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Saturday, December 29, 2007

The Trouble With China

Here's a story that, combined with the fact that Persian Gulf princes are rushing pell-mell out of the greenback, should give dollar bulls that nasty, "twisty snake," pre-diarrhea feeling in their pit of their stomachs …

China Lets Currency Appreciate a Bit Faster

China's currency rose steeply against the dollar this week, feeding speculation that Chinese authorities, yielding to international pressure and economic realities at home, were allowing their currency to appreciate more rapidly. The currency, known as the yuan or renminbi, rose 0.9 percent this week — faster than over any week since China stopped pegging it to the dollar on July 21, 2005. Thursday, the yuan rose 0.37 percent, the largest one-day increase since the peg ended.

Reading on, we find …

Until recently, the government worried that allowing the currency to rise would let in more imports and stifle exports, leading to deflation. But China's consumer price index was up 6.9 percent in November compared with a year earlier, led by an 18.2 percent rise in food prices.

And here's a part I find really interesting …

Until very recently, the third obstacle to a much stronger yuan has been the danger that it would lead to cheap food imports that would drive down the prices realized by China's farmers. This has been particularly important because many officials, from President Hu Jintao on down, want to narrow the gap between rural and urban incomes. Higher food prices have benefited many peasant farmers this year, increasing their incomes as they sell their crops for more money. Not all peasants have gained, however, as part of the inflation has occurred because of an epidemic among Chinese pigs as well as drought in areas of southern China.

I find that interesting because I always thought the thing holding back China on letting the renminbi appreciate is the worry that it would make their exports too expensive. It turns out that's a red herring; they're actually worried about upsetting their large rural population. So if they can keep the farmers happy, what's to stop China from letting the renminbi REALLY appreciate? That, my friends, is the million-renminbi question.


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