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Chinese Economic Data Challenges Government’s Stance on Yuan
Published on: 2010-06-12
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China’s gains in retail sales, consumer prices and industrial production countered the government’s assessment that the recovery isn’t “solid,” and put more pressure on policy makers to let the yuan rise.


Inflation accelerated to an annual 3.1 percent pace in May, surpassing officials’ target for the full year, retail sales gains quickened to 18.7 percent and industrial production jumped 16.5 percent, government reports showed yesterday in Beijing. The central bank said in a June 8 statement China still doesn’t have a “solid” recovery in domestic demand.


The indicators build the case for a stronger currency to help alleviate price pressures and quiet criticism that Premier Wen Jiabao’s government has a mercantilist policy that’s hurting the global recovery. American lawmakers said they’ll go ahead with legislation targeting the yuan peg just as U.S. and Chinese leaders prepare to meet at a Group of 20 summit this month.


“China’s recovery is clearly on track and overheating risks are still building as inflation accelerated and money and investment growth remains strong,” said Kevin Lai, a Hong Kong- based economist at Daiwa Capital Markets. “The government should move on the currency as soon as possible before pressure from the U.S. intensifies again.”


Asian stocks gained for a second day yesterday on optimism that the region’s rebound, led by China, is proving resilient so far to the European debt crisis that the World Bank said this week may cause “double-dip” recessions in some countries. The MSCI Asia Pacific Index rose 1.3 percent as of 5:55 p.m. Hong Kong time.


Yuan Bets


Bets on the yuan to strengthen against the dollar increased after U.S. officials stepped up calls for China to end the peg of 6.83 that was adopted in July 2008 to shield exporters from the global recession. The yuan’s 12-month non-deliverable forwards rose 0.4 percent to 6.7558 per dollar as of 5:40 p.m. yesterday in Hong Kong.


The increase in consumer prices was the biggest in 19 months, while a separate report on producer costs showed the largest jump in 20 months, at 7.1 percent. The M2 gauge of money supply rose 21 percent in May from a year before after a 21.5 percent gain in April, the central bank reported.


Rising Rates


Money-market rates rose after the figures. The yield on the one-year onshore interest-rate swap, a fixed-cost paid to receive a floating one, climbed three basis points to 2.3 percent.


Meantime, China failed to draw enough bids at a sale of treasury bills for a third time this year amid speculation banks sought higher returns to protect against inflation. The finance ministry issued 11.45 billion yuan of the 15 billion yuan of 91- day securities on offer at an average yield of 1.9062 percent, according to traders at BOC International Holdings and Agricultural Bank of China, who asked not to be identified.


U.S. Treasury Secretary Timothy F. Geithner said at a congressional hearing on June 10 that a more flexible yuan would allow China to pursue “a more effective, independent monetary policy, which is particularly important now, with China’s economy facing a risk of inflation in goods and in asset prices.”


Property Prices


Data on June 10 showed property prices rose at a near- record pace, with costs jumping 12.4 percent across 70 cities from a year earlier. Government efforts to crack down on speculation have had an impact on sales, which tumbled 25 percent in May from the previous month.


This week’s economic data suggest that China’s growth rate peaked in the first quarter, settling in at 9 percent or more in coming quarters, some economists said.


China’s economy will probably expand at “slightly over” a 10 percent annual pace this quarter after the 11.9 percent surge in the first quarter, Barclays Capital estimates. The pace will slow to 9 percent in the final three months of the year, Peng Wensheng, head of China research for Barclays in Hong Kong, wrote in a note yesterday.


Industrial production growth eased from a 17.8 percent year-on-year rate in April. Urban fixed-asset investment rose 25.9 percent on that basis in the first five months of the year, compared with 26.1 percent in January-April.


The World Bank, in an economic outlook published June 9, forecast 9.5 percent GDP growth for the year, compared with 3.3 percent for the U.S. and 0.7 percent for the euro region.


Band Widening


Barclays forecasts China will raise deposit rates from the third quarter and borrowing costs from the fourth to help contain inflation, and anticipates a widening in the yuan trading band. “The exact timing is difficult to forecast and goes beyond economics,” Peng wrote in the note, referring to the political oversight of the yuan decision.


China’s export gains have spurred the ire of U.S. lawmakers, who pushed Geithner at a Senate Finance Committee hearing on June 10 to apply greater pressure to his counterparts. Shipments abroad climbed 48.5 percent in May, helping yield a $19.5 billion trade surplus for the month.


U.S. government figures show America with a $71 billion trade deficit with China for the first four months of the year, up 5.7 percent from the same period of 2009.


“There is now a long trail of broken promises that can no longer be ignored,” Senator Ron Wyden, an Oregon Democrat, told Geithner. Lawmakers led by Senators Charles Schumer, a New York Democrat, and Lindsey Graham, a South Carolina Republican, are pushing legislation that would let companies seek import duties to compensate for an undervalued currency.


Global ‘Distortions’


The Treasury chief noted in the hearing that China did let the yuan rise 21 percent against the dollar in 2005-08. Geithner said in his testimony that “the distortions caused by China’s exchange rate spread far beyond China’s borders and are an impediment to the global rebalancing we need.”


China probably has until the end of the month to strengthen its currency before Congress acts, Rebecca Patterson, the head of foreign exchange at the private banking unit of JPMorgan Chase & Co., said in a Bloomberg Radio interview on Surveillance with Tom Keene.


Acting within that time frame would address the peg before President Barack Obama is scheduled to meet with Hu Jintao, his Chinese counterpart, and other members of the G-20 nations. Indian and Brazilian officials have joined the U.S. in recent months in urging a shift in yuan policy.


“The frustrations with China’s trade practices are growing by the moment,” Graham, the senator, said in an interview on Bloomberg Television’s “Political Capital with Al Hunt” airing this weekend.

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