Chinese currency quickening pace of appreciation

The change may seem minuscule. But for those who follow China's currency, 0.8% is practically a bonanza.

That's how much the Chinese yuan has appreciated against the dollar in the last week, its fastest pace in almost a year.

Monday showed no signs of slowing down as China's central bank set its so-called parity exchange rate at 6.395 yuan for each dollar, giving the Chinese currency a value of 15.64 U.S. cents, a record high. (The bank sets the rate in the morning before every currency trading session and allows the yuan to strengthen or weaken 0.5%.)

The yuan has gained 3.1% against the greenback this year and 6.8% since June 2010, when China depegged its currency from the dollar. Many analysts had expected the yuan to climb just over 6% for the year, but the last few days may give them reason to revise on the upside.

The uptick in appreciation is welcome news to trading partners who have long argued that China unfairly undervalues its currency to boost its exports. Reinforcing that view, China last week reported its largest trade surplus in more than two years.

Diplomacy may be at play as well. The yuan's strengthening comes right before Vice President Joe Biden's arrival in China this week. The last time the so-called redback grew this fast was last September, when Washington was preparing a report on China's currency regime.

But more than anything, analysts say, the strengthening yuan has to do with China's growing battle with inflation, which hit a 37-month high in July, stoking fears of social instability the cost of food.

A mightier yuan would make imports cheaper and rein in the nation's over-abundant money supply.

The recent downgrade of U.S. government debt by Standard & Poor's has also raised doubts in Beijing about the merits of running large trade surpluses, which increase China's foreign-currency reserves. With few other viable ways to invest that money, China has accumulated about $1.2 trillion in U.S. Treasuries.

In a recent research note, Daniel Hui, a senior foreign exchange strategist at HSBC, said of the yuan's quickening appreciation:

[I]t is increasingly likely that this is going beyond just macro factors, and that domestic politics is becoming increasingly important.

We have long viewed [foreign exchange] policy as ultimately being the outcome of a domestic political process. Now, the U.S. sovereign downgrade by S&P as well as the seemingly increased potential for a third round of quantitative easing is stoking real debate [in China] as to the broader costs and benefits of China's choice of exchange rate policy. This, alongside recent domestic discontent, may have been enough to shift [foreign exchange] policy away from the previous stance, becoming more permissive and lessening the requirement for such large accumulation of dollars. If so, this new, accelerated pace of appreciation could last for some time.

The trend could also mean that China's central bank, which favors liberalizing the country's financial sector, is gaining ground against pro-export forces -- namely rich coastal provinces and their patron in the central government, the Ministry of Commerce.

The ministry has said that a sharp appreciation of the yuan would leave millions of factory workers out of jobs. 

But Li Jie, head of the Reserves Research Institute at the Central University of Finance and Economics in Beijing, disagrees, telling The Times last week that a stronger yuan would help the country's manufacturers by reducing raw-material prices and wages.

"It would easily offset the pain of having more expensive exports," Li said.

-- David Pierson

Photo: A grocery store cashier holds 100-yuan notes in Beijing. Credit: Frederic J. Brown / AFP / Getty Images

 

 

 

 

 

The Fed to the rescue, again?

The Federal Reserve may not launch a new stimulus plan for the economy when policymakers meet Tuesday, but the central bank almost certainly will try to assure investors that it has a plan, if needed.

The Fed holds its normal mid-summer meeting at a time when stock markets worldwide have been in a free fall, as investors fear that the economic recovery is in serious jeopardy.

The Dow Jones industrial average plunged 5.6% on Monday, to 10,809, after tumbling 5.8% last week. Some broader U.S. market indexes now are in bear market territory, meaning they’ve fallen more than 20% from this year’s highs.

Many analysts believe the Fed will try to boost confidence in its post-meeting statement Tuesday by suggesting that the U.S. economy is better than it looks. The Fed has noted repeatedly that some of the headwinds the economy faced in the first half have faded.

Case in point: Oil prices have reversed. On Monday, U.S. crude oil futures sank $5.57 to $81.31 a barrel, the lowest since November. The price has tumbled 28% from its spring high. That will put at least some money back into consumers’ pockets.

But even if the U.S. isn’t facing a new economic crisis, it is surely facing a new crisis of confidence, egged on by Standard & Poor’s downgrade of the government’s credit rating after the bitter partisan battle in Congress over the federal debt ceiling.

The Fed can’t afford for business and consumer confidence to fall into a black hole. That would make another recession self-fulfilling.

So the post-meeting statement is “likely to talk in detail about possible options” if the economy needs more help, said Anshul Pradhan, fixed-income strategist at Barclays Capital in New York.

Bernanke and other Fed officials have previously spelled out other steps they could take to try to bolster the economy. One would be to pledge to hold short-term interest rates near zero for a specific period -- say, two years -- rather than for an “extended period,” the wording the Fed has been using.

In theory, that could give businesses and investors more incentive to do something potentially more productive with their money than keep it in bank accounts earning nothing.

The Fed also could try to pull long-term interest rates (including mortage rates) down further by reinvesting the proceeds from its $2.65-trillion Treasury- and mortgage-bond portfolio only in long-term Treasuries, such as 10-year and 30-year bonds.

But some analysts say a continuing stock market meltdown could force the Fed to launch yet another massive "quantitative easing" program to buy Treasury debt across the board, in concert with similar bond-buying campaigns by the European Central Bank, the Bank of Japan and perhaps others.

The idea: Keep printing money and injecting it into the financial system, hoping it will kickstart economic growth.

George Goncalves, interest-rate analyst at Nomura Securities in New York said the Fed, the ECB and the Bank of Japan might have to commit to injecting $3 trillion to $5 trillion into the global financial system to have the necessary effect, given that their previous cash injections were insufficient.

"I think you need shock and awe," he said.

That would undoubtedly unleash a new round of inflation at some point. But if Bernanke has to choose between inflation and depression, it should be an easy decision.

"They will not sit by and watch this thing cascade," Goncalves said.

-- Tom Petruno

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Photo: Fed Chairman Ben S. Bernanke. Credit: Mandel Ngan / AFP / Getty Images

 

Gold surges past $1,670 toward new record amid economic worries

Gold prices are surging along with concerns about the state of the global economy, rushing to a high of $1,675.90 an ounce in New York on Wednesday, up from $1,641.90 on Tuesday.

Investors, spooked by a raft of discouraging reports about slowing job growth, have been pulling out of stocks and retreating into the safety of the precious metal.

Even as the government cobbled together a deal on the debt ceiling, Wall Street was stumbling. The turbulence has helped gold continue its decade-long upward march.

The country's credit rating could still take a hit down the line, threatening the value of the dollar, said Marin Aleksov, chief executive of precious metals broker Rosland Capital in Santa Monica. But the potential for more borrowing does the same, he said.

"The economy's stalling, you have the possibility of a downgrade and a debt deal that's just not enough in the long term," he said. "If you don't trust currency, you don't trust the markets and you don't trust your leaders, where else can you go but gold?"

Prices hit a then-record high of $1,641.90 an ounce Tuesday amid news that the Bank of Korea bought its first batch of gold in more than a dozen years. Analysts said they expect more central banks looking to limit their exposure to a weakening dollar to follow suit.

By the end of the year, the price could meet -– or exceed -- $1,800, they said.

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-- Tiffany Hsu

Photo: Gold souvenirs are displayed at jewelery shop in Amman. Credit: Majed Jaber / Reuters