China Whispers..then SHOUTS

Oct 3 • Between the lines • 2921 Views • Comments Off on China Whispers..then SHOUTS

China’s official news agency, Xinhua, has ridiculed U.S. lawmakers’ efforts to pressure Beijing over its currency policy insisting that the USA admin. is resorting to deflecting blame onto China for its own domestic economic malaise. “This has become a common practice, whenever the (U.S.) economy is slow, whenever an election is nearing, voices in the United States pressing for the rise of the renminbi are all over.” – Xinhua.

This statement comes the day before the U.S. Senate decides to take up legislation that could allow USA companies to seek import duties against countries that the USA admin. considers have undervalued currencies, ergo unfair subsidies. U.S. lawmakers contend that China undervalues the Yuan by circa 25 to 40 percent, giving Chinese products an unfair competitive advantage in global markets.

“The race for the U.S. presidential election has heightened, and the yuan exchange rate is now a target again,” the Xinhua commentary asserted, concluding that “the opinions of advocates of the yuan bill are expedient and shallow.” Beijing repeatedly urges U.S. lawmakers not to “politicise” the differences over China’s exchange rate practices by passing the bill.

China’s central bank has set record high yuan/dollar mid-points this year to guide the yuan’s rise to help fight inflation and reduce the economy’s reliance on exports. In September the yuan weakened slightly. The yuan has risen 3.19 percent against the dollar since the beginning of this year and 6.89 percent since it was unpegged from the dollar in June 2010.

European countries must act decisively to resolve the euro zone debt crisis, or risk member states forced out of the single currency, China’s top newspaper said in a front page commentary. The call came in the overseas edition of the People’s Daily, the official paper of the ruling Communist Party underscoring Beijing’s worries regarding the safety of its investments in the euro zone.

Europe is standing at a crucial juncture in its history. It must show great wisdom, great boldness and great resolve, and genuinely go into action. If it is able to set up a fiscal union, Europe can still turn its luck around. If the decision comes too late, some (euro) members may be forced to pull out. But if Europe keeps dilly-dallying, the situation can only worsen and gather speed. Outsiders who want to help will not dare, and then the euro zone may really disintegrate. Without doubt, this would be a huge disaster for Europe and the world. Leaving aside how enlightened that plan may be, Europe’s efforts to put it in place have been too sluggish. A failure to act when they should will certainly cause more trouble, and the euro zone’s problems are now getting greater and greater.

China’s pile of $3.2 trillion in foreign exchange reserves, the biggest in the world, continues growing due to trade surpluses and capital inflows. Analysts estimate that China holds approx. a quarter of its foreign exchange in euro assets, there are limited places for it to park investments of such a scale.

China’s factory activity increased in September for the second consecutive month as export orders strengthened. The official purchasing managers’ index showed inflation pressures eased slightly. China’s PMI rose to 51.2 from August’s 50.9. The export orders index rebounded to 50.9 from 48.3 in August, which was the 28-month low. The 50-point mark is the dividing line between expansion and contraction. The People’s Bank of China reaffirmed on Friday that it would keep monetary conditions tight in its effort to rein in stubborn inflation, adding that containing domestic price pressure remains its top priority.

Zhang Liqun, a researcher with the Development Research Center, a think-tank under China’s cabinet – “The small rise in September PMI indicates a rising likelihood that the downward trend in economic growth is stabilising. However, considering all factors, there is still high possibility the economy could continue to slow. Small firms are facing many difficulties right now”.


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The Greeks have no more gifts to bear..

The Greek economy is forecast to shrink 5.5 percent this year, more than the 3.8 percent forecast by the EU and IMF. The Greek cabinet has finally approved a plan Sunday evening to lay off state workers, and sign off a draft of next year’s budget, in a race to slash stave off bankruptcy. Without the release of the next €8 billion tranche of the EU bailout Greece will run out of money to pay state wage bills within seven days. European officials are desperate to avert a Greek default, which would wreck the balance sheets of European banks, damage the prospects of the euro single currency and plunge the world into a new global financial crisis.

Negotiators from the International Monetary Fund, the European Union and European Central Bank, known as the troika, have been combing through Greece’s budget and reform plans since Thursday. The inspectors are expected to agree to the release of the aid. EU officials have suggested that banks that agreed to write-off 21 percent of the value of Greek debt in July may be forced to take even more pain.

The government plans to begin layoffs by putting 30,000 workers in a “labor reserve” by the end of this year. They would be paid 60 percent of their salaries for a year, after which they would be dismissed. But the government has yet to announce how the plan would work. If most workers placed in the reserve are near pension age and planning to retire soon anyway, the savings would be negligible and the inspectors are likely to be unimpressed. The inspection visit, expected to continue into the middle of this week, also focuses on budget plans for 2012-2014, a commitment to raise 50 billion euros from privatisation by 2015 and requirements to open up the country’s overly regulated economy.

ECB to quantitative ease?

The ECB does not have a history of creating money through asset purchases and has never been open to policy given its mandate is to keep inflation in check. At the height of 2008′s turmoil the closest the bank went to quantitative easing was the purchase of covered bonds. The euro zone debt crisis has reached such a critical point markets are speculating with regards to ECB QE. The ECB’s rules do allow it to buy any asset except for sovereign debt directly from governments. The solutions available to governments, such as common euro zone bonds, could face potentially lengthy constitutional challenges and may simply be politically undoable.

The ECB has put the onus on governments insisting that the solution to the crisis is responsible fiscal policy and monetary frameworks. It has gone on record that it will never embark on outright QE and given no sign of changing that view. To create large quantities of new cash at a time when inflation is already well above the bank’s two percent target (three percent currently) would be the antithesis of a decade of careful control over prices. But some analysts are discussing how it could be done.

The ECB did spend 60 billion euros in mortgage-related covered bonds in a one-year program started in June 2009. Media reports have recently suggested they could do that again, but to be able to release a larger chunk of money they would have to consider buying more liquid assets. While buying corporate bonds or equities can trigger a dramatic shift in market sentiment and spur growth, it may not go to the heart of the problem, which is governments facing increasing funding pressure as the crisis spreads.

Early trading indications

The U.S. dollar has advanced against the euro, extending gains from last week amid concerns about a global slowdown. The dollar climbed to in early Asia- Pacific trading from $1.338 at the end of last week in New York, and rose to 77.16 yen from 77.06 yen. The USA dollar was little changed against the New Zealand dollar to 76.10 cents from 76.14 cents and bought 96.62 cents per Australian dollar from 96.62 cents. The dollar and the yen strengthened last week as growing evidence that the global economy is slowing boosted investor demand for the currencies perceived as being the safest. Brent crude is down by circa $122 a barrel approaching the psychological 100 barrier were no doubt many stops and shorts are gravitating.

Economic indications

09:00 Eurozone – PMI Manufacturing September
09:30 UK – PMI Manufacturing September

Morning data publications that may affect market sentiment include the PMIs for Europe and the UK. These surveys give an idea of the overall health of the economic outlook as figures tend to match the overall state of the economy. A high PMI indicates an increase in materials purchased and a figure above 50 indicates positive business conditions. Bloomberg’s expectations for the Eurozone are 48.4 and for the UK the expectations are 48.5 a reduction of 0.5%.


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