China Slams U.S. for Inflating Global Asset Prices

On the eve of U.S. President Barack Obama’s visit to China, a major Chinese official has criticized U.S. monetary policy in unusually harsh language. Liu Mingkang, China Banking Regulatory Commission chairman said the zero interest rate policy of the U.S. Federal Reserve posed a “new systemic risk.”

Liu, using language reminiscent of warnings by NYU economist Nouriel Roubini and speaking at a financial forum in China’s capital Beijing, said:

This situation has already encouraged a huge dollar carry trade and had a massive impact on global asset prices… It is boosting speculative investment in stock and property markets and will pose new, insurmountable risks to the global recovery and, particularly, to the recovery in emerging markets.

In my view, this is pure political posturing by the Chinese in order to defuse any U.S. criticisms of Beijing’s currency peg. Call it a pre-emptive strike. The U.S. has seen the unemployment rate rise to 10.2% and the trade deficit rise quite dramatically as well. Many are blaming the Chinese and their currency peg to the U.S. dollar.

When Barack Obama visits China this week, the Chinese expect him to focus on the yuan dollar peg. His administration will find it increasingly difficult to hold protectionist pressures at bay given the yuan’s firm peg to the U.S. dollar even while the dollar has plummeted. To prevent the U.S. from successfully painting the Chinese peg as the sole major risk to the global economic recovery, the Chinese must therefore point to the destabilizing effects from measures taken by the U.S. to reflate its domestic economy.

The Chinese have shown success thus far. Last week, Tim Geithner penned an Op-Ed in the Wall Street Journal along with the Finance Ministers of Indonesia and Singapore which pointed a critical finger at China by asking for “market-oriented exchange rates.” Yet when the APEC (Asian Pacific Economic Cooperation) summit in Singapore ended that same language was cut from the final commiunique.

On the other hand, there has been little change in the prospects of a revaluation of the yuan peg.

Reuters reports:

Speculation that China might let the yuan resume its climb after a 16-month pause swirled after a change last Wednesday in the long-standing wording used by the People’s Bank of China to describe its currency stance.

In its third quarter monetary policy report, the central bank failed to refer to keeping the yuan "basically stable at a reasonable and balanced level" when discussing the outlook for the exchange rate.

Asked whether the PBOC was heralding a return to the gradual appreciation of the yuan against the dollar seen from July 2005-July 2008, Chen told Reuters: "I don’t think the central bank meant to say that."

And all indications suggest that we are now returning to the same unbalanced pre-crisis growth model – but with the global economy in a considerably more fragile state. In this climate, the issues of the yuan currency peg and low interest rates in the U.S. will continue to be front and center for some time to come.

Comments

[Dan Harris:]

You make a great point about this being a preemptive strike. I hadn't thought of it that way, but I think you are right.

Nov 16 12:15 AM

[Gary A:]

Brasil took care of the carry trade malarkey fomented by Larry Middle Stooge Summers. They are taxing capital coming into Brazil. That must be on the minds of the Chinese. They may need to tax the carry trade.

That would stop this madness. Taxing trades on Wall Street would take care of trading malarkey that goes on as well.

Governments must place special taxes in critical areas.

Nov 16 01:06 AM

[rick12345:]

Inflate your currency so that we can then return the money that we borrowed from you at a 50% discount, even though the money was lent to us in good faith as a means of bailing ourselves out of this shit.
In the meantime we will take the money that you have invested in our country and offer you a paltry return on deflated dollars. By the way, we still want your goods at a cheap price, so don't think for a minute we will be paying any more for them, regardless of the exchange rate.
Can you see any reason why China would be upset?

Nov 16 04:24 AM

[Value Added:]

The Chinese are right - we are guilty of creating the dollar-carry trade and thereby inflating asset prices. And of course, the Chinese are guilty of inflating asset prices as well, but by a different approach - maintaining the currency peg, and then snapping up assets around the globe with excess dollars. The whole scene has an element of comedy to it, despite the serious stakes involved. Let's hope some degree of balanced cooperation is achieved.

Nov 16 08:56 AM

[coreopsis:]

Rick12345: a concise brilliant analysis in a nutshell. It's only the Americans who are last to figure it out.


On Nov 16 04:24 AM rick12345 wrote:

> Inflate your currency so that we can then return the money that we
> borrowed from you at a 50% discount, even though the money was lent
> to us in good faith as a means of bailing ourselves out of this shit.
>
> In the meantime we will take the money that you have invested in
> our country and offer you a paltry return on deflated dollars. By
> the way, we still want your goods at a cheap price, so don't think
> for a minute we will be paying any more for them, regardless of the
> exchange rate.
> Can you see any reason why China would be upset?

Nov 16 10:29 AM

[Nom De Plum:]

When Governments manipulate markets for nationalist reasons, it is usually a precursor to conflict. I'm not predicting WW III, but if the "Dollar Carry Trade" continues unabated for years, I predict a major international sovereign fallout. Our monetary leaders fail to understand the "Law of Unintended Consequences" and create these boom/bust cycles over and over again. Greenspan was hailed as a hero for bringing rates to 1.0% for a year to save the economy, but in the end he was villified for enabling the housing bubble...Unintended Consequences. I have not spent enough time trying to figure out what asset bubble is being created currently, but there is NO DOUBT IN MY MIND that holding rates at 0.0% for over a year will produce Unintended Consequences.

If the U.S. does not figure out a way to invest in itself and grow through internally generated cash flow and modest leverage, then our future is bleak. Transferring debt from the private sector balance sheet to the U.S. government balance sheet does not materially improve the situation we are facing and is not a viable long-term solution.

The main reason the U.S. private sector created so much debt and derivative exposure a half decade ago was because internal growth was anemic and leverage was the only way to maintian high rates of return on equity. The best solution would have been public/private partnership or massive funding to be the world leaders in alternative energy or the world leaders in biotech. This would create long-term jobs for our citizens, retrain a large percentage of the workforce from the disappearing manufacturing base to leading edge industries and allow the U.S. to maintian its leadership position for attracting capital.

I fear we missed a great opportunity that will lead to political instability. I hope I am wrong.

Nov 16 01:56 PM

[artkarl:]

It may SERVE as a pre-emptive strike, but there's no doubt that it's stupid to finance speculation thru a negative interest rate.
What happened to biting the bullet and doing hard work?
-Karl Krachenberg

Nov 16 03:33 PM

[bobbybutte:]

as a person who has become financially independent SOLELY from allocating capital let me add some things here

China is nt going to do anything same way we arent doing anything about the yuan being manipulated and the trade imbalnce

China needs the Us to buy all the worthless high margin stuff because they know asians are not that foolish

sad but true

Nov 16 03:38 PM

[John Peralta:]

Isn't it funny that the Chinese criticize the USA for doing exactly what they are doing. Will they be even angrier if Americans permanently save more - as they do? The Chinese are expanding their money supply even faster than America. As always, it is "do as I say not as I do."

Nov 16 06:05 PM

[rick12345:]

All the Federal reserve need to do is lift long term interest rates (which they won't do) and people will move away from high risk currencies into (supposedly) safer USD's. I think their strategy is to wait for 2 quarters of positive growth before they act. In the meantime expect more of the same old rhetoric each time the USD approaches 0.75 Euro. Ultimately, they still have another $0.10US to play with.
An interesting thing happened on Tuesday - gold decoupled itself from the dollar; I believe it is only a matter of time now before we hear the sound of a gold bubble going "pop".

Nov 17 07:58 PM