low profile coverage, but EXTREMELY important development from China ...
I posted this in the Members' Area due to political policy content ...
(snip)"1930s beggar-thy-neighbour fears as China devalues
China has begun to devalue the yuan for the first time in over a decade, raising fears that it will set off a 1930s-style race to the bottom and tip the global economy into an even deeper slump.
The central bank has shifted the central peg of its dollar band twice this week in a calculated move that suggests Beijing aims to offset the precipitous slide in Chinese manufacturing by trying to gain further export share abroad.
The futures markets are pricing in a 6pc devaluation over the next year. "This is clearly a big shift in policy and we are now on alert," said Simon Derrick, currency chief at the Bank of New York Mellon.
The move follows a Politburo speech by President Hu Jintao warning that China is "losing competitive edge in the world market".
China has allowed a crawling 20pc revaluation over the past three years. Any reversal risks setting off conflict with the incoming team of President-Elect Barack Obama in Washington. Mr Obama called China a "currency manipulator" during the campaign, a term that carries penalties under US trade law.
Outgoing US Treasury Secretary Hank Paulson is viewed as a "friend of China". He called for a stronger yuan this week before embarking on a visit to Beijing, but the plea was couched in friendly terms. This soft-peddling may soon change.
Hans Redeker, currency head at BNP Paribas, said China's policy switch could set off a dangerous chain of events. "If they play this beggar-thy-neighbour game, it will cause a deflationary shock for the whole world," he said.
It makes sense for countries with current account deficits such as the UK, US or Turkey to let their currencies fall, but China has the world's biggest trade surplus.
Michael Pettis, a professor at Beijing University, said it was "very worrying" that a pro-devalulation bloc seemed to be gaining the upper hand in the Communist Party. "I really do believe that we are on the brink of a very ugly period for trade relations," he said.
China has relied on exports to North America and Europe as its growth engine, making it acutely vulnerable to the contraction in global demand. Mr Pettis said this recalls the role played by the US in the 1920s, a parallel fraught with danger. "In the 1930s the US foolishly tried to dump capacity abroad, but the furious reaction of trading partners caused the strategy to misfire. China already seems to be in the process of engineering its own Smoot-Hawley," he said, referring to the infamous US Tariff Act in 1930.
China showed restraint during the Asian crisis in 1998, holding the line against domino devaluations across the region. It may yet hold the line this time.
However, this crisis is more serious. The manufacturing sector has seen the steepest decline since the records began, with devastation sweeping the textile, furniture and toy sectors. Civil unrest has begun to rock the Guangdong and Longnan regions.
Beijing has slashed rates and unveiled a fiscal stimulus of 14pc of GDP, but most of the spending comes in the form of instructions to local governments to spend more – but without giving them the money. Does China really intend to step in to prop up global demand? The jury is out. "(snip)
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In case this isn't registering immediately, by intervening in foreign exchange markets to devalue the Yuan, the Chinese gov't is now effectively 'subsidizing' the price advantage of all products exported from China to foreign countries !!!
Re: low profile coverage, but EXTREMELY important development from China ...
with some follow-up in regard to possible underlying reasons ...
(snip)"This evening a rumor showed up on the forum that China and another nation (Korea?) are going to intentionally devalue their currencies within days by 30-35%.
I was wondering how long it was going to take for the Chinese to decide how to deal with Paulson for what he did to them.
See, back on September 30th I wrote a ticker in which I reproduced the portion of an interview on CNBC in which it was disclosed by Mr. Sherman of California that the TARP/EESA was intended to bail out Chinese investors who our bankers screwed (along with everyone else) by selling them trash securities that were claimed to be "AAA" grade paper.
Now of course Paulson, it appears, was lying not only to Congress, but also to The Chinese!
Congress is spineless. Paulson counted on them (and the media) failing to raise sufficient hell to agitate the American people prior to the bill's passage, and he also counted on The American People being a nation of sheep who would not descend on Washington DC and demand that he resign immediately, refusing to leave town until he did.
But did Paulson and Bernanke ever intend to actually pay off the Chinese, never mind that our government has no business covering the outrageous (and even possibly unlawful) actions of private banks?
Or was Paulson and Bernanke's original intent to use any possible excuse to get their hands on a crapload of money to pay off their buddies in the banks, while screwing everyone they promised they would help, including the Chinese?
Now it would appear that the Chinese are rather pissed off. See, China's Central Bank chief made an "unscheduled" trip to America yesterday, while Paulson was in China himself.
Who did he come to see?
Perhaps, did he come to deliver notice to America?
Was his message a gigantic "screw you America", perhaps?
What say you Congress, and The American People, now?
Let me put this in stark relief - there is absolutely nothing that we (or the Japanese, who will get screwed to Mars by this as well) can do about this. Well, nothing other than play "Smoot Hawley", or worse, "Cowboys and Chinese."
Don't think some bright folks will not think about one (or both) of those options folks. They will. Either would of course be an absolute disaster, but that's nothing new for our political elite.
Why is this such a big deal? Because this sort of intentional devaluation is the precise "beggar thy neighbor" policy that was followed in the 1930s and was in no small part responsible for accelerating the deflationary spiral downward into hell on a global basis.
If there's anything to this you can kiss off what's left of our export market and further destruction of the American Wage Base. Oh, and while we're at it, would anyone like to take a bet on these same nations unloading into our government's tampering with the Treasury and Agency markets "while the getting is good", then telling us to bite it on future purchases of those securities too? How do you spell "bond market dislocation"?
This, if true, is massively deflationary on a global scale and there isn't jack that we can do about it.
I have said for over a year that the right thing for America to do is to force all of the bad debt into the open, default that which must default, and then go after each and every individual involved in any part of this massive fraud, no matter who they are and who they work for. While this would not have prevented the losses (indeed, it would have forced them to the forefront) it would have demonstrated to the world that (1) we are a nation of laws, and lawlessness will not be tolerated, and (2) it would have provided a buffer (foreign and domestic victims could go after the malfeasors both personally and corporately) against any argument that our government was officially sanctioning these acts.
Instead, Ben and Hank did in fact sanction the outrageous actions of these firms and individuals, and since they are speaking as officials of The United States Government their actions in this regard have now caused other nations - those aggreived - to search for ways to punish not the executives of Wall Street firms who did these evil things but rather The United States as a whole. "(snip)
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