Sunday, February 27, 2011

Interesting Commentary From China Regarding The RMB

Part if not all of the goal of quantitative easing is to force China's hand at revaluing the RMB, thus making US exports more competitive and bringing jobs back home.  China has refused to revalue and as a result has faced growing inflation at home.  Bernanke has even hinted at times that if countries do not like the results of "our" monetary policy they should adjust "their" currency.  That's about as direct a central banker can be without writing down a country's monetary policy for them.

The choices for China are rather difficult.  Inflation, especially in the face of the global unrest that has developed recently threatens instability within their country.  Rice has now started to move up in price as well adding further pressure.  Tiananmen Square was partly a result of inflation concerns and the last thing China wants as they try to become a more dominant player in the world are pictures of tanks rolling in the street at protesters.

Should China decide to raise the value of the RMB they can fight inflation, to some extent but they risk losing jobs.  Is there much of a difference between higher inflation with a job or lower inflation without a job?  Additionally China is trying to slow down its own economy to manage what many see as a bubble in asset prices.  Chinese Premier Wen Jiabao seems somewhat concerned with the precarious situation China finds itself in a recent speech (from Reuters).

"Rapid price rises have affected the public and even social stability," Wen said.

Wen said maintaining social stability was also central to the country's foreign exchange policy, requiring a step-by-step increase in yuan flexibility so that Chinese businesses could adapt to the changes.

"If the yuan saw a one-off large appreciation, that would cause many closures of our processing enterprises and make many export orders shift to other countries and many of our workers will lose jobs."

"Let them think about that: if businesses go bankrupt, workers become unemployed and rural migrant workers go home, then what do we have to expand domestic consumption, where will increased consumption come from?"

"I have in fact said before that if price rises become linked to the problems of graft and corruption, that will be enough to spark public discontent, and even create serious social problems," Wen said.

The war between Bernanke and China is clearly on per Wen's comments.  He seems to take a soft tone and almost concedes that China will revalue the RMB over time but I suspect their timeline is not that of Bernanke who needs jobs in the US immediately, not in two years.  No one ever holds all the cards in a negotiation but clearly Wen is showing a weaker hand, something  that may unfortunately inspire Bernanke to continue QE in June.

Lastly, another comment regarding growth forecasts was rather interesting and clearly shows China is concerned about an overheating economy and managing a goldilocks scenario which many have tried and I don't think any have succeeded.

Wen also said the official GDP target was 7 percent per year for the 2011-2015 developmental plan. That rate is significantly below the average annual 11.2 percent growth during the last five-year period, but growth targets tend to undershoot actual performance.


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