Eye on China: The Yuan

Although it is very early in the policy implementation stages for the new administration, Obamanomics appears to include a two pronged strategy emerging with respect to China: 1) To Assume a more dominant role for the US in international financial policy while acting to protect domestic industry –in part by demanding that China cease its currency manipulation and, 2) continue to borrow heavily from China to finance the stimulus programs designed to get the US economy moving again.

Put plainly, the people that owe China money and are hoping to borrow much more are also demanding that they place themselves at a competitive disadvantage going forward in the name of fair play.

We believe that internal demand will be the primary engine of growth in China as the short term impact of the massive stimulus programs there are supplemented by steadily increasing personal consumption at home. In the near term, however, Beijing must be pragmatic in defense of its export industries. In the spirit of “soft power” that the administration of Hu Jintao has promoted, it is unlikely that the reaction of officials will be anything more than the polite brush off that they have largely provided until now in response to calls to allow the Yuan rise.

As we noted this yesterday, Luo Ping’s comment to reporters last week that a depreciation of the US Dollar is inevitable signals a certain resignation by Chinese leaders as they continue to float their best customer’s bar tab. We think it is a mistake to read this as a signal that Beijing will also acquiesce to US currency policy demands.

Andrew Barber
Director