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YUAN TROUBLES AND THE CHINESE GLOBAL ECONOMIC LEADERSHIP

YUAN TROUBLES AND THE CHINESE GLOBAL ECONOMIC LEADERSHIP

At first I’d like to point out the main thesis of the material: China has long ago become the first economic of the planet. While reports on the U.S. monetary policy contain the new data on its financial troubles all the more often, the PRC macro-statistic data indicates a fantastic increment of steel, cast iron and cement production.

In fact China produces 50% more capital construction materials than the rest of the world and, which is more important, this volume is really demanded at the giant-scaled constructions. I have to explain at once that experts treat the "construction" markers to be the most representative indices of economic well-being. Housing starts indicator, for instance, demonstrates the number of new premises constructions. Mind that this indicator is really sensibly responds to the change of interest rates in the country, as long as mortgages are always borrowed for the construction. At the same time construction process is directly connected to the level of population incomes, which is why the increase of construction volumes characterizes the improvement of common wealth and healthy economic development. Investors are cautiously waiting for this index monthly (it is published on the third week of each month at 16:30 Moscow time along with the "Building permits" index) and react to its changes keenly. It’s worth reminding that the level of the U.S. accommodation construction is at its minimum mark since the statistics had been recorded (since 1959). It happens despite the QE2 program, which is to partially ease the life of developers too.

Yet, while the U.S. leadership cannot stop the gradual meltdown towards the new recession, smoothing it with attempts to pump the economy with liquid cash, the Celestial Empire has to slow its economy down in order to keep it from overheating. At that, the real sector (rather than a printing machine) acts as the locomotion of the economic growth.

Yet, it’s still not so plain — China has to balance between the deliberate understatement of its national currency rate (using this advantage in the foreign trade) and the control of inflation pressure, which is secured through the consequent increase of bank backing norms and consolidation of the interest rate, thus, slowing the Chinese locomotion down with the monetary tools.

It means that if the States were forced to addict its economy — not just the national economy, but the global one too, thus threatening the stability of the entire global system — to the "needle of liquidity" (that policy was successful only until the dollars were pumped into the economy, yet once that current QE program ended, the state of the financial market was restored to the level of 2009 again), the PRC wages the opposite policy, increasing the stability of the banking system, building up the export.


CNY/USD, 1 year

We have to mention that holding yuan in leash has its drawbacks. There are all the grounds to believe that by the end of this year inflation (CPI) will hit 5% and there is still a number of factors, which may catalyze the growth of inflation pressure:
— Excessive liquidity,
— increasing cost of labor force,
— balking up import prices,
— rise of agricultural products’ prices.

Along with that we have to be aware that if China gradually prepares yuan for becoming the new regional currency (if not the global reserve one). So, for instance, Beijing now deals in yuan, while trading with Venezuela, which is to promote the market attraction of the Chinese currency. All the more, yuan now has a steady foundation to secure (which is to be defended too), while the dollar position at the global arena are not that steady anymore. Forecasts that yuan may become a global reserve currency in 15 years seem to be a wishful thinking for the dollar (more experts tend to credit dollar with less than 10 years).

In order to prove this statement, we may note that few days ago yuan rate went as high as up to 6.3486 for 1 U.S. dollar on the market. This is the highest price of the PRC national currency since 1993. The drastic upswing is caused by the expectations for China to hasten the consolidation of the national currency after a tough U.S. Criticism.

Meanwhile, demanding to improve yuan, the USA act not as locomotion of the global economy, but rather as an economy, whose inertia slows down the economic development of other countries through the dollar monopoly. It is non-surprising that American legislators jump out of their suits, trying to help the country to stay in the economic lead. That includes the law for exerting extra pressure upon China, for Beijing to improve the national currency even quicker.

Beijing, though, hasn’t been denying (but rather admitting willingly) the necessity to gradually rise the cost of yuan by approximately 6.5% since Jun 2010. The main cornerstone of the currency war is the pace of these changes, as long as the understated yuan gives China a trade advantage, severing the U.S. economy (20% growth of yuan will cause the $50 to $100 billion reduction of the U.S. trade deficit). Even so, those numbers remain quite relative. The matter of fact is that strong yuan may also alienate cheap manufacturers and push them towards Bangladesh or Vietnam and the USA would still remain uncompetitive.

Along with that we can’t avoid discussing the main risk of China. The spreadsheet listed below includes ten countries — the leaders of Chinese production import. It’s for us to see that the U.S. share is only slightly less than 30% of the general trade volume. An appropriate question come to mind then: what if China fails to build up its export by the moment American industrial production stops completely?

 

At that, one of the major goals of Chinese economic policy is the increase of domestic demand in order to make the state economy more robust in case global financial system in its present form collapses. Such collapse is undoubtedly advantageous for China — after it the Celestial Empire will officially gain the status of global leader, which would allow it to impose its own view on the paradigm of historical development onto the rest of the world. That’s what conditions the intense urbanization in an attempt to create the Chinese middle class, which is to become "the consuming safety cushion". At that, the scale and pace of Chinese urbanization is really unprecedented in the human history.

According to the McKinsey Global Institute estimates, in 20 years Chinese cities will be replenished with 350 million dwellers more, which is more than the entire population of today’s America. Urbanization of the Celestial Empire creates promising prospects and huge outlets for Chinese and international companies. For instance, China has outstripped the USA in the PC sales, having become the major computer hardware market by the 2nd quarter of 2011. Throughout the accounting period PC sales in the PRC have gone up to $11.9 billion, while in the USA they’ve reduced to $11.7 billion on the contrary. We might counter that, saying that the PRC population is 5 times more than the U.S. one, while today merely 10 out of 100 people own PCs, but that’s exactly the potential of consumers’ growth, which is to secure unprecedented advantages for China in future.

By Alexey Puhaev

 

 

 

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