On March 11th the daily Gallup Poll on President Obama’s job performance showed 46% of those questioned approving of the job Barack was doing but 48% disapproving. This is the first time the President’s approval rating has been negative since his administration began.
It would appear that folks in the U.S. aren’t the only ones displeased. Benjamin Netanyahu has ignored all attempts by the White House to halt building in East Jerusalem going so far as to announce continuation of the construction during a visit by Vice President Joe Biden. In late February Syrian President, Bashar Assad met openly with Mahmoud Ahmadinejad and Hezbollah chief Hassan Nasrallah dismissing the Administration’s request that Syria loosen ties with Tehran and the militants.
Russia too, has amped up its anti-U.S. efforts recently as they announced their commitment to help Iran launch its first nuclear-power plant this summer. Prime Minister Vladimir Putin is not without his own troubles however as thousands of Russian citizens rallied this weekend in “Day of Wrath” demonstrations protesting the fall in living standards since the economic crisis began.
While these snubs are not to be ignored and could lead to bigger problems down the road for America, the heat would seem to be at its highest with China at the moment as 130 members of the House sent a letter to the President calling for a broad effort to get Beijing to change its currency policy and asking the Administration to place tariffs on Chinese imports if the country does not comply.
It should not be lost in the fracas that Congress’ efforts to change the Middle Kingdom’s Yuan policy is happening just weeks before the April 15th date on which Uncle Sam must decide whether to designate Wen Jiabao and the boys “Currency Manipulators”. It should also not be lost that the ensuing trade war that would follow such a tag would do neither side a speck of good as the world continues to struggle to its feet.
China, for its part, has been adhering to its “I’m rubber, you’re glue” strategy of blaming the whole thing on America’s profligacy and lack of fiscal discipline to the extent that those two terms are not redundant.
As it points its finger East, China is also sending dollars in the same direction buying Treasuries from “Spendthrift Sam” almost as quickly as he can auction them off. A scare occurred in December when it was learned that China sold $34BN worth of U.S.A I.O.U.s but subsequent counting revealed that Premier Wen was still the premier global holder of USTs.
In the process of their debt buying binge it seems that China has learned a thing or two of their own about deficit manipulation. One such lesson involves the accounting for 260.82BN Yuan ($36.16BN) in local government spending that was budgeted but not spent in 2009. These Yuan are destined to be spent in 2010 and as such it might seem that the “carry-over” is a non-event except for the fact that doing so is a practice known as “accrual” accounting which is quite different than the “cash” accounting most countries adhere to including China, heretofore. Keeping the Yuan in last year’s budget has understated this year’s budget deficit by 0.7%, at 2.8% of GDP vs. the 3.5% of GDP it would be if that pesky 260.82BN Yuan were included. I’m not sure if it was Confucius, but a wise man once said: “Those who live in glass houses should not throw stones.”
S&P, in their new role as credit vigilante, as opposed to their old role as top shop in the “ratings for sale” business, warned recently that bad debts as a result of China’s very aggressive government-backed lending program could see a spike in defaults in the next few years. They went on to say the parties involved should be able to keep the problem at a “manageable level”. Hopefully that is not coming from the same department that said housing prices would never decline by more than 2%.
If we have learned one thing over the past two plus years, it is that every crisis calls for scapegoats. Here in America we have been led to believe that the big banks caused the entire credit crisis, except that is, for the entire credit crisis that was caused by credit default swaps, except that is... you get the picture.
In the war of words with China, the scapegoat is the Yuan. Our pols in D.C. would have us believe that were it unpegged, unemployment in this country would immediately go to zero and housing prices would go at least as high as they ever were and maybe even higher.
The reality, sorry Washington, is that fixed exchange rates were de rigueur from the end of WWII to the 1970s when the Bretton-Woods agreement was in place and that even today, China is far from the only country that pegs its pelf to the buck. The benefits of doing so include a more stable monetary policy which makes investment decisions that much easier, reducing the uncertainty around trade and capital flows in the process.
The downside to a peg is that the country pegging gives up some, if not all of its monetary independence. An interesting concept when considered in light of China’s command economy.
The result of the peg has been primarily positive as evidenced by the increase in world trade, the creation of a ready market for goods “Made in China” and also a few more millionaires in the country doing the “Making”. All in all it would seem an ideal situation but as was said before, every crisis needs a scapegoat and once in the public’s cross-hairs, at least one shot is usually fired.
As such the question remains, will China revalue the Yuan? Mohamed El-Erian, CEO of Pimco, says he has “no doubt that a revaluation will happen over the next two years. The timing, ironically, gets delayed by external pressure.”
The benefits to the Chinese of a higher Yuan would include a reduction in inflationary pressure (a current concern in that country) while promoting domestic consumption and reducing investment in exports (also stated goals).
The concerns surrounding hot money chasing a rapidly rising Yuan and its effect on real-estate might seem a little overheated as Jens Nordvig, an FX strategist at Nomura Securities, says: “the overall amount of lending is low by comparison to any G-10 country and over a multi-year horizon, having concerns about a credit crisis is too early.”
How much is the Yuan likely to rise were it allowed to? Three month Yuan forwards are forecasting a 3.5% appreciation but the twelve month forward is only pricing in an upward move of about 2.5%. Leslie P. Norton, writing in Barron’s this weekend thinks a slow and steady 5% a year appreciation in the Yuan, similar to that seen before the crisis, will probably be the order of the day before long.
Besides the absolute level, convertibility is the next issue China will have to address with regard to the Yuan. Here Pimco’s El-Erian believes a five-year horizon is appropriate as China “has no choice but to move from direct to indirect policies and convertibility is part of that”.
Without any comments as to whether they would be in a position to know any better than anyone else, Goldman Sachs sees the Yuan becoming a “reserve currency” in the future, although their vision of the “future” does not equal (/=) 2010. This year, they say, is for China to move into 2nd place in the league tables of “World’s Largest Economies”.
Enjoy the week. Pretty soon I might be writing: ????.
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