APEC: Don't Expect Any Major Changes

There was no important breakthrough at the APEC meeting this past weekend.

The ministers promised to resist protectionism and adopt structural reforms as necessary to unwind the global imbalances, but without detailing specific changes or making new commitments one must assume that little has changed. If anything, the reluctance of officials to seek yuan appreciation kept the dollar bearish sentiment intact. If the yuan is not going to share in the adjustment process, some reasoned, then the euro and other "adjustable" currencies will have to.

At the same time, some participants were disappointed, having expected some move by the Chinese ahead of the US and then European visits. The implied appreciation imbedded in the non-deliverable forward market for yuan narrowed (0.2%), breaking a three day advance. China's trade with ASEAN members has increased 20-fold since 1993 to almost $180 billion. China's stimulus efforts and general economic well being has become increasingly critical for many countries in the region.

Although the yuan has effectively been repegged to the dollar since July 2008, the dollar's weakness seemed a greater cause of concern. Officials from several countries expressed concern that the low Fed funds rate and excess liquidity is fueling a huge wave of speculation that is inflating asset prices and overwhelming many developing countries. Meanwhile, Chinese people themselves are happy to borrow dollars as a way to "bet" on yuan appreciation. Foreign currency borrowings by Chinese businesses and individuals has risen for eight months through October and stands 40% above year ago levels at a record $360 billion. Demand for dollar loans and the corresponding drop in dollar deposits has lifted the cost of borrowing dollars on-shore in China.

Disclosure: No positions