Bernanke Ratchets Up Pressure On China Over Exchange Rate

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 (CHN), Greater China Fund (GCH), iShares FTSE/Xinhua China 25 Index Fund (FXI), JF China Region Fund (JFC), PowerShares Golden Dragon Halter USX China (PGJ).

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Comments

[vick van no...:]

Opened Agressivley ?
Thats not good.Why must they start this eventful meeting by arguing?.Of course the chinese know how the yanks feel -I should say Yank politicians,and the Yanks should know a little about Chinese culture and it's politicians to know they should start a long on-going relationship and discussions with a little wisdom and not heated arguments.
Everyone knows what needs to be done. Keep it civillised you dumb-Ass cowboys .

2006 Dec 15 06:40 AM

[Ray Lopez:]

Vice Premier Wu Yi, a 70 year old woman, is very savvy (WSJ had an article on her). vick van nouhuys assumes that the Chinese even care what Paulson says--they don't, except to save face in the short term, which doesn't matter strategically. In fact, IMO the Chinese are looking to US Congress to see which way the wind blows.

In any negotiation between the Free Market capitalists and the Statist Communists, the communists usually win (being more disciplined) so I would figure the Chinese will do nothing except baby steps this time around unless the US Congress gets tough in 2008 (election year).

That said, I am betting on a fall in the RMB with an unhedged bet on the RMB being revalued (see Everbank.com)

2006 Dec 15 03:41 PM

[saud ibn ab...:]

Shame on USA financial/monetary persons. August 15, 1971 Nixon order "metallic gold window" closed. All nations central banks ordered US dollars no longer recognized medium of exchnage, accounting unit. US dollar total zero "0" store of value. Monetary system and its financial products have never corrected for that "inconvertible currency" decision by world's uber rich. Therefrom, USA must not act to impose it's failed economic/monetary/fina... exchange models/theories upon Eastern Hemisphere.
In sum, You will not and must not hustle Eastern Hemisphere independent sovereign mixed economies.
You people don't manage world monetary system as "banker to the world". Aug 15, 1971 events self imposed total loss of business leadership. Where are your 430 trillion usd in "financial assets", Long Term Capital New York Federal Reserve emergency special facilities "bail out". Again not in our back yards.

2006 Dec 16 07:46 PM

[Ray Lopez:]

saud ibn adbulaziz: in financial matters you vote with your dollars. So far, I don't see the world adopting the Euro (except Cuba), the Yen or any other currency (RMB) other than the dollar. Until they do, the US can print as many dollars as it wants, and the rest of the world must accept it, and like it. This is known as having a US deficit "without tears".

2006 Dec 18 08:46 AM