In defence of Brazil (and US) against China

This isn't the first time for a South American country to charge an Asian counterpart with its cheap currency. In fact, as my previous post shows, Brazil, one of the significant emerging powers, repeatedly voiced strong concerns for China's currency policy.

Looking at how its currency, real, is valued in the markets, you'll see Brazil's complaint is well-founded. The real is now one of the most overvalued currencies among major economies. According to the BIS, the real has appreciated nearly 40% in real terms since the start of 2009, while the yuan, China's currency, once devalued 6% in the midst and has not yet recovered the level of the start of 2009. Who could say Brazil is paranoid?

However, Brazil has a problem blaming China: China is now Brazil's number-one export partner, and Brazil has recently had a huge trade surplus with China. It means that a cheap real would help exporters, especially commodity firms, thrive more in the world's fastest growing economy, but increased trade surplus would cause a trade dispute with China, a country that Brazil is fast deepening a tie with.

One of the reasons of Brazil's clamor is that the country's overall trade surplus has abated since 2006. Last year, it's little more than 20 billion US dollars, less than half of 2006, which a strong real supposedly brought about.

FT blog claims that the real's strength comes from breakneck economic growth fuelled by government spending. In that sense, Brazil's problem looks like homegrown. Taking into account that domestic inflation is rising due to the rise of commodity prices over the globe, however, the country has no choice but to raise its policy interest rates to curb inflation, which in turn helps the real appreciate more.

Brazil is planning to slash its government spending to ease pressure on the central bank to raise interest rates, and hence an upward pressure on the real. But the share of government spending in GDP is 19.5% in 2009, no bigger than 20 to 23% in the 1990's. It's questionable that only the cut in government spending could achieve the goal of a stable currency.

Inflation is also rising in China, which has recently led the country to hike its interest rates. Yet, the speed of the yuan's rise has been stubbornly slow so far. Even though the Obama administration refused to label China a currency manipulator, the tide of requirement for yuan's rise looks like not ebbed among US policymakers. Brazil, together with the US, has every reason to grumble over China's currency when no country dares to get on China's nerves.

On the post-Mubarak Egypt

This blog is meant to be written for topics related to, mainly, economics, not politics. Politics is not my first choice, but the crisis unfolding in Egypt gave me a food of thought on the post-Mubarak era, which I think is rarely mentioned or imagined in the media.

We have to think of a new factor in assessing the Middle Eastern politics, which is rapidly emerging in the region. It's people, not authoritarians. What do Egyptians think now? Information available now on Egyptian protesters is pointing to one palpable feature: they hate the US, irrespective of fundamentalists or secularists. In fact, Anderson Cooper, CNN's renowned newscaster, and several of his crews were punched several times in Egypt, and other journalists from BBC or ABC news are also reported to be roughed up in the crowd. The reason is simple: those journalists are from the West which Egyptians hate.

Many analysts have a point to see that the Obama administration is so totally unprepared for the situation that their reaction is belated and awkward facing people's sudden anger, at a loss of which way to go. This analysis isn't unwarranted, but we have to think ahead of it. The thing is that even if Obama team moves fast to make its position clear to anyone, the situation wouldn't change so big: Egyptians hate Americans.

It doesn't mean that Obama should back up falling Mubarak, ignoring and if necessary suppressing people's demand for the resignation of a longtime ruler for the sake of regional stability. It's the worst way to respond to the crisis, and would ignite people's anger so much that another extreme regime is inevitable in African continent. Even so, it looks like that given Egyptians hatred against the US, the post-Mubarak government, be it fundamentalists or secularists, has little choices but to distance itself away from the US, which gets a room for China and Iran to have a say in Egypt's politics. Or the post-Mubarak Egypt would at least slightly lean toward the two countries, not to provoke the West.

In fact, Iran has already voiced support for the uprising, triumphing its Islamic revolution in 1979. On the contrary, China hasn't done anything but to issue a short statement in hope of stability and order. The country fears that uprising fans out to their own, which could undermine their polity, so it has no intention to get into other countries' turf right now.

However, if Egypt alienates itself from the US, now Egypt's top export partner, China might fill in the blank after the US leaves. Europe has no ability or intention to do that. China would be satisfied with a country as long as it's a good partner with China in trade or politics no matter how badly it governs.

The US should be ready to deal with anti-West Egypt and the resulting disruption of oil markets. It's time to think realistically.

Decoupling of stock markets

It looks like Asia (Asia ex-Japan, of course) has been heading into a cycle of rate hike these days. The Bank of Korea, South Korea's central bank, raised its policy interest rate last week by 25bp to 2.75%, third rate hike since last year. In the same week, the Bank of Thailand, Thailand's central bank, also tightened monetary policy by venturing into the fourth increase of its benchmark interest rate by 25bp to 2.25% in a year.

What everybody is now watching very closely is, however, China, the second largest economy in the world. The country raised its reserve requirement ratio by 50bp last week, the seventh in a year. Fear of economic slowdown due to the rate hike dived the Shanghai composite, a benchmark index of China's stock, to a nearly three-month low of 2677.65 on Thursday.

Will China's economy slow down so soon this year? At least for now, it seems that the world markets read it as only China's problem, not themselves.

First, let's look at how China is big in the current world economy. China's contribution to the world growth has been increasing dramatically for the last ten years. Though it plunged in 2008 because of the recession after the Lehman crisis, the country's growth amounted one-third of the world growth in the same year. In addition, China's economy GREW more than 9% in 2009, whereas the world economy LOST 2%. It appears that China is now a sole locomotive driving the global economy.

Nonetheless, the world stock markets haven't responded to the decline of China's stock.

In fact, the S&P500 gained 6% since early December, while the Shanghai composite declined 5% in the same period. Does this mean a "decoupling" of China from outside world? Given that China's stock market is intrinsically different from other markets in the sense that it's driven more by politics than economics, it seems that a contrasting move of stock markets between two countries isn't surprising at all.

I have no definitive answer yet to why the world isn't responding to China's stock market slump, even though China's influence in the global economy is increasing exponentially. More time is needed to scrutinize it.

Manufacturing is too concentrated in China

It looks like Brazil is gaining an expertise of creating new rhetoric. According to a BBC report, Brazil's Finance minister Guido Mantega stepped up its warning on currency manipulation, saying, "This is a currency war which is turning into a trade war." Mantega went further to express a jittering voice against China's currency, yuan, adding that "China's 'undervalued currency' was also distorting world trade."

As my last post shows, Brazil's concern would be justifiable given the rapid appreciation of its currency, real. In the last two years, real has risen more than 30% in real terms, one of the biggest gains of all. Brazil's exports are only 13% of GDP, but it could still put a considerable pressure on exporters. On the other hand, yuan lost 4.5% of its value despite a double-digit growth of China's economy which has led the country to the world's largest exporter. Who could say that Brazil is overreacting?

China surpassed Germany as the world's largest exporter in 2009, which undervalued yuan probably had huge effects. Then, what is China exporting? Of course, it should be manufactured products. China is making a gigantic effort to be the world's factory, and estimated to replace the US as the world's largest manufacturer in as early as 2010. China's manufacturing claimed mere 1% among the world's total in 1970, one-twenty-fifth of the US. But now it's more than 17%, and close to the US's 20%. This is an amazing concentration of industrial power given not only developed economies but also emerging countries like Brazil and Russia are transforming themselves to service economies.

An important question should then arise: What if China goes bust? China is going to be the world's factory, but what would happen if the world's factory loses its motion and stops producing? It seems that the world has recently forgotten or is afraid to ask about the demise of China's economy, but the risk remains as to the excessive concentration of manufacturing on one country.

China keeps buying Treasuries

A little while ago, a rumor was frequently heard around in the markets that China, the world largest holder of foreign reserves, is going to diversify its portfolio away from the US dollar assets like the Treasury securities in favor of, say, euro bonds like German Bunds. In March 2009, Zhou Xiaochuan, governor of People's Republic of China, dared to argue for a gradual move towards using IMF's Special Drawing Rights as a global reserve currency, criticizing the dollar as too much concentrated in global foreign reserves.

China's intention was to shun the dollar's decline as the Fed launched the first quantitative monetary easing in the mid March 2009, because the country accumulated a staggering amount of the Treasury securities immediately after the Lehman crisis in September 2009 crushed the US stock and MBS markets China heavily invested in. But now it looks like China isn't raising a voice against the dollar.

Why? The reason is simple: the dollar hasn't depreciated so much since then, in part due to the Greek crisis that smacked the euro down to the four-year low in 2010. This enables China to feel safe still buying the dollar assets, especially the Treasuries.

China is using UK custodians to keep its dollar assets, which is reflected in the graph above. Given a steady increase in China's foreign reserves, the UK holdings of US Treasuries would shift to China's in the next revision of statistics, hence lifting the country's holdings upward more in line with foreign reserves.

Nonetheless, China's appetite for euro assets hasn't languished at once. The country bought more than 230 billion yen of Japanese short-term bonds in January to July this year, but sold all of them for only two months of August and September. The reason is that China needed a temporal vehicle to lay aside money to flee from the Greek crisis, so it got back to the euro once the crisis stabilized.

Does China keep investing in the dollar? Nobody knows for sure. However, given the eurozone crisis, which is now involving Spain, the world's ninth largest economy, doesn't seem to subside soon, China's words for diversification would be seen as only a bluff.

Japan decouples from Asia

"Decoupling" usually refers to a talk on Asia's or emerging countries' economic expansion with little dependence on the West. But it looks like that decoupling is starting to take on another round in Asia: decoupling inside Asia.

A sign of stagnation is gradually looming in Japan, which has still been mired in a persistent deflation. The unemployment rate in October rose unexpectedly to 5.1% from 5.0% in September. The average estimate was 5.0%. The index of industrial production in October fell 1.8% from the previous month, a consecutive decline over 5 months for the first time since October 2008 to February 2009. The result may look like better than the average forecast of a 3.2% fall, but the fifth straight month of decline sounds more stark than the actual number.

The sagging global demand may also help drag the third largest economy down to the bottom. Nevertheless, a considerable damage on the economy is coming from the factors peculiar to Japan: the expiration of government subsidies to cars and electronic products, and the 15-year high yen which is sending a downward pressure on exports. Household consumption is no hope to underpin the economy amid sticking deflation.

Japan has so far enjoyed the four consecutive quarter of positive growth, but it now risks a contraction in this quarter. It was more or less anticipated, but it's awful nonetheless.

Miyako Suda, a member of the BoJ policy board, admits the possible downfall in this quarter.

Prolonged economic weakness may keep Japan in deflation longer than the Bank of Japan's current forecast, a member of its policy board said on Wednesday, offering the bleakest view to date by a central bank policymaker.

Board member Miyako Suda said there was a strong chance Japan's economy will contract in the final quarter of this year after strong growth in July-September, which was due mostly to expiring government stimulus steps offering incentives to buy low-emission cars.

…

"Considering the impact from recent yen rises and the worsening of sentiment among companies and consumers, the risk of prolonged weakness in the economy remains high."

Meanwhile, the other two Asian giants, China and India, are showing rather a sign of overheat in the economy, putting a pressure on the authorities to raise the interest rates before inflation accelerates. China is first.

China's manufacturing grew at a faster pace for a fourth straight month in November, indicating the economy can withstand higher interest rates as price pressures escalate.

The Purchasing Managers' Index rose to 55.2 from 54.7 in October, China's logistics federation said on its website today. That was more than the 54.8 median estimate of 14 economists surveyed by Bloomberg News. A PMI released by HSBC Holdings Plc also jumped.

Today's reports showed input prices surging, reinforcing the case for the central bank to boost borrowing costs again after it lagged behind counterparts from Malaysia to South Korea. Concern that monetary tightening will hamper corporate profit growth spurred an 8 percent sell-off in China's benchmark stock index in the past month.

"The risk of a sharp growth deceleration has abated, but all signs are suggesting that inflation may surprise on the upside," said Tao Dong, a Credit Suisse AG economist in Hong Kong. He called input-price data "alarming."

The logistics federation's PMI showed the strongest reading in seven months, while the measure released by HSBC and Markit Economics was at an eight-month high of 55.3.

Turning to India, the November data indicates that India's manufacturing has also grown faster than before.

India's manufacturing sector expanded at its fastest pace in six months in November on the back of robust new business and a sharp rise in export orders, a survey showed on Wednesday.

The HSBC Markit Purchasing Managers' Index, based on a survey of 500 companies, rose to 58.4 from 57.2 in October. It was the strongest level since May, when it was 59.

The November reading marked the 20th consecutive month that the key index of manufacturing in Asia's third-largest economy has been above the reading of 50, which divides growth from contraction.

"The momentum in manufacturing picked up further in November. Output accelerated and growing order books point to a continued strong momentum in the months ahead," said Leif Eskesen, chief economist for India & ASEAN at HSBC.

According to another report, manufacturing is gathering steam in South Korea and Taiwan, both of which are less sanguine than the two giants though.

In South Korea, the HSBC PMI jumped to 50.23 from October's 20-month low of 46.75, ending six months of contraction.

Taiwanese manufacturing expanded for the first time in four months, with the HSBC PMI rising to 51.7 from 48.6.

At least, Japan's weakness clearly stands out compared to neighboring countries. The cabinet is preparing for another round of fiscal stimulus, but the effect is likely to be no less pallid. Taking an incompetent monetary policy into account, a gloomy moment is waiting for the country with few tools to overcome it.

China is an irritant?

President Obama, of course, didn't say so, but somebody might want to paraphrase it instead to hint Obama's inner reflection.

U.S. President Barack Obama took aim at China as the Group of 20 summit ended Friday, calling its undervalued currency "an irritant."

The president, speaking at a news conference in Seoul, suggested China bears much of the blame for global trade imbalances, The New York Times reported. He abandoned his usual cautious language on the subject and said China and other countries should not assume "their path to prosperity is paved simply with exports to the United States."

"Precisely because of China's success, it's very important that it act in a responsible fashion internationally," Obama said. "And the issue of the renminbi is one that is an irritant not just to the United States, but is an irritant to a lot of China's trading partners and those who are competing with China to sell goods around the world."

At the G20, Obama and other leaders agreed to pass along checks and balances of international trade to the International Monetary Fund to study.

The leaders asked the IMF to find "indicative guidelines composed of a range of indicators" that would "serve as a mechanism to facilitate timely identification of large imbalances that require preventative and corrective actions be taken," The Wall Street Journal reported.

The final agreement said countries with "overvalued flexible exchange rates" would be permitted to take "carefully designed macro-prudential measures."

But leaders clearly balked at putting teeth in the communique that would measure or correct trade imbalances this year.

"The idea is not to stall on solutions that would be put on the table too early," said French President Nicolas Sarkozy, who will chair the next G20 summit next year.

Canadian Prime Minister Stephen Harper said, "I think we've got everyone talking the same language, everyone understanding longer term what has to be done."

It's a very harsh word for a Nobel Peace Award winner. Nonetheless, it's not difficult to see that his irritation is coming from a declining support for the administration, which has just been demonstrated as a historical defeat in a mid-term election.

In spite of a lot of speculations beforehand like "the new Plaza Accord", the G20 meeting in Korea didn't cut any policy or agreement but for a mundane communique, presenting us how deeply the world is divided on the currency issues.

Anyway, I'm very much interested in a following blog post by Los Angels Times, which should be a concluding remark for the G20.

Seems like the country has been enjoying a little vacation from President Obama during his month-long trip to Asia the last eight days.

He'll be back home Sunday, talking up more storms. But today he was back briefly, if only from South Korea.

The G-20 summit of world leaders that concluded today in Seoul, South Korea, was so productive in the area of economic solutions that at his departure news conference (full text below, as usual), the first thing President Obama chose to talk about was Iraq.

He wanted to call attention to yet another "milestone" over there, the not-really-quite-completed-but-we're-really-still-making-progress-in-months-long-negotiations on yet.... ...another national government. It seems like over all these years we've passed so many important "milestones" there that we ought to be reaching a destination pretty soon. Even if they do use kilometer stones.

Anyway, talking about Iraq again about sums up the value of the Seoul summit.

Aussie as a proxy of China

A bit of surprise rippled through the markets yesterday, which looks like coincided with a similar event in late October. Reserve Bank of Australia unexpectedly decided to raise its official interest rate by 25bp to 4.75% at the monetary policy meeting, where most analysts predicted it to be held steady. Rattled currency markets made the Australian dollar shoot up to around parity with the US dollar.

RBA explained the reason for rate hike is that

the economy is now subject to a large expansionary shock from the high terms of trade and has relatively modest amounts of spare capacity. Looking ahead, notwithstanding recent good results on inflation, the risk of inflation rising again over the medium term remains.

Australia has set an inflation target of 2-3% not to "materially distort economic decisions in the community." The core CPI has recently increased by 3%, an upper limit of the inflation target. Given that the terms of trade has hit all time high, RBA's decision to raise the interest rate is considered to be preemptive in terms of curbing inflationary pressure.

Note that China also raised the interest rates suddenly late last month, which plunged world stock markets and appreciated the US dollar as a safe haven in fear of China's economic slowdown. RBA, though, interpreted the largest trade partner's action differently, saying in the statement that "concerns about the possibility of a larger than expected slowing in Chinese growth have lessened recently." China's policy would have stirred RBA to concentrate more on inflation than economic condition.

It wouldn't be ridiculous to trade the Australian dollar as a proxy of the yuan.

Who can say "No" to China?

I'm interested in this article, but haven't posted since I found it. The reason? Well, I was going to comment on the article, but did have few time to elaborate. Anyway, it's written by two renowned economists, Alan Auerbach and Maurice Obstfeld. The summary is:

As the debate over China's exchange-rate policy and the US response intensifies, this column argues that a large Chinese revaluation – whether forced of voluntary – will not be a free lunch for the US. Drawing on a theoretical cost-benefit analysis, it suggests that if the US wants to create jobs at the lowest costs, it should first consider further fiscal expansion.

I'm not 100% sure, but I can't wholly agree with the conclusion. What if the US doesn't require Chinese revaluation anymore? Complaints on China's currency policy are coming from not only advanced nations but also emerging countries like India, Brazil or Thailand, which is cornered to think seriously of restraining foreign flows to the country. If the US doesn't say anything, who says? Who else can say "No" to China when China has amassed huge political and economic clout over the globe? I think that currency matter is, like the other economic policy, highly political in the sense that it shouldn't be viewed only from an point of economics.

China raises interest rates

China suddenly raised its interest rates yesterday. The announcement was made at around 7pm in China time. So, there was no influence on Chinese stock markets in 19 October.

China's central bank surprised on Tuesday with its first increase of interest rates in nearly three years, a move that reflects its concern about rising domestic asset prices and stubborn inflation.

It said it would raise benchmark one-year deposit and lending rates by 25 basis points each.

Oil prices fell, stocks pared their gains in Europe and the dollar rose across the board after the announcement as investors were caught off guard by the tightening step.

"The interest rate rise is entirely outside of market expectations," said Zhu Jiangfang, chief economist at CITIC Securities in Beijing.

"The recent rise in headline inflation has put the real rate into negative territory. And I think that's why the central bank needs to raise interest rates in such a hasty way," he said.

A number of leading economists, including some advisers to the central bank, have suggested the central bank increase deposit rates to keep savers' returns in positive territory.

China reported consumer inflation of 3.5 percent in the year to August and economists expect that the pace climbed to 3.6 percent in September.

Still, the increase in rates is surprising given that several top leaders have recently expressed confidence that inflation is under control, and have said that higher rates would potentially suck in speculative capital from abroad.

"They did it now likely because Thursday's GDP and CPI data is too strong for them," said Dariusz Kowalczyk, senior economist at Credit Agricole CIB in Hong Kong.

China is due to report third-quarter GDP and a suite of economic data for September on Thursday. Economists polled by Reuters expect that economic growth slowed to 9.5 percent year on year last quarter, down from 10.3 percent in the second quarter.

As the article reports, stock prices plunged all over the world while the dollar and bond markets surged. It's because investors feared Chinese economy cooling down and flocked to safe havens. Look at the charts below.

Flight to safety. That's the word heard in the markets in 19 October. But the impact of interest rates rise looks like limited and short-lived. Chinese stock markets gained a little bit today, though real estates lost.

China's benchmark stock index rose to a six-month high on speculation the nation's first interest- rate increase since 2007 will help tame inflation and contain asset bubbles.

China Life Insurance Co. and Ping An Insurance (Group) Co. rose more than 4 percent after Mirae Asset Securities said insurers will outperform in a rising rate environment. Liquor maker Kweichow Moutai Co. and Tsingtao Brewery Co. led gains among consumer stocks that are less dependent on the economy. China Vanke Co. and Poly Real Estate Group Co. slumped at least 6 percent as higher borrowing costs may deter demand for housing.

The rise in interest rates makes me wonder whether China lets the yuan appreciate. The yuan should rise if the spread of interest rates shrink, though China's currency depreciated today. People say that the fear of inflation compelled China to raise interest rates. But I don't think it's the whole reason. G20, delayed currency report, and the US midterm election. There is much left to be explained on China's sudden action.

What Obama expects from China

One might see it as sheer coincidence that the US Treasury Department was scheduled to release a currency report in which China would be accused as a currency manipulator on the same day when China's Communist Party leaders meet to discuss the country's next five-year plan. But Treasury Secretary Timothy Geithner, again, decided to delay the release.

The U.S. Treasury Department said it will delay a report on international currencies, including China's, while citing progress in the acceleration of the yuan's rise.

The report will be delayed until after meetings of the Group of 20 nations in the coming weeks, according to a statement from the Treasury today.

Treasury Secretary Timothy F. Geithner "recognized China's actions since early September to accelerate the pace of currency appreciation, while noting it is important to sustain this course," according to the statement.

Geithner has increased pressure on China to allow the yuan to strengthen, saying last week the nation is contributing to a "damaging dynamic" of countries keeping their currencies weak to spur exports. Record imports from China are fueling calls by U.S. lawmakers for action to protect American jobs as next month's elections approach.

China's yuan has surged by about 2.8% from late July so far. Geithner's message is absolutely clear: we need more. You, China, appreciate the currency much more till the coming big events. At this point, time schedule is important. According to the Treasury statement,

The Heads of State, finance ministers, and central bank governors of the G-20 and the Asia-Pacific region will participate in several important meetings over the coming weeks. These meetings provide an opportunity to make additional progress on the important challenge of securing stronger and more balanced growth.

The Treasury will delay the publication of the report on international economic and exchange rate policies in order to take advantage of the opportunity provided by these important meetings. 

Hmm, let's check out the schedule.

The Treasury statement shown above implies that the G20 meeting, be it Finance Ministers' or Summit, is important for both the US and the world. But it's no doubt that Obama's priority lies in the US midterm election held in 2 November, which the Democrats are on the brink of losing amid increasing frustration for the administration's economic policy among the public. So, the de facto deadline must be 2 November.

China's Central Party Committee meeting runs through 15 to 18 October. Its main theme is to approve a new 5-year plan for the country. BBC explains:

The ruling CPC is expected to endorse a new economic model of "inclusive growth", a model that stresses not just on GDP growth at any cost, but on balanced development across the different sections of the society and different geographic regions.

A widening wealth gap is fuelling social tensions and threatening the power of the CPC.

So the conference will be discussing improved income redistribution and social reform. At the same time, international pressure is mounting for China to stimulate its domestic consumption rather than relying on exports.

The meeting is also expected to confirm Xi Jinping as the vice-chairman of the party's Central Military Commission, paving the way for him to succeed Hu Jintao as the next leader of China in 2012.

To achieve balanced economic growth, China might endorse another round of yuan's appreciation, which I think the Obama administration expects. We'll see next week.

Is China really rising yen?

Recently, some analysts have argued that yen is appreciating because China is buying it. Let's see some example. Marshall Auerback said;

The best means of avenging the nation for historical slights and grievance, and making oneself the dominant power in Asia (whilst mitigating the influence of the US through its levers on Japan) is very simple: just buy yen and force the Japanese corporations to hollow out Japan.

China's intention is clear, according to Auerback. He reiterates;

And what does this mean for Japan, which is the canary in the coal mine? With this kind of investment going on in China, the Japanese firms haven't a chance to compete with the yen prevailing at this level. And China knows this so it continues to buy Japanese yen bonds, which keeps the currency high and basically destroys its main Asian competitor. It represents the ultimate revenge for Manchukuo and the Rape of Nanking. And this is a development that could move very fast because the excesses of investment in China are currently so great.

Historical reason. Yeah. It's easy to understand. Yves Smith joins the forces.

Hefty buying by China has pushed the yen to high levels which are particularly damaging to its economy

But we know that China sold Japanese bonds in August. According to Japan's Ministry of Finance,

Data released Friday by Japan’s Ministry of Finance showed China sold a net ¥2.018 trillion ($25.59 billion) worth of Japanese assets in August, selling back most of the net ¥583 billion it bought in July and the ¥2.3 trillion it bought in the first half of the year.

It means that in August, China sold about 90% of Japanese bonds it bought this year. If China is a culprit of yen appreciation, yen should have depreciated in August given that China sold its yen holdings. But wait! Yen appreciated in August, didn't it? Japanese bonds markets also rose in August.

The graph above shows the US dollar/yen trend from July to October. It's clear that yen APPRECIATED in August, not depreciated. So, the question should be: Is China really the driver of yen appreciation? We have to come back to that question rather frequently.

Does China really want it?

Today, Chinese currency yuan reached at the new high of 6.6830 to the US dollar. It's plain obvious that China's intention is to circumvent criticism from the West at the nearing G7 meeting on its currency policy. It's kind of childish, but China looks like to believe it works.

Nobody believes China seriously wants to appreciate its currency, though China would need it sooner or later if it changes to a more "harmonious" economy. The action just before the international meeting is always China's way to dodge blame and save their face. For example, China announced a massive public spending plan which amounts to 4 trillion yuan just before the G20 meeting in 2008. Also in June this year, a few days before the G20, China suddenly rose its currency. Even recently, China appreciated yuan before Wen met Obama. Who says that China isn't manipulating the currency?

I don't think that the US or Europe withdraws the criticism against China on the currency policy, even though yuan has appreciated a bit. If you appreciate the currency at will, you depreciate the currency in return at will. Also, the core problem in the world isn't excessive consumption, but lack of demand in creditor nations like China. You can't rely on the US or Europe to consume more given their current battered economy. Why is China playing this game? Do they really think that they can persuade the US not to rant them if they change the policy a little bit?

I think that a currency spat only represents part of the problems with China. As I showed previously, China's rise has caused rather tension than reconciliation with neighboring countries. This could be a test case of how China plays a responsible role in the world with its growing might.

China's arrogance revealed (again!)

China hit back at the international criticism on yuan policy.

China stiffened its opposition to a rapid appreciation of the yuan, setting the stage for a confrontation over exchange rates at this week's international monetary meetings in Washington.

Premier Wen Jiabao said China will stick to its policy of gradually increasing the currency's flexibility and lashed out at European Union leaders for teaming with the U.S. to pressure the Chinese government.

"Europe shouldn't join the choir" clamoring for a higher yuan, Wen told a business conference yesterday before an EU- China summit in Brussels. "If the yuan isn't stable, it will bring disaster to China and the world. If we increase the yuan by 20-40 percent as some people are calling for, many of our factories will shut down and society will be in turmoil."

It's nothing new that China retaliates its claim to let yuan appreciate gradually, not faster or by outside pressure. But I find something different in Wen's words.

Wen is behaving very arrogantly.

That's the same as what I saw in the dispute between Japan and China over Senkaku Islands. Japan released a Chinese captain earlier, but China kept 4 Japanese into custody. China is pushing their national interest boldly and bluntly, taking the world economy as a hostage. His words prove it.

This year, yen rose more than 10%, bearing the brunt of fierce market force along with India and Thailand. It isn't surprising that the Japanese did something to stop it. 

Martin Wolf of FT is very straightforward.

Has the time for a currency war with China arrived? The answer looks increasingly to be yes. The politics and economics of an assault on Chinese exchange rate policy are increasingly convincing. The idea is, of course, deeply disturbing. But I no longer believe there is an alternative.

We have to address four questions. Is China a "currency manipulator"? If it is, does it matter? What might China reasonably be asked to do? Finally, can other countries shift China's policies, with limited collateral damage?

The first question is the easiest. If a decision to invest half a country's gross domestic product in currency reserves is not exchange rate manipulation, what is?

Then, what should we do to stop  China's manipulation of its currency?

... Negotiation remains a hope. The rest of Group of 20 leading countries should unite in calling for these changes. But if negotiation continues to fail, alternatives must be considered. Import surcharges are one possibility. Fred Bergsten of Washington's Peterson Institute called for countervailing currency intervention in the FT this week; and Daniel Gros of the Centre for European Policy Studies in Brussels recommends capital account reciprocity: affected countries could prevent other countries from purchasing their financial instruments, unless the latter offered reciprocal access to their financial markets. This idea would also make the Bergsten plan more effective.

Reciprocity. That's what a Japanese politician (I forgot his name) mentioned when he was asked about China's purchase of JGB.

China is buying Greece

China is buying Greece.

Greece is starting to emerge from its severe debt crisis, Chinese Premier Wen Jiabao said on Sunday during a visit to Athens.

"It is with joy that we see Greece emerging from the shadow of its debt crisis," Wen told the Greek parliament. "The financial market has started to stabilise, the budget deficit is coming down, investor confidence is increasing and a growth prospect is emerging on the horizon."

"We have every confidence in Greece's future," he said.

China offered on Saturday to buy Greek government bonds when Athens resumes issuing, in a show of support for the country whose debt burden pushed the euro zone into crisis and required an international bailout.

Goldman Sachs was reported to recommend China to buy Greek debt this January in FT. Even after that, several times mass media has noted China's buying spree of Euro debt. One reason is, of course, that China wants to diversify its portfolio to depend less on US bonds. Other sources indicated that the second largest economy in the world is purchasing Japanese and Korean bonds.