So much for that then.
In remarks that put a period to the annual meeting of China’s National People’s Congress Premier Wen Jiabao said that China’s currency is not undervalued. “We oppose all countries engaging in mutual finger pointing or taking strong measures to force other countries to appreciate their currencies.”
I think that puts an end to any hopes that China would start to let the renminbi appreciate against the U.S. dollar in the window before the state visit of China’s leaders to the United States in April. The currency futures market apparently agrees. On Monday March 15 the non-deliverable 12-month futures contract dropped 0.3% to 6.6435 renminbi to the dollar. That’s the biggest drop in more than a month. The Chinese currency is now pegged to the U.S. dollar at 6.83 renminbi to the dollar.
Keeping the renminbi pegged to the dollar makes it tougher for China’s government to fight inflation and to curb speculative excess in China’s real estate and stock markets. An undervalued renminbi—or even just the perception of an undervalued renminbi—brings more hot money into the country, pushing up prices for stocks and real estate. And this at a time when inflation seems to on the market—the annual inflation rate rose to 2.7% in February from 1.5% in January.
At the same time as Wen was ruling out any appreciation in China’s currency, he also stepped up the fight against inflation. And that rattled markets.
He announced a new inflation target of just 3% for 2010. That target is significantly lower than last year’s target of 4% inflation. The premier also raised the rhetorical stakes saying “If there is inflation plus unfair income distribution and corruption, it will be strong enough to affect the stability of state power.”
All this talk of fighting inflation and of tougher inflation-fighting goals—while currency appreciation is at the same time off the table—has convinced financial markets that Beijing has accelerated plans to increase ban k reserve requirements again—perhaps as early as this week–and to raise interest rates—perhaps in April.
The worry, of course, is all this would slow China’s economy. On Monday, March 15, the Shanghai Composite stock index fell 1.5%. Commodity prices also declines with copper, for example, down 0.8%.
dkchinabiker,
Well said. I would add that our “nanny government society” mentality does NOT prepare us for dealing with China. China can be a useful friend or a dangerous foe. But we should NEVER underestimate them.
Thinking of China, I am reminded of the trainer who got killed by the Orca recently. China is a lot like an Orca: You may have it “contained”, but don’t think for a second that you have it controlled. China plays by it’s own rules, and you either respect those rules or pay the price.
When dealing with China, put all your feel-good ideals to the side. I’m not suggesting war; I AM suggesting we play dirty pool if we have to. This is like a poker game, where you know the other guy is cheating, but you’re still playing anyway.
andante: When is the playing field ever level? Take F1 for example. Budgets are never level. Ferrari almost always win. My mom told me Life is not fair. I guess many of us have to remember this lesson. Obviously our playbook is not working. We as a country need to put something in the playbook to level the opposition, but our government have been nearsighted. We should not expect China to level the playing field.
love a good cat fight…
Upside,
I have all three, but I appreciate your concern for my well-being.
Jim in an upcoming post do you think you might be able to explain how it is China can kept their currency pegged to the dollar? Or anyone else who is up to it please feel free too. I am not exactly sure how it works. I am sure it has something to do with buying dollars or something, but not sure if that’s all there is to it.
Thanks!
andante: China is a tough country to negotiate with. The reason is that they care the most about economic sense of any negotiations. I know many companies who turned down Chinese offers, because they were not so good in a long term, i.e. required tech transfer to Chinese. However, many US companies are nearsighted and are willing to get short-term benefits by giving up the IP rights. Get rich quick scheme. Whom to blame? Chinese? I do not think so …
Thanks Ed, I’m sure the National People’s Congress will take your advice into account.
Get a life, get a job, or get your own blog.
Competition is great but the playing field is not level. And China wants foreign companies to turn over their playbook (patents and their most sensitive technology) before they can play on their field.
Look up mercantilism in your online encyclopedia. The people in places like Michigan understand what this means to them.
Chinese are trying to address their own problems using their ways of doing things. It is their right to do so. Alternatively, they can use Greek ways of doing things.
I do not understand what is a big deal about it? If you can’t compete with Chinese directly, find your own way to compete with them.
China has no property tax. The Chinese government apparently parceled out land to cities who sold it. Speculators can own large amouts of property without having to pay any taxes on it. Wen took the issue of property tax that some in China were proposing off the table and instead decided to use tightening of credit.
Yea, figures. I was waiting for your 11.50 tip and when it hit 12 last week I ALMOST pulled the trigger. OOooops.
tater,
You saw what happened? SBAY just got approved to uplist to NASDAQ. Even the next downswing won’t take it back to friday’s close.
Ed, looks like I missed the boat on SBAY. Until the next down swing that is!
Without manipulating their currency, I don’t see how the Chinese plan to fight inflation? Bank reserve requirements and raising interest rates are all well and good, but as long as the money is already in the economy, and as long as it continues to flow into the economy (via their exporting), there’s no inflation fighting being done. What they need to do is raise taxes, and pay down their debt.