Income Planner

By having an understanding of what is going on around us, we as individuals at least won't be blindsided.  It sometimes feels like the 80's all over again, except at that time it was the Japanese who were buying up everything in the states.  But you guys were too young to remember that.  As I said when I returned from China last month, the Chinese if they wanted to, could take over the world.  Only air and water pollution might stop them, otherwise you can't believe the crush of people that I felt.  Dubai and the rest of the mid east emirates have $1.5 trillion they can spend thanks to their petrodollars.  China has almost as much and Japan is not too far behind.  When they stop investing in our Treasury bills, the party will really be over.

China's high-stakes currency game

BY Jacquieline Thorpe

Financial Post

Beijing adds another dash of volatility to global markets

The ease with which the world's biggest communist country has managed to become king of the capitalist world's playground should be enough to make any Wall Street financier blush.

That's because the astonishing rush of the loonie, which continued as it moved above US$1.10 yesterday, is not just about soaring oil prices and a robust domestic economy, but how the People's Republic of China is adjusting its currency -- and in so doing managing to bend the world's foreign exchange markets to serve its own interests.

"They're very adroit," said Charles Dumas, director of Lombard Street Research in London. "What they've done tactically, is very effective."

Whether this will ultimately allow for the smooth transition of the emerging market giant into the global economy -- not a bad thing for anyone -- or end in a protectionist backlash remains be to seen. Either way, it is a high stakes game that is adding another dash of volatility to financial markets already seething with global credit woes.

The volatility picked up dramatically yesterday after comments from two Chinese officials suggested the country may diversify some of its vast horde of US$1.4-trillion foreign exchange reserves -- built up by being Wal-Mart tothe world -- away from U.S. dollars into stronger currencies like the euro.

The comments sent the U.S. greenback spiralling lower and the loonie briefly to a record high of US$1.1030 before it ended North American trading lower at US$1.0777. The greenback also hit new lows against the euro, the British pound and the Australian dollar while gold and oil raced higher. The yellow metal hit US$845.40 an ounce, its highest level since 1980 and oil touched a record high of US$98.62 a barrel.

Global stock markets already reeling under the fallout from the U.S. housing downturn, ended sharply lower amid the upheaval.

China's actions in global currency markets appear particularly cunning over the past year. Under huge pressure from the United States it has allowed its currency to appreciate about 9% against the U.S. dollar since July, 2005, when it allowed its currency to float more freely against the greenback.

But over the same period, the yuan has dropped about 9% against the euro, a handy development since Europe is now China's biggest trading market.

Indeed, European Union-bound exports are now larger than those to the United States, having grown 37% this year, versus 17% for the U.S.

Mr. Dumas said China's comments yesterday formalize its mercantilist interest in a rising euro. "A rising euro enables China to move the yuan up against the dollar while it falls against the euro, improving China's competitiveness in its largest, fastest growing export market," he said.

By keeping its currency low on both fronts, China can continue to export its way to prosperity and provide employment for its army of workers, a classic strategy for developing economies from time immemorial. The trouble is, other currencies like the loonie and the euro shoulder an increasing burden of the greenback's decline.

There is not much the rest of the world can do about it, however, as China has a treasure-chest of foreign exchange reserves to maintain its peg and keep its currency where it wants it. Foreign exchange markets seem to have sensed this powerlessness among the world's central banks and have pressed the current trend of a weak U.S. dollar and yuan to the limit.

So far, Chinese currency manipulation has not been altogether a bad thing for the rest of the world. China may be eating the rest of the world's lunch in the manufacturing sector but it continues to provide it with cheap consumer goods, an essential feature of the West's consumer society.

But almost all attempts to buck a natural economic tendency -- in this case a stronger yuan to reflect the world's fastest growing economy -- eventually fail. China's strategy looks like it may already be starting to unravel. The cost of oil and food imports is now soaring in China as a weak currency is ultimately inflationary. It is not great for Chinese consumers, either as they face higher import prices -- thus hindering the development of the domestic economy.

"The degree of overheating is intensifying and inflation is picking up and will pick up further," Mr. Dumas said.

China also risks incurring another trade enemy in the Europeans as well as the Americans, which could lead to a protectionist backlash.

China may soon find its go-slow approach to currency appreciation may even be too slow for its liking, in which case look for some of the heat on the loonie and the euro to dissipate.