders on Sunday to adopt an internationally backed solution to untangle an election dispute, saying the poor, earthquake-battered country needed a stable government to rebuild.

 
Clinton held talks in Port-au-Prince with outgoing Haitian President Rene Preval and leading presidential candidates on a visit overshadowed by the unfolding political crisis in Egypt.

 
She said she delivered the message that Washington wants Haitian authorities to enact recommendations by Organization of American States experts that revise contested preliminary results from chaotic November 28 elections in the Caribbean nation.

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Senator Pat Toomey- Pay China First Act

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Gets stupider by the day…

“Sen. Pat Toomey (R-Pa.) introduced what Democrats are calling the “Pay China First Act,” which would require the federal government to pay all its debt obligations first and everything else — vets, schools, you name it — with what’s left.”

Okay, so we tell Ben Bernanke to press the “China debit/credit buttons” on the keyboard first. That should take about 2 seconds, and then we can get back to crediting and debiting everything else as we always do.

This is what supposedly qualifies for serious economic debate in the US these days.

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State of the Union

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Some of the risks listed at year end seem to be coming on line, including slower growth out of China, euro austerity keeping a lid on demand in the euro zone, and US fiscal balance too tight for anything more than very modest top line growth, given current credit conditions and the negative income effects of near 0 interest rate policy and QE.

With crude oil continuing to soften, and Brent looking to close the gap with WTI by falling more than WTI, the dollar continues to gain fundamental support as it becomes ‘harder to get’ overseas.

And falling gold and silver prices, along with most other commodities, are showing a world that is sensitive to those indicators that QE2 doesn’t look to have been at all inflationary, leaving many people with positions they otherwise would not have taken (long gold, silver, commodity currencies, and other implied ‘short dollar’ positions).

The risk here is that the dollar gets very strong, and commodities very weak, which can lead to a US equity correction as well as a strong bond rally, all contributing to a deflationary malaise, as the theme remains:

Because we believe we can be the next Greece, we continue to work to turn ourselves into the next Japan

Which includes a misguided national effort to export our way to prosperity, which is likely to be featured by the President tonight.

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macro currency update

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So it looks to me like all the major currencies have somewhat strong fundamentals.

That is, policy is working to make them ‘harder to get.’

EU and UK austerity policies are proactively cutting net govt spending from where it was.

And the EU has figured out that the ECB can fund at will entirely without ‘finance’ concerns, gradually removing the perceived chances of catastrophic defaults and the break up of the currency union with each succeeding intervention.

While higher crude prices are making the $US a bit easier to get offshore, interest rate policy, including QE2, is removing dollars from the non govt sectors that would have otherwise been paid out by the US govt, and domestic credit expansion remains anemic, particularly with regards to housing, the traditional source of ‘borrowing to spend.’ And the international stampede out of the dollar due to unwarranted fears of QE2 is still in the process of getting reversed. This flight took a variety of forms, from selling the dollar vs other currencies to buying gold, silver, and other commodities in general.

China is tightening up on state sponsored lending which makes yuan harder to get as they ramp up their politically motivated struggle to fight inflation.

And there are at least some noises that even India and Brazil seem to be at least leaning towards less inflationary policy, though sometimes misguided.

And while Japan has done a bit of fiscal expansion, and a bit of dollar buying, markets are telling us it hasn’t done enough, at least not yet, as the yen remains firm even after more than a decade of a near 0 rate policy.

All the currencies getting strong at the same time with only minor shifts in relative value is also evidenced by a general deflationary bias in the market place.

And, as previously discussed, this is coming after rising commodity prices have had a chance to bring on higher levels of supply.

Low interest rates have also added their positive supply side effects, as inventory is cheap to hold and capacity cheap to bring on line and keep in reserve.

Historically, private sector credit expansion has kicked in as economies recover, replacing the aggregate demand from government deficit spending, as the automatic fiscal stabilizers work to increase tax payments and reduce fiscal transfers for the likes of unemployment compensation.

This time, however, it seems to be different, with govts. taking proactive measures to contain and reduce deficits rather than continuing the govt. deficit spending until the hand off to private sector credit expansion takes over and the automatic fiscal stabilizers kick in.

In other words, for the size govt we have, we remain grossly over taxed as evidenced by the still massive output gap.

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Gross misrepresentations

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My comments following Bill Gross’s comments:

I don’t know if the U.S. has reached a desperate point, but it is employing instruments and vehicles and policies that smack of desperation.

He fails to see the function of federal taxes is to regulate aggregate demand, and not to raise revenue per se.

We are not looking at a default here, but at years of accelerating inflation, which basically robs investors and labor of their real wages and earnings.

Apart from the possibility that he’s wrong, and that there will be no accelerating deflation, inflation per se does not make a nation poorer, and does not necessarily reduce real wages and earnings. In fact, real wages could very well be made to increase during an inflationary period. It’s all about policy responses and institutional structure. And as for investors, some will do well and some will do poorly, which most don’t consider an injustice.

We are looking at a currency that almost certainly will depreciate relative to other, stronger currencies in developing countries that have lower levels of debt and higher growth potential.

Maybe and maybe not on both scores.

The dollar may not depreciate.

And lower levels of public debt and higher growth potential do not necessarily mean a currency will appreciate.

For example, Japan has had perhaps the least growth potential and one of the strongest currencies for quite a while, and China has had a policy of keeping its currency weak which has been credited with fostering high growth, etc.

And, on the short end of the yield curve, we are looking at creditors receiving negative real interest rates for a long, long time. That, in effect, is a default.

No, it’s a policy option.

A default is a promise broken.

And there is no national promise by any nation to provide a real return to savers at the short end of the curve.

Ultimately creditors and investors are at the behest of a central bank and policymakers that will rob them of their money.

That’s a serious and groundless accusation of motivation of the Fed.
Robbing implies dishonesty and involuntary confiscation.

However no one is forced by the Fed or anyone else to hold dollars in money market accounts, investors buy securities with known nominal interest rates, and for all practical purposes investors know much the same information regarding inflation as the Fed does.

So when William Gross uses the word ‘rob’ he’s implying the Fed is deliberately publishing false inflation forecasts to trick investors into buying US govt securities at rates lower than if they knew the Fed’s actual inflation forecasts.

I suggest an immediate apology is in order for this groundless, inappropriate, and insulting remark.

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China agrees to purchase billions in US goods

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So President Obama declares victory because we get to build planes and send them to China.

And why?

To get our dollars back, of all things, as if there’s any public purpose to that.

And so because we continue to believe we could be the next Greece, we continue to turn ourselves into the next Japan.

Which includes being an exporter, just like Japan.

China agrees to purchase billions in US goods

January 19 (CNBC) — The Obama administration, trying to build ties with an economic rival, said Wednesday that China would buy $25 billion in U.S. goods and had given final approval to a long-negotiated $19 billion deal for 200 Boeing planes.

The announcement came as Chinese President Hu Jintao arrived at the White House for a state visit with President Barack Obama.

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US pressing China to buy tens of billions of dollars in US aircraft, auto parts, agricultural goods and beef “to build goodwill”

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I call it a completely misguided sense of public purpose as a direct consequence of not understanding monetary operations:

U.S. Presses China for Deals

By Bob Davis

January 15 (WSJ) — The U.S. is pressing China to buy tens of billions of dollars in U.S. aircraft, auto parts, agricultural goods and beef to build goodwill when the two countries’ leaders meet Wednesday.

In the run-up to the closely watched event between Chinese President Hu Jintao and President Barack Obama, the two countries are jockeying to set the agenda for the visit, as they haggle over deals. The White House expects the centerpiece of the package to be the sale of Boeing Co. jets.

Leaders of both nations say they want to show that the U.S.-China relationship, which was on the skids last year, is back on track and is mutually beneficial. But they also want to frame the meeting in a way that plays most favorably at home.

“Our relationship is marked by great promise and real achievement,” said Secretary of State Hillary Clinton in a speech on Friday. “And more than ever it will be judged on the outcomes it produces.”

Mr. Hu’s last state visit, in 2006, came before the global financial crisis when the U.S. was clearly a dominant economic power. Since then, China has become the world’s second-largest economy and its state-orchestrated style of development has become a rival to the U.S.’s more market-oriented approach.

Chinese deal-making is part of nearly all of their state visits abroad—it announced $16 billion in deals in India last month. And given a trade gap with China on track to pass $250 billion last year, the U.S. visit will likely be dismissed by China critics as insufficient.

But the White House considers the deals a way to show concrete benefits from the encounter, when many other issues being discussed—including Iran, North Korea and intellectual-property issues—aren’t easily resolved. The Obama administration also wants to show its ability to add jobs during a time of 9.4% U.S. unemployment.

Given tensions in past months between the two powers, China wants the meeting to go off smoothly and to underscore its new world stature. Since Mr. Hu’s last visit to the White House, “China has grown into this strong young man from a teenage boy,” said Zhuang Jianzhong, deputy director of the Center for National Strategic studies at Shanghai’s Jiao Tong University.

The U.S. goal is tangible progress on issues including trade, currency policy, North Korea and Iran.

In her speech, Mrs. Clinton singled out the need for China’s military “to overcome its reluctance at times to join us in building a stable and transparent military-to-military relationship.” She was referring to the Chinese military’s recent rebuff of Secretary of Defense Robert Gates’s bid to re-establish close, regular meetings at top levels.

Mrs. Clinton also said it was vital China join the U.S. “in sending North Korea an unequivocal signal that its recent provocations—including the announced uranium enrichment program—are unacceptable.” The U.S. recently credited Beijing for convincing North Korea to calm tensions after it shelled a South Korean island.

This past week, Undersecretary of State Robert Hormats, Commerce Undersecretary Francisco Sanchez and Deputy U.S. Trade Representative Demetrios Marantis spent three days in Beijing ironing out trade and investment issues. They focused on two Chinese buying trips, headed by senior officials of the Chinese Ministry of Commerce and the China Council for the Promotion of International Trade, that are set to begin Saturday and run through Jan. 21.

The two groups plan to visit half a dozen cities, including Boeing’s home base of Chicago, where Mr. Hu will meet with U.S. and Chinese business executives Friday.

The aircraft purchases are a priority because Boeing is a symbol of U.S. export strength, and it has facilities and subcontractors around the U.S. China also has great purchasing flexibility when it comes to aircraft because carriers’ deals aren’t final until they are approved by the government.A Boeing spokesman declined to comment.

China is also looking to highlight its role as an investor in the U.S. auto industry. SAIC Motor Corp., China’s largest auto maker, recently bought a $500 million stake in General Motors Co., just under 1% of the company. Chinese investors have bought stakes in auto suppliers.

The focus on purchases, said a senior U.S. official is “in part to reduce the trade imbalance, in part to demonstrate to the American public that there are real job benefits to the relationship with China and, in part, to improve the overall tone and to make the trip successful.”

On other commercial issues, the U.S. is pressing China to provide a specific plan for how government agencies and state-owned businesses will buy legitimate software, not knock-off versions. Beijing has already committed to such purchases.

The White House is also seeking commitments that U.S. firms in China won’t be shut out of government-backed projects for high-tech products. The U.S. official said it was unclear at this point how much progress would be made in those areas.

China is looking to use the state visit to compel changes in U.S. policy. Beijing blames the Federal Reserve’s low interest rates and bond purchases for worsening China’s inflation. A delegation of Chinese academics have been visiting Washington, urging the Fed take into account the problems of developing nations when setting policy.

There is little chance the U.S. will agree, said Eswar Prasad, a China scholar at the Brookings Institution, who met with the academics, because of the Fed’s mandate to consider domestic economic concerns when setting policy. The Fed also believes boosting the economy helps the global economy because so many nations rely on the U.S. market.

Foreign-exchange policy is also bound to be a big issue at the Obama-Hu meeting. Since China announced in mid-June that it would lets its currency float somewhat, it has appreciated about 3.6%—with the yuan strengthening in recent days to new heights.

When accounting for the effects of higher inflation in China compared with the U.S., Treasury Secretary Timothy Geithner said the yuan is moving up at a pace of about 10% a year. That is getting closer to the level the U.S. would like to see.

Either China lets the currency rise to fight higher prices, Mr. Geithner argues, or higher prices will make Chinese exports more expensive anyway. In either case, “competitiveness is going is shifting now in our favor,” he said.

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Proposal for Japan and China- buy US state muni bonds!

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My proposal for Japan and China is to announce a plan for each nation to purchase up to $150 billion of US state municipal bonds to help out the US states during these difficult times.

They would be welcomed as rescuers, much like they have been with their announcements to buy securities from troubled euro zone member nations.

While at the same time, buying $US financial assets in the form of state muni debt would work to weaken their currencies vs the dollar and support their export industries.

Doesn’t get any better than that!

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