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Last week China economy review and analysis (April 07, 2010)

Contributed by Daniel Stewart & Company

By Daniel Stewart & Co

Another country to report an increased PMI Manufacturing survey: quite sharply up at 55.1. The People’s Bank of China published a report suggesting that USD’s current rebound will be limited because of the deficit and continuing low interest rates. The Chinese are clearly and understandably nervous of the renminbi being ‘stranded’ like the yen in the 1980s and 1990s following its revaluation. Deputy PBOC Governor Zhu Min spoke at Davos in January of his fears about the instability that would arise if the USD became entrenched as a major vehicle in the international currency carry trade. This would involve speculators borrowing cheaply in dollars and selling them to invest the proceeds in countries with much higher interest rates (e.g. into China if the current restrictions were lifted). However, Mr Zhu has also opined that at some stage China ‘should and could move to a floating currency’ and commented that the public deficit problem in Greece was just a start. (Mr Zhu was appointed a special adviser in February to Mr Strauss Kahn at the IMF, a position which the Chinese feel does not reflect their place in the global economy: we are going to hear a lot more from him nevertheless).

Mr Hu Jintao, the Paramount Leader, has accepted President Obama’s invitation to Washington to attend a conference on nuclear disarmament on 12-13 April: a sure sign of the continuing thaw in relations after the snubs at Copenhagen. This appears to have given Mr Geithner the pretext to delay his report to Congress on exchange rate policy until after both the G20 (Finance Ministers’ and Central Governors’) meeting on 22-23 April and the Strategic & Economic Dialogue Economic Meeting with China in May. The Chinese are reported to be very pleased but not so the hawks in Congress.

The Sino-Chinese 'dance' will continue with a visit by Secretary Geithner to Beijing to meet Vice Premier Wang. Apparently, they have been trying to meet/dance for some time. Meanwhile the Chinese are considering adding the rouble, won and ringgit to the currencies they offer fixed rates for, to facilitate trade (they already offer rates for the dollar, euro, yen, Hong Kong dollar and the pound). More importantly, they are preparing to issue three year bills for the first time for nearly two years. This is a means of mopping up excess liquidity and is being seen as a precursor to either a revaluation and/or an interest rate increase. Non deliverable forward rates are now signalling a 3% revaluation of the renminbi to 6.6 against the dollar.