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Stock Markets Predicting Peace in the Yuan War
Stock Markets Predicting Peace in the Yuan War

The Yuan War Continues

Stock Markets Predicting Peace in the Yuan War

About: Bank of New York Mellon China ADR Index (BKCN), Treasury Department, U.S. trade representative Susan Schwab, New York University professor Nouriel Roubini, Bloomberg, China's President  Hu Jintao, President Obama, ADR Index, China Stock Digest, Chinese equities, Jim Trippon, China's equity markets
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The real story of what’s happening in relations between China and the U.S. can be found in the tale of the tape. The Bank of New York Mellon China ADR Index popped over the past week, while mainstream news media continued sounding the alarm about a trade war or an attack on the dollar by China.

The threat of deepening division between Washington and Beijing has been making China investors nervous recently. Five U.S. senators have called for stiff tariffs against Chinese goods as punishment for “undervaluing” the yuan. On April 15th the Treasury department is expected to issue a sensitive report that could brand China a currency manipulator. Former U.S. trade representative Susan Schwab went to far as to predict that the “currency manipulator” label was inevitable as political pressures mounted.

In turn, officials in Beijing warned Washington that Beijing would not accept threats. This was seen in some circles as yet another hostile remark when it was a mere statement of fact. Beijing’s mandarins may indeed negotiate, but they will balk, and perhaps even lash out, if they feel demeaned, humiliated or coerced.

Stock Markets Predicting Peace in the Yuan War

New York University professor Nouriel Roubini told Bloomberg last week the U.S. and China are on a “collision course” over the Chinese currency and investors are underestimating the disruptions for global financial markets.”

But astute investors have read between the lines of reports from China and the U.S. recently and discerned a new tone of cooperation emerging. A flurry of indications points to a desire by both sides to cooperate as much as possible.

China's president, Hu Jintao announced that he will attend a Washington summit on nuclear security on April 12th, just three days before the currency report was expected. Although the US-China relationship has come under considerable pressure recently, Beijing's decision to attend the April 12 summit, to discuss nuclear terrorism and possible responses, indicates possible cooperation on the sticky question of China and Iran..

China has previously resisted calls to slap sanctions on Iran, an important trading partner. But President Hu’s decision to visit Washington may signal a shift in policy in favor of U.S. concerns. On Thursday night, President Obama spoke by phone with Mr. Hu for about an hour from Air Force One, an unusual length of time considering past frosty relations. China’s press reported that President Hu expressed a desire for healthier ties. The White House said Mr. Obama pressed China to get tougher on Iran and its nuclear ambitions.

It would be a diplomatic gaffe to brand China a currency manipulator, and to begin the process of imposing tariffs just days after President Hu visits Washington in a clearly cooperative gesture. Indeed, the White House has declined to affirm that its currency report will be released on April 15th as anticipated. I expect that it will be delayed as China sends more signals.

Stock Markets Predicting Peace in the Yuan War

Don’t expect China to knuckle under to Washington’s calls for an upward valuation of the yuan in the 25 percent to 40 percent range. Beijing recently signaled through its media why that won’t happen. The Chinese government has conducted “stress tests” on companies that could be affected by yuan revaluation. The outcome is no surprise.

The tests indicated that many industries, including home appliance, light industry and textiles, cannot bear an immediate and sharp appreciation in the yuan's value. A mere 3 percent appreciation of the yuan will reportedly shrink profits by up to 50 percent at machinery and electronics makers.

Clearly Beijing will not expose its fragile export industries to this kind of punishment. Expect China to agree to a wider trading band in the valuation of the yuan, instead.

That may not seem like much, but it appears we are seeing important harbingers of peace and cooperation between Beijing and Washington. That alone has been enough to quell investors’ nerves and send the ADR index to a peak just shy of its 52-week high of 400 points

China Economy: China Tightens Credit - What Does It Mean
China Economy: China Tightens Credit - What Does It Mean

A Warning: What China’s Credit Tightening Tells Investors

 A Warning: What China’s Credit Tightening Tells Investors

About: (Bank of New York Mellon China ADR Index, China’s Consumer Price Index, Chinas Producer Price Index, Marc Faber, Year of the Golden Tiger, Chinese New Year, Chinese Lunar New Year, Golden Tiger, Bank of China, China economy, China Stock Digest, Chinese economy, China stock market)
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China kicked off its Lunar New Year holiday with a bitter pill for investors. China’s central bank ordered lenders to set aside larger reserves…the second time in a month it has done so. That signals an ongoing tightening of credit in China, despite repeated official pronouncements that Beijing is continuing its “moderately loose” lending policy.

Even the Chinese press isn’t buying that line wholesale anymore. One newspaper described the latest action as a government effort to “freeze more money from lending.” Starting February 25th the reserve ratio, the share of deposits that banks must set aside as reserves, will increase by 0.5 percent on yuan deposits.

Chinese investors were spared the aftershocks because the Bank of China made its announcement after stock markets had closed for the lunar holiday. But investors in Chinese equities on this side of the Pacific weren’t so lucky. The Bank of New York Mellon China ADR Index gapped down 2% as markets opened on Friday, and recovered only slightly as the trading day came to a close.

China’s latest credit squeeze was also blamed for a very weak opening for U.S. stocks as key American indexes slumped in the one percent range on Friday.

Investors should expect even more credit tightening from Beijing as the inflationary effects of China’s lending boom and its increasing money supply ripple through the economy.

Unfortunately, the latest inflationary figures were wrongly celebrated. The media concentrated on a very slight “easing” of the China’s Consumer Price Index. The January CPI was up 1.5% from a year before, compared to December’s 1.9% rise.

Much more importantly, January’s Producer Price Index shot up. Wholesale inflation, as it is sometimes called, accelerated to 4.3 percent, up from December's 1.7 percent rate. This means consumers are almost certain to face similar price hikes in the future as retailers pass on their higher costs.

Also, housing prices rose 9.5 percent in January from a year earlier in seventy large and medium-size Chinese cities. That was 1.7 percentage points higher than December's housing price rise, the highest increase in 21 months.

It’s only a matter of time before Beijing takes further action to tighten credit, potentially by raising interest rates.

The effects of monetary decisions in Beijing on stock markets half a world away demonstrate once and for all the importance of China to global economic stability in the eyes of investors. The sensitivity of U.S. markets to relatively minor monetary tremors from China may seem irrational. But the plunge of U.S. indexes after Beijing’s latest decision signals the extreme fragility of investor confidence in the U.S. economy.

Professional gloom-monger, Marc Faber, made headlines by predicting that monetary tightening in China could cause an economic crash there. Nonsense. China’s booming economy does have well-recognized weaknesses. But we can be certain that Beijing’s economic commanders will move swiftly, and that they have the funds to deal with any danger signs that may appear. Never underestimate China’s determination to continue its growth curve.

More frightening for investors is the potential for U.S. monetary tightening to hurt American stock markets, especially considering their extraordinary sensitivity to Chinese monetary maneuvers.

The U.S. government cannot continue to lend money at near zero interest rates in its ongoing effort to revive the economy. When Washington finally taps the brakes, look out Wall Street.

Wall Street Worries as Washington Toys with Chinese Trade War
Wall Street Worries as Washington Toys with Chinese Trade War
Giti Tire

US stock markets have had a very wobbly opening this Monday as fear spreads that the Obama administration has fired the first salvo in a trade war with China.

President Obama made a long-awaited decision on Friday about imposing sanctions on China over alleged “dumping” of low-cost tires on the American market. Obama sided with trade unions and imposed stiff duties on $1.8 billion worth of Chinese tire imports.

The United Steelworkers brought the case against China back in April claiming that more than 5,000 tire workers had lost their jobs since 2004 because of cheap Chinese tires flooding the U.S. market. Obama's order raises tariffs for three years on Chinese tires — by 35 percent in the first year, 30 percent in the second and 25 percent in the third.

The Chinese government hit back fast and on many fronts. On Sunday, Beijing announced it would investigate complaints that American auto and chicken products are being dumped in China or benefit from subsidies. China says the U.S. imports have “dealt a blow to domestic industries.” You can be sure Beijing won’t have much trouble arguing that U.S. farmers and automakers are heavily subsidized.

On Monday Beijing escalated its action with a complaint to the World Trade Organization (WTO). The Chinese complaint to the WTO in Geneva triggers a 60-day process in which the two sides are to try to resolve the dispute through negotiations. If that fails, China can request a WTO panel to investigate and rule on the case.

With unusually swift and coordinated action the official Xinhua new agency quoted the government as saying, “China believes that the action by the U.S., which runs counter to relevant WTO rules, is a wrong practice abusing trade remedies." The government said the U.S. imports have "dealt a blow to domestic industries."

So far it’s a trade spat, not a “war” but it is an irritant as Washington and Beijing prepare for a summit of the Group of 20 leading economies in Pittsburgh on Sept. 24-25. Obama is set to visit Beijing in November and his reception could be very frosty.

Wall Street Worries as Washington Toys With Chinese Trade Wa

Amazingly, American tire companies had begged the President not to go ahead with sanctions against China. “By taking this unprecedented action, the Obama administration is now at odds with its own public statements about refraining from increasing tariffs,” said Vic DeIorio, executive vice president of GITI Tire in the U.S. “This decision will cost many more American jobs than it will create.” GITI Tire is the largest Chinese tire maker, and a U.S. retailer of low-cost imports.

Although investors are not yet facing World War III between the two economic superpowers, it’s enough to make the markets very nervous. The Chinese ADR Index tumbled heavily at the markets’ opening but recovered swiftly as cooler heads prevailed.

Alarmists are worried that China, which holds about a trillion dollars worth of U.S. financial instruments could declare a real economic war. The tools Beijing could use are worrisome. China could:

  1. Sell dollars they hold faster than they already are
  2. Not buy at the treasury auctions in the near future

It’s a little too early for China to exercise the nuclear option in this trade dispute, but the events have spread fear in otherwise buoyant markets. Investors in U.S. stocks should exercise caution and consider diversification as worries about devaluation of the U.S. dollar, inflation and trade wars continue to loom.

Holders of Chinese ADRs should ride out this rough period if they are confident that the shares they hold are from companies which continue to grow profits by double-digits.

And, more importantly, they should not be invested in companies dependent on foreign exports.

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Jim Trippon
China Stock Digest