Geithner Could Label China As A Currency Manipulator Come April

The Greek debacle has been dying down a bit after attempts by bigger EU nations to placate the markets. While the Greece situation is still dicey, it is still in ICU but showing signs of life and recovery. Now we have a new looming "bear factor" coming to play with a fixed deadline, mid-April.



There have been furious behind the scenes negotiations that have basically gone nowhere. Now the discussions, opinions and grouses are being publicly aired - obviously after the secretive discussions went nowhere, the US BSDs will have to air their attempts to the democratic Senate, telling them that they have tried. Just weeks before he makes a decision whether to label China a "currency manipulator," which could trigger tougher action against Beijing, Geithner said last week that Beijing should allow its yuan currency, which is virtually pegged to the US dollar, to appreciate in a reflection of market expectations.

"We can't force them to make that change. But it is very important that they let it start to appreciate again," he said.

Some experts believe the Chinese currency is undervalued against the dollar by up to 40 percent. The United States and China's other trading partners claim that it gives the Asian giant an unfair trade advantage by making Chinese exports cheaper. US lawmakers have called on Geithner to label China a "currency manipulator" in a mid-April US Treasury report, as they demanded Beijing to revalue the yuan.

The exchange rate is the most important factor in determining U.S. export competitiveness. Every increase of 1 percent in the dollar, averaged against other major currencies, reduces US exports by about $20 billion annually and destroys about 150,000 jobs. The recurrent overvaluations of the past 30 years, when the dollar became overpriced by 30 to 40 percent, contributed significantly to the decline in manufacturing jobs and was the major cause of the huge current account deficits of most of that period.

The policy goal should be a competitive exchange rate that produces a sustainable trade balance, rather than a "strong dollar." Fortunately, the decline of the dollar since 2002 has virtually restored equilibrium in its value against most other industrial countries' currencies.

Fred Bergsten said that the remaining large misalignment is the undervaluation of at least 25 percent of China's renminbi and the currencies of several important economies surrounding it (Hong Kong, Malaysia, Singapore, Taiwan). How to make a correct statement but with all the wrong examples. Yes, the HKD is undervalued but its not their active manipulation that causes that, OMG its been pegged to the USD for 20 years - if anything it just shows that HK has been a lot more competitive and productive using the same currency.

Singapore is not overvalued, if anything they have let their currency to appreciate as they wanted to be progressive and hive off the labour intensive industries. So Fred's very wrong there. As for Malaysia, well he is right on the dot. As much as the yuan is undervalued, Bank Negara has been keeping the ringgit in step with the yuan for the past 5-7 years. BN is more concerned on pricing Malaysia's industrial competitiveness rather than letting the ringgit appreciate on its own. Taiwan's currency is also slightly undervalued but nowhere as much as the ringgit. Of in my view, if the yuan is 40% undervalued to the USD, the ringgit is about half that.

If China continues to block any rise of the renminbi, the administration should label it a currency manipulator and escalate pressure, including by taking China to the World Trade Organization.

Obama has entered into negotiations for a Trans-Pacific Partnership with seven Asia Pacific nations, a group that could shortly expand to include a critical mass of countries in that region and eventually evolve into the Free Trade Area of the Asia Pacific that President George W. Bush proposed in 2006. The administration should aim to conclude these talks when the United States hosts the annual summit of the Asia-Pacific Economic Cooperation forum in 2011.

The Obama's administration should abandon its plan to increase taxes on the overseas activities of U.S. firms because their foreign investments clearly increase U.S. exports. Several modest tax reforms could enhance our international competitiveness, including to attract direct investment here by foreign companies that would then access many of their global markets from the United States and create jobs here.

The administration and Congress must avoid hurting U.S. competitiveness when they inevitably move to raise tax revenue substantially over the next few years to help curb the budget deficit. Increases in corporate income tax rates would jeopardize exports by raising U.S. production costs. By contrast, a value-added tax or national retail sales tax, or better yet a gasoline or carbon tax, could be fully rebated at the border on exports (and imposed at the border on imports) and thus avoid such harm. Positive export and job expansion would be fostered by replacing some or all of our current income tax system with these alternative devices.

In the past a rising renminbi hasn’t reduced China’s surplus, the United States can’t produce many of the goods it now imports from China, so most of the jobs won't get shipped back even if the yuan is revalued 20%. In many cases, Chinese exports compete with those of other developing nations. If the renminbi rises, those nations would become more competitive – and would also find their currencies appreciating against the dollar, offering new channels for onshoring.
China is an economy in the process of rapid transformation – exactly the circumstances in which a real exchange rate that makes sense one year may be way off base just a few years later.

The U.S. administration feels that the policy of keeping quiet on China and instead engaging its leaders privately has failed. The U.S. grudgingly accepted for a while that China was bound to re-peg in the middle of the economic and financial storm of 2008-09 as it was rapidly losing exports and experiencing a sharp growth slowdown.

A formal U.S. statement that China is a currency manipulator would not trigger automatic U.S. trade sanctions against China; rather, it would lead to a negotiation process that bilaterally—or possibly multilaterally with the IMF—would rectify the situation. Trade sanctions would be the eventual outcome of failed negotiations. In fact, it could take the better part of a year for disputes to be lodged with the WTO and trade sanctions imposed. But certainly even a formal U.S. statement that China is a currency manipulator would significantly raise trade tensions and nervousness in financial markets about a trade war.

The real-estate boom is turning into a bubble, with home prices rising more than 32% in the largest cities in the last year alone. Ghost towns are popping up all over China as the increase in the supply of commercial real estate, with vacancy rates in office space of 20% in Beijing and 16% in Shanghai, and of residential real estate, especially at the high end of the market, is becoming serious. Even in infrastructure, China has advanced too far for a country at its level of development, as evidenced by empty highways to nowhere, bullet trains that no one uses and fancy, empty new airports.No country in the world is productive enough to take almost 50% of GDP every year, reinvest it into more physical capital stock to produce more goods and services and not end up with a glut of capacity that will eventually cause low returns, rising nonperforming loans and rising implicit liabilities for the public sector.

Letting the currency appreciate is key for achieving the stated goal of increasing consumption's share of GDP.The financial market consequences of such a move could be significant: If the decision is unexpected, global stock markets could fall by several percentage points once the ugly M word is uttered by the U.S. Treasury. And so far, financial markets don’t seem to be pricing in such an outcome. History suggests that even threats of trade protectionism can sharply move financial markets. Take 1987: The U.S. had a very large current account deficit, in spite of the dollar falling since 1985, and the major U.S. trade partners (Japan and Germany, which were running a large surplus with the U.S.) were resisting the U.S. push for further rapid appreciation of their currencies against the U.S. dollar. On a Sunday morning, as tensions were rising, then-U.S. Treasury Secretary James Baker appeared in a TV interview and implicitly threatened a trade war if Germany and Japan were to resist further appreciation of their currencies. The next day, the Dow Jones index fell by 20% in the infamous October 1987 stock market crash.


p/s photos: Ju Daha

Xinjiang Oil Boom Ignites Uighur Unrest

This was an prescient article by Jamil Anderlini in Korla, Xinjiang, published: August 28 2008 in The Financial Times.

“Offer energy resources as tribute [to Beijing] to create harmony” proclaims a giant billboard outside a petrol station in Korla, in China’s restive western frontier region of Xinjiang.

The increasing importance of the Muslim-dominated Xinjiang autonomous region as a source of the energy and minerals needed to fuel China’s booming eastern cities is raising the stakes for Beijing in its battle against separatists agitating for an independent state.

Unequal rights: in spite of affirmative action programmes, any jobs in the region that wield any real power are held by Han Chinese, who now make up 70 per cent of its population

“The Chinese didn’t want to let Xinjiang be independent before, but after they built all the oilfields, it became absolutely impossible,” said one Muslim resident in Korla, who asked not to be named for fear of retribution by government security agents.

The desert around the city is punctuated every kilometre or two by oil and gas derricks, each of them topped with the red Chinese national flag, an assertion of sovereignty over every inch of the energy-rich ground.

Korla itself is an important junction on the 4,200km-long west-east gas pipeline that carries natural gas from Xinjiang to Shanghai.

A brand new airport, high-rise office blocks and scores of new apartment complexes are proof that the city is reaping the fruits of an energy boom that has seen annual natural gas production in the surrounding Tarim Basin increase 20 times between 2000 and 2007. But the vast majority of profits from the industry are sent back east, along with the oil and gas.

In 2005, Xinjiang’s local government was allotted only Rmb240m ($35m, €24m, £19m) out of the Rmb14.8bn in tax revenue from the petrochemical industries that are based in the region.

In Korla, the oil industry is under the control of a subsidiary of PetroChina, the state-owned energy giant, which answers directly to its head office in Beijing.

“We don’t have the power to tell them to do anything – they only listen to their bosses in Beijing,” said one local government official who asked not to be named.

Many of Korla’s original Uighur residents feel they have missed out altogether on the few benefits that have trickled down to the region from the rapid extraction of its energy resources.

Mineral exploration began in the Tarim Basin at the start of last century but it was not until 1958, nearly a decade after the Chinese Communist revolution and the re-conquest of Xinjiang, that the first oilfield went into production.

At that time Uighurs, a Muslim Turkic people with stronger links to central Asia than the rest of China, were the only inhabitants. Today, Han Chinese from central and eastern provinces make up 70 per cent of the population in Korla.

“A lot of Uighurs say this whole area used to belong to them, and now they are strangers in their own home,” said Xie, a shopkeeper whose parents were sent out to Korla from their native Hunan province in the 1950s to work in a bomb-making factory for the People’s Liberation Army. “Some of them are very angry and they’re causing more and more trouble these days.”

Uighur resentment has been exacerbated by a massive security operation timed to coincide with the Olympic and Paralympic Games period. Under the auspices of ensuring a “peaceful Olympics”, the government has set up roadblocks and security checks and dispatched armed street patrols, all of which has failed to stop a number of attacks by suspected separatists in recent weeks that have left more than 30 dead. Two policemen were killed on Thursday in a clash with armed Uighurs.

At a checkpoint outside Korla, “wanted” posters display the mugshots and personal details of 11 Uighurs, some as young as 17, who are being pursued for the crime of selling banned literature, including DVDs and books on the creation of an Islamic state.

Amnesty International says Xinjiang is the only part of China where people are regularly executed for political offences.

“There are a lot of people who want Xinjiang to be independent of China but we personally don’t even dare think those thoughts,” said one Uighur in Korla when asked what he thought of the separatist cause.

On Petrochemical Boulevard, the main street in Korla, the only visible Uighurs are street cleaners and the odd waiter hanging out in the doorway of a Muslim restaurant.

Locals say Uighurs are sometimes given low-level jobs in the oilfields, but there are none in management positions in Korla. In spite of affirmative action programmes that reserve a proportion of official posts for minority groups, all government and military positions with any real power are held by Han Chinese.

PetroChina and its Korla subsidiary refused to be interviewed, but one former employee said discrimination was rife within the company.

“There used to be two Uighurs driving for the oil company here,” said this former employee, who asked to be known only by his surname, Ma. “But they were moved to a different work unit because the bosses think Muslims are all terrorists and separatists.”

p/s photos: Macy Chan

Beijing's BYO To The Party

Beijing has unveiled a 4 trillion yuan (HK$4.54 trillion / US$582bn) economic stimulus package to help boost domestic demand - in what is seen as a shift to "proactive" fiscal and "moderately easing" monetary policies.

The measures, which run until the end of 2010, were announced after a meeting of the State Council chaired by Premier Wen Jiabao, Xinhua News Agency reported. Some 100 billion yuan (US$12.8bn) is earmarked for this quarter alone.

The spending will focus on 10 areas, including low-cost housing, infrastructure in rural areas, and social welfare, in addition to transport networks - railways, highways and airports - environmental protection and technical innovation.

It also includes capital expenditure to renew city power grids. Some of the spending overlaps longer-term stimulus plans reported earlier - including a 2 trillion yuan railway plan and 5 trillion yuan expenditure on roads, waterways and ports from 2006 to 2020.

BNP Paribas chief economist Chen Xingdong said: "This is the first time China has officially confirmed the shift to easing monetary and fiscal policies. Although it was a 'slow heating up process,' it shows the government's realization of the urgency to bolster economic growth." Economists have been anxiously waiting for a huge stimulus plan ever since gross domestic product growth slowed to 9 percent in the third quarter from 10.4 percent in the first half.

"At the Central Economic Work Conference, to be held later this month, Chinese leaders are expected to announce concrete measures to stimulate the economy ... Beijing's new policy drive of upgrading infrastructure, rural land reforms, and expansion of social welfare is akin to a 'New Deal' with Chinese characteristics," said Jing Ulrich, chairman of China equities at JPMorgan. China's economy grew at the slowest pace in five years in the three months through September as export orders shrank amid the global financial turmoil. Domestic industrial production also fell after Beijing ordered heavily polluting factories to shut down ahead of the Olympic Games in August.

The Cabinet also confirmed that reform of the value-added tax system will cut companies' tax bills by 120 billion yuan. Beijing will also remove credit limits of commercial banks to further encourage lending support to small and medium-sized enterprises. The People's Bank of China has cut interest rates three times since mid- September. People's Bank of China governor Zhou Xiaochuan, meanwhile, said the central bank forecasts the mainland economy to expand between 8 and 9 percent next year.

The success of this plan depends crucially on continued government credibility in the face of rapidly rising deficits as well as on the health and stability of the banking system.If the banking system can withstand a downturn without any significant rise in NPLs and without forced credit contraction, this may be the shot in the arm China and the world needs. This move by China is a very big hint of how worried the government is and how determined they are to address the issue that this plan was approved.

The government can force credit expansion by requiring the banks to lend more.

Certainly they are trying. Last week, after weeks of rumors that loan caps were being relaxed, the PBoC announced that they were junking the credit restrictions they had previously imposed on banks. But loan growth has still been very low.

This is hardly surprising. In such dire economic circumstances with global credit markets and liquidity seizing up, with domestic bankruptcies rising, with inventories and receivables also rising, it takes both brave banks and brave borrowers to accommodate credit expansion. Most good companies seem reluctant to borrow and anyway banks are reluctant to lend.

So what if policy-makers simply announce minimum loan growth targets for every bank? That should certainly cause an expansion in banks’ balance sheets. However, this will create some problems. It might not be effective in net credit creation for the country. If banks don’t want to lend but are forced to, we will see off-balance sheet transactions placed back on balance sheet and a much more rapid decline in loans from informal banks. That means that real credit expansion can still be negative even with minimum loan growth target enforced onto the banking system. Forced lending will also result in a sharp deterioration in quality of borrowers. It is always possible to find borrowers, even in a sharp economic contraction or investment crisis.

US$582bn is not a small sum, even if you spread it out over a few years. There is the multiplier effect or trickle down effects. The rule of thumb is that every one dollar spent is worth between 4-8 dollars in the real economy, velocity of money supply.

The sum announced by China is certainly very big. Is it big enough? The US GDP is about US$14 trillion or 3.5x China's GDP of US$4 trillion. Say US loses 2% of its GDP, to make it up, China would have to grow by a staggering 6.8% - of course, that's assuming the problem is just contained in the US, and that China is the only engine of growth left in the world. The other factor to bear in mind is that Chinese consumer only make up some 35% of China's GDP, much lower than US consumers. Final conclusion - its not a Prozac, but its better than nothing, a lot also depends on whether its for "show and tell" or will the measures be implemented assiduously.

p/s photos: Sammi Cheng