A conundrum
China is attracting hot money as its currency appreciates, $100 billion or so in the first quarter alone. Meanwhile, China is now contemplating what happens when exports to America slow. Peoples Daily:
“China is seeing an even stronger capital inflow now, despite some nations suffering a credit crunch,” Fan Gang, a member of the central bank’s monetary policy committee, said. China’s foreign exchange reserves, the world’s largest, increased by $153.9 billion in the first quarter, compared with $135.7 billion during the same period a year ago. But less than one third of the gain could be attributed to its $41.4 billion trade surplus during the same three-month period…the renminbi’s appreciation compared with the US dollar is also attracting speculators, Fan said. “The capital inflow will add up to excessive liquidity and worsen inflation.”
China is now battling its worst inflation in more than a decade. In February, the nation’s consumer price inflation increased 8.7 percent, the highest in 11 years. The government has adopted a slew of measures, such as credit control and temporary price intervention, trying to reduce inflation to about 4.8 percent this year. Meanwhile, the government has sought another remedy by allowing the currency to appreciate faster. Its value increased 4.2 percent in the first quarter alone…
A serious US recession and an ensuring slowdown of China’s exports to the nation could cost as much as 1 percentage point of China’s GDP growth, Fan estimated. Currently, the US market absorbs 23 percent of China’s total exports, while fast-growing East Asian economies receive about 30 percent.
It is such an odd economic time. China is getting billions in hot money betting on its currency’s appreciating — and the appreciating currency lowers China’s great competitive advantage. Meanwhile, the financial wizards continue to play oil (at $112) as the anti-dollar, while oil prices will eventually crimp demand and may make a US recession worse. So the currencies move one way, while the fundamentals move the other. Such disconnects are finite.