Economic talks between China and the US opened aggressively, with Fed Chairman Bernanke and Treasury Secretary Paulson arguing that China needed to accelerate liberalization and stop fixing its currency, and Chinese Vice Premier Wu Yi countering that American misconceptions about China aren't conducive to good relations. Bernanke criticised China's price controls on fuels and electricity prices, which he said have contributed to the 50% rise in China's oil consumption since 2000 and led to half of 2006 world oil demand growth coming from China, and claimed that China's capital markets "remain distorted and underdeveloped". But the greatest tension was over China's currency, with has appreciated only 5.7% since the yuan-dollar peg was ended in July 2005. China's exchange rate policy distorts the allocation of resources between sectors, and "the situation has likely worsened recently'' because in the last 5 years the yuan has dropped 10 percent on a trade-weighted basis after inflation. "The principal imbalance lies in the composition of Chinese GDP, which is heavily tilted toward investment and net exports and away from domestic consumption and government provision of social services."
• Sources: Full text of Bernanke's speech, Bloomberg, New York Times, WSJ,
• Related commentary: Chinese Stocks Hit All-Time Highs, U.S. Trade Deficit Narrows To Near Five-Year Low, Investing in China: Rapid GDP Growth Rates Indicate Prosperous Future; Full Seeking Alpha Coverage of China.
• Potentially impacted stocks and ETFs: China Fund (NYSE:CHN), Greater China Fund (NYSE:GCH), iShares FTSE/Xinhua China 25 Index Fund (NYSEARCA:FXI), JF China Region Fund (NYSE:JFC), PowerShares Golden Dragon Halter USX China (NYSEARCA:PGJ).
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