China, the epicenter of virtually every global imbalance, is still flying off the tracks. Time for Ben to shift the Bernanke Dollar Helicopter into dive-bomber mode again.
If my guesstimated read on Bernanke is right, he will surpass whatever expectations will be for the upcoming Fed meeting and get blamed for capitulating to Wall Street. Keep in mind the caveat that I’m usually wrong. We’ll see.
Dec. 10 (Bloomberg) — China’s trade surplus probably held near a record in November, adding fuel to U.S. Treasury Secretary Henry Paulson’s demands for faster yuan appreciation.
The gap widened 16 percent to $26.6 billion from a year earlier, according to the median estimate of 20 economists surveyed by Bloomberg News, after rising 13.5 percent to a $27.1 billion in October. The figures may be released as early as today.
Paulson, who visits Beijing for talks Dec. 12-13, said last week the yuan’s gain against the dollar hasn’t been fast enough to address global trade imbalances and warned tension over the yuan has resulted in growing protectionism. China has cut export rebates and increased imports to curb the swelling trade surplus, while fending off calls for stronger currency.
“Paulson is likely to remind China that it needs to do more on its currency,” said Adrian Foster, director of capital markets at Dresdner Bank AG in Beijing. “International pressures are building up.”
The estimate for the trade surplus would bring the gap to $239 billion for the first 11 months, up 53 percent for the same period last year.
Paulson, speaking in Washington Dec. 5, said the pace of the yuan’s appreciation hasn’t been enough to “to reduce China’s global trade surplus, its internal imbalances, or foreign-exchange market pressures.”
Chinese Premier Wen Jiabao last month snubbed a European plea for the yuan to appreciate faster against the euro after two days of talks in Beijing with officials including European Central Bank President Jean-Claude Trichet.
The yuan has gained 12 percent against the U.S. dollar since abandoning its peg in July 2005 and fallen 8 percent versus the euro.
China widened its currency’s trading band in May before Chinese Vice Premier Wu Yi traveled to Washington for the last semi-annual talks, known as the Strategic Economic Dialogue.
Under the current regime, the yuan is allowed to move as much as 0.5 percent against the U.S. dollar every day, from the previous limit of 0.3 percent.
“There will be a broadening of the trading band again in the next few months,” said Jan Lambregts, head of Asia research at Rabobank International in Hong Kong. “It will just be a symbolic gesture unless the existing limit is utilized.”
The daily yuan trade has never touched the 0.5 percent wall.
Exports probably grew at the slowest pace since December 2005, apart from March when the pace of growth was distorted by the introduction of export rebates. Overseas sales rose 21 percent in November from a year earlier after climbing 22.3 percent in October, according to a Bloomberg News survey. Imports likely gained 23.3 percent after increasing 25.5 percent.
The global economic slowdown, an appreciating currency, reduced export incentives and higher production costs have started to damp Chinese overseas sales, according to Sun Mingchun, an economist at Lehman Brothers Holdings Inc. in Hong Kong.
Exports account for 40 percent of China’s economy, almost double from a decade ago, according to Lehman Brothers.
China last month agreed to abolish subsidies on goods including steel and wood products, which the U.S. had challenged at the World Trade Organization. It also pledged to increase American imports and boost investment in the U.S.
The following table shows economists’ estimates for percentage changes in China’s exports and imports in November from a year earlier. Predictions for the trade surplus are in billions of U.S. dollars.------------------------------------------------------ Trade Bal Exports Imports Firm (USD Bln) YoY% YoY% ------------------------------------------------------ Median 26.6 21.0% 23.3% Average 26.8 21.3% 22.9% High 32.7 25.8% 27.0% Low 22.4 19.0% 16.0% Number of Estimates 20 20 20
If China’s train wreck crashe via domestic inflation-unrest, it will be largely unpredictable. All the previous domestic disturbances were not predicted by the institutions most heavily invested in predicting them (Chinese security services), so Western investors, as the lowest individuals on the information food chain, will be left the most naked when the tide of Chinese liquidity recedes.
Assuming that the Chinese government won’t impose the necessary monetary solution of a yuan revaluation (which is not affordable and less so as time goes on), the cost of inflation will be increasingly reflected in spontaneous “mass incidents” in China’s poorest, least wired regions, as more and more workers are unable to buy food or fuel. This should coincide with a major loss of confidence in Chinese banks and a run on Chinese financial institutions in favor of hard assets, as per 1987-89.
Beijing has recently begun using Western media norms and information openness as a weapon against provincial corruption. However, when unrest becomes more widespread, China’s newfound openness will work to Beijing’s detriment as it will be unable to halt the flow of information. Therefore, “Chinese” media will be a useful way for Westerners to catch glimpses of a secular shift of Chinese “social volatility” (riots and unrest).
This will be the trigger to sell commodities and prepare for a commodities bear market.