China leading global economy in recovery

China’s industrial production and trade surplus posted robust double-digit gains in October, indicating a strengthening recovery in the world’s third-largest economy. China, unlike the U.S. and other western industrial nations, has managed well in the advance of the global economic crisis. Such economic strength is also likely to increase pressure on policy makers to let the yuan appreciate as a hedge against inflation risks.

The announcement came days before leaders from the Asia-Pacific region gather in Singapore this week, and a visit by President Obama to Beijing next week, where he plans to raise the issue of China’s currency policy and a more “helpful” role that China can play in the global economy.  China’s Premier, Wen Jiabao, and Zhou Xiaochuan, China’s Central Bank Chairman, have so far resisted pressures to loosen reins on the renminbi (yuan), awaiting a bigger rebound in exports in an effort to secure social stability and job gains.

“For China, it is necessary and appropriate to allow the currency to be more flexible,” Asian Development Bank President Haruhiko Kuroda said in an interview with Bloomberg Television in Singapore yesterday. “Crisis response by the Chinese authorities has been excellent,” and “they’ve brought about a very strong economic recovery,” he added.  As a result, production rose 16.1% year-over-year, the most since March 2008, according to China’s state statistics bureau in Beijing.  Meanwhile, retail sales gained an annual 16.2% in October.  In addition, the trade surplus almost doubled from September, to $24 Bn, as the slide in exports eased to the slowest pace this year.  The rise in retail sales is promising. If Chinese households can spend and consume more, and more capital investments by corporations, it can go a long way to leading a global economic revovery. Like most Asian nations, Chinese households and corporation are notoriously tight-fisted when it comes to spending, consumption and capital investment. 

Hours after the economic indicators were released, the central bank said foreign-exchange policy will take into account global capital flows and changes in major currencies, prompting speculation it will allow the currency to strengthen. The yuan’s peg to the dollar since July 2008 has left it dropping along with the greenback against the Euro and the Japanese yen.  Successively, China’s central bank holds more than $2Trn in U.S. Treasury reserves — enough to wipe-out the entire current U.S. federal budget deficit. 

Chinese central bank policymakers have indicated they will improve the setting of the yuan’s foreign exchange rate in a “proactive, controlled and gradual manner and based on international capital flows and movements in major currencies,” the People’s Bank of China’s said in a quarterly report yesterday. Officials have previously aimed to keep the yuan “stable.”

“The change in description of the yuan policy may signal an early warning to the market,” said Shi Lei, a Beijing-based analyst at Bank of China Ltd.  Read more here.

Source:  Bloomberg; Globe & Mail         Photo: LIU JIN/AFP/Getty Images

World Bank warns of Greenback's declining role in global finance

(NYT) WASHINGTON — The president of the World Bank said on Monday that America’s days as an unchallenged economic superpower might be numbered and that the dollar was likely to lose its favored position as the euro and the Chinese renminbi assume bigger roles.

Zoellick

“The United States would be mistaken to take for granted the dollar’s place as the world’s predominant reserve currency,” the World Bank president, Robert B. Zoellick, said in a speech at the School for Advanced International Studies at Johns Hopkins. “Looking forward, there will increasingly be other options to the dollar.”  Mr. Zoellick, who previously served as the United States trade representative and as deputy secretary of state under President George W. Bush, said that the euro provided a “respectable alternative” for financing international transactions and that there was “every reason to believe that the euro’s acceptability could grow.”  In the next 10 to 20 years, he said, the dollar will face growing competition from China’s currency, the renminbi. Though Chinese leaders have minimized their currency’s use in international transactions, largely so they could keep greater control over exchange rates, Mr. Zoellick said the renminbi would “evolve into a force in financial markets.” 

‘The United States would be mistaken to take for granted the dollar’s place as the world’s predominant reserve currency.’  -World Bank president, Robert B. Zoellick

The World Bank, which is financed by governments around the globe and lends money primarily to poor countries, has no say over the economic policies of large nations or over currency matters.  But Mr. Zoellick’s comments were unusual, in part because he seemed intent on being provocative. He argued that the United States and a handful of other rich nations could no longer dominate the world economy and suggested that America was losing its clout. He also took issue with a central piece of the Obama administration’s proposal regarding the country’s financial regulatory system.

“The greenback’s fortunes will depend heavily on U.S. choices,” Mr. Zoellick said. “Will the United States resolve its debt problems without a resort to inflation? Can America establish long-term discipline over spending and its budget deficit?”  Read more here.

LA Times:  The Twilight of ‘Pax Americana’..??