from Follow the Money

More variations on 7.99. The world changes, Chinese policy doesn’t.

July 13, 2006

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The latest Chinese macro news summary from Market News International pretty much says it all – nothing much has changed.  The RMB floats between 7.990 and 7.999.  Exports grow faster than imports.  And investment growth continues to be stupendous.  

     **The yuan ended at 7.9926 to the dollar on the exchange-traded  market, against yesterday's close of 7.9910, traders said. The central bank set a central parity rate of 7.9948 to the dollar before the start  of trading today, compared with yesterday's 7.9916.

     **China's GDP climbed 10.9 pct year-on-year in the second quarter, the official Securities Times reported. China's CPI rose 1.5 pct  year-on-year in June, while PPI was up 3.4 pct year-on-year in the same month.  Fixed asset investment in the first half rose 31.3 pct year-on-year, and it rose about 35 pct for June alone. The industrial value-added output in June gained 19.5 pct year-on-year.

It sure seems like China is unwilling to even try to make use of standard macroeconomic tools to help cool the economy.   The maximum policy measures under consideration under Beijing – whether higher interest rates or a bit more appreciation in the RMB – are far too small to make a difference.   Say China lets the RMB appreciate by 2% rather than the 1% of the first half of the.   The total move would perhaps make up for inflation differentials between China and the US.  And the RMB would still depreciate in real terms.

With oil at $75 plus again and concerns that events are spiraling out of control in the Middle East, the world seems to be changing far faster than Chinese policy.

Should China’s investment bubble burst (30% y/y growth in fixed asset investment has to be discounted to get the number in the national accounts, but it is still very fast growth), China won’t have anyone to blame but itself.    It sure won’t burst because the exchange rate has been allowed to appreciate too fast.  

And it may end up bursting because China continues to miss opportunities to make use of standard instruments of macroeconomic control – higher interest rates, a stronger exchange rate – too cool an economy that sure looks to have grown an extraordinarily fast clip in the first half of 2006.   Perhaps even faster than the official estimate.

Investment was darn close to 50% of Chinese GDP by some measures even before the most recent surge  … 

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