Expect a lot more trade intervention

The currency may well be undervalued, but a significant rise in the RMB, especially if it is countered domestically by an increase in credit at lower real rates, might actually make the global imbalances worse and, more worryingly, cause China’s debt burden and capital misallocation to rise. This would make China’s eventual adjustment far more difficult.

The focus should be on shifting China’s economy towards the more labor-intensive and efficient sectors, and an appreciating RMB might actually make things worse, especially if it encourages hot money inflow. It is much better, I think, for China to raise interest rates than to raise the value of the

China PMI drops to lowest in 32 months

50.4 is the lowest number since early 2009, during the depths of the recession. So this number, shades above contraction, is a big deal. In fact, the sub-index for new (export) orders index is contracting, meaning slowing economic growth in the developed economies is now impacting China as well

Stephen Roach on America’s other 87 deficits

Here are a few excerpts from Stephen Roach’s latest at Project Syndicate

Deleveraging, Banks and Economic Recovery in Ireland

The challenge that the Irish economy faces can best be described in the context of flows and stocks of assets and liabilities. Under the Memorandum of Understanding (MoU) with the IMF/EU/ECB Troika, Ireland must implement a severe fiscal austerity programme and reduce the size of its banking system. These goals must be achieved in the context of a deleveraging process in the household sector brought about by the need to repair balance sheets following a collapse in the value of housing assets. The current policy mix, which aims to reduce these stocks simultaneously, is unlikely to be successful, a feature we term the domestic trilemma. An external trilemma arising from the constraints of EMU membership also limits the policy choices for high-debt economies attempting to engineer an export-led recovery. This paper argues that a sequencing of policies is required for Ireland to achieve its goals

Argentina Reelects Fernandez, Unorthodox Policies And Peso Weakness To Continue

Fernandez will try to maintain the unorthodox mix of policies for as long as she can, and has shown little willingness to more towards orthodoxy during her first term. Troubles will come both internally and externally, with the growing fear that the exchange rate will bear the brunt of adjustment in the coming months

China’s Dwindling Trade Surplus Signals Weak World Economy

The Chinese trade surplus has dwindled. But pressure to revalue the Yuan remains. Video below

China Notes from the Yum! Brands Earnings Call

Today’s Yum! Brands’ earnings conference call was dominated by China. Management talked a lot about commodity inflation running around 8 percent and 20% labor inflation, which they do not yet see abating. This doesn’t square with the August official inflation rate of 6.2 percent. A China hard landing scenario is now on traders’ radar and needs to be closely monitored. The stock closed down 2.7 percent

Chart of the day: Largest German trade partners

Since I did the numbers for the US, I thought I would do the numbers for Germany too. Below are the bilateral trade figures for Germany in 2010, first ranked by deficit with country and then by surplus with country. Germany has a deficit with 73 countries and a surplus with 147 countries. The largest deficit by far is with China at $23 billion, followed by Norway, Ireland and Japan. The largest surpluses are with France, the UK, the US and Austria

BRICs to the rescue

Turning to foreign sources of capital will only aggravate the problem from which Europe already suffers. Even assuming that developing countries are willing to take on risks that Europeans find prohibitive, their help will not improve prospects for Europe. On the contrary, it will hurt growth prospects and make the ultimate resolution of the debt crisis more difficult than ever. BRICs should be exporting more demand, not more capital.

It is important that the desperate short-term funding needs of certain governments do not lead to an overall worse outcome for Europe. If Europeans do not want to fund credit-impaired European governments, they should not ask foreigners to do so. Slower growth and foreign debt will not help resolve the problem of insolvency

Chart of the day: Largest US trade partners

Below is the list of the largest trade partners of the United States as compiled by the US Census Bureau. The United States has a bilateral trade deficit with 12 of the 15. So I have ranked them according to trade deficit, with China in first place by a mile. Mexico is actually second, Japan and Germany, third and fourth respectively. The list also includes oil exporters like Saudi Arabia and Venezuela, but the lion’s share of the US trade deficit is in goods and services

China currency bill is about US politics, not trade

Below is a video of my appearance on RT International last night discussing the recent bill to authorise sanctions against the Chinese for currency manipulation. I see this bill as all about the politics and little about the economics

China Bill: Huff, Puff and Bluff

US national elections are 13 months away and not coincidentally, the Congress is looking at a new measures to encourage China to re-value the yuan. While there is little doubt that the yuan in under-valued, though reasonable people may differ on the magnitude, politics more than economics appears to be the driving force