Foreign Currency Reserves and Inflation Soared in China

From Reuters,

China's foreign exchange reserves soared to a record of more than $3 trillion by end-March, while its money supply growth blew past forecasts, threatening to aggravate the nation's inflation woes and trigger more policy tightening.


Chinese banks extended 679.4 billion yuan ($104 billion) in new local currency loans in March, while the broad M2 measure of money supply rose 16.6 percent from a year earlier, both above market expectations.

Tapping the brakes on money and lending growth has been a crucial part of Beijing's campaign to rein in inflation, which probably hit a 32-month high of 5.4 percent in the year to March, according to local media reports.

After making progress at the start of the year in mopping up excess cash, the People's Bank of China appeared to lose some ground in March.

"The latest numbers show that it is still too early for China to ease monetary tightening. China still needs to keep tightening policy at the current pace in coming months," said Qu Hongbin, chief China economist with HSBC...................................................
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China has raised benchmark interest rates four times since last October and has required the country's big banks to lock up a record high of 20.0 percent of their deposits as reserves.

Economists polled by Reuters last week said that China was heading for a pause in its half-year cycle of monetary tightening, forecasting that it would raise interest rates just once more this year.

America turning Japanese?

Paul Krugman in New York Times,

What about the fact that the employment gains of the past few months, although welcome, have, so far, brought back fewer than 500,000 of the more than 8 million jobs lost in the wake of the financial crisis? Hey, worrying about the unemployed is just so 2009.


But the truth is that policy makers aren’t doing too much; they’re doing too little. Recent data don’t suggest that America is heading for a Greece-style collapse of investor confidence. Instead, they suggest that we may be heading for a Japan-style lost decade, trapped in a prolonged era of high unemployment and slow growth.

................. I wish I could say that falling interest rates reflect a surge of optimism about U.S. federal finances. What they actually reflect, however, is a surge of pessimism about the prospects for economic recovery, pessimism that has sent investors fleeing out of anything that looks risky — hence, the plunge in the stock market — into the perceived safety of U.S. government debt.


What’s behind this new pessimism? It partly reflects the troubles in Europe, ...............But there are also warning signs at home, most recently Wednesday’s report on consumer prices, which showed a key measure of inflation falling below 1 percent, bringing it to a 44-year low.

This isn’t really surprising: you expect inflation to fall in the face of mass unemployment and excess capacity. But it is nonetheless really bad news. Low inflation, or worse yet deflation, tends to perpetuate an economic slump, because it encourages people to hoard cash rather than spend, which keeps the economy depressed, which leads to more deflation. That vicious circle isn’t hypothetical: just ask the Japanese, who entered a deflationary trap in the 1990s and, despite occasional episodes of growth, still can’t get out. And it could happen here.

........................................I strongly suspect that some officials at the Fed see the Japan parallels all too clearly and wish they could do more to support the economy. But in practice it’s all they can do to contain the tightening impulses of their colleagues, who (like central bankers in the 1930s) remain desperately afraid of inflation despite the absence of any evidence of rising prices. I also suspect that Obama administration economists would very much like to see another stimulus plan. But they know that such a plan would have no chance of getting through a Congress that has been spooked by the deficit hawks.


In short, fear of imaginary threats has prevented any effective response to the real danger facing our economy.

It is Hungary This Time!

US stock market dropped precipitously yesterday as Hungary spooked investors with another potential sovereign debt default after Greece.

From Wall Street Journal

Lajos Kosa, vice president of the right-leaning Fidesz party, which won an overwhelming victory in the April elections, said Thursday that Hungary was in a Greek-style sovereign-debt crisis. And Friday, the prime minister's spokesman, Peter Szijjarto, roiled markets by saying the economic situation is severe and that Hungary isn't likely to meet budget-deficit targets prescribed by the International Monetary Fund.

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Mr. Szijjarto's remarks clobbered the Hungarian forint and the euro Friday. The reaction spilled over into sovereign debt-insurance markets across Europe and into the currencies of Poland and the Czech Republic, the two other large non-euro countries in the former Communist east.


The euro sank below $1.20 to a fresh four-year low, trading at $1.1966 late Friday in New York. The cost to insure against sovereign debt default rose sharply early Friday in Europe—to the highest levels in nearly a month for Greece and Portugal. Bigger economies, such as Spain and Italy, also saw debt-default insurance costs rise to their highest levels since at least the start of 2009, according to data provider Markit.

Mr. Szijjarto said at a news conference that Hungary's new government is "ready to avert the Greek road," but he added that "there is nobody in the country apart from the previous government who still says the budget deficit of 3.8% of gross domestic product can be reached." That is the IMF's target for this year.

How does the Europe sovereign debt crisis affect the US? Part I

It seems that the market was not convinced that the sovereign debt crisis in Europe is over even after a $1 trillion backstop program for Euro Union (EU) and over $100 billion rescue package to Greece. The Dow had another triple-digit down day when there was no single sector that closed in green. The euro tumbled as far as $1.2358, its lowest level since the fall of 2008 as investors fled to safety such as gold, USD and yen. Since the beginning of 2010, the euro has lost about 13.5% of its value against the dollar.

Some argued that the EU problem is far from over while some argued that the $1 trillion program was more than enough to put an end to the panic. Some others argued that the spillover effect of the crisis on the US was exaggerated. After all, Germany was the only country that is among the top 5 trade partners in 2009 [Click on the following diagram to enlarge it.]

However, together EU countries carry about 20% of the US foreign trade. Exports to EU countries were $221 billion and imports from those countries were $281 billion. As a result, the trade impact is not completely dismissable. Precipitous fall of Euro against US dollar may hurt American exporters. In additions, multinational companies who derive revenues from overseas will suffer from unfavorable translations of their overseas revenues into US dollar. Among American companies with large exposure to Europe are Exxon Mobil (XOM) 38%, General Electric (GE) 24%, Ford Motor (F) 21%, Johnson & Johnson (JNJ) 26% and Dow Chemical (DOW) 13%. This effect has not taken into consideration cross-country spillover effects. For example, if Chinese economy slows as demand from Europe weakens, Chinese demand for American goods may weaken too.

What they say about the economy today?

Meredith's Bearish on Banks and the Economy
The influential bank analyst, Meredith Whitney who cut her rating on Goldman Sachs Group Inc. last month, said bank stocks are overvalued after rallying faster than the U.S. economy and share prices will fall to tangible book value.

“I haven’t been this bearish in a year,” Whitney, founder of Meredith Whitney Advisory Group LLC, said today in a CNBC television interview. “I think you can sit on cash for a little bit, because you have to wait for a leg down in valuations. The S&P is expensive across the board.”

“The banks that are asset-sensitive to consumer credit are not places you want to be,” Whitney said. Financial companies aren’t adequately capitalized and will need to raise more capital in the next year, she said.

Whitney said she expects a so-called double-dip recession in which the U.S. economy slumps again before recovering. She said bank stocks won’t fall as far as they did last year because of a smaller impact from fair-value accounting, which requires companies to value assets each quarter to reflect market prices.

Ben Bernanke Signals No Intervention in Foreign Exchange
 Federal Reserve Chairman Ben S. Bernanke said it’s “not obvious” that asset prices in the U.S. are out of line with underlying values after a 64 percent jump in the Standard & Poor’s 500 Index from its March low.


“It is inherently extraordinarily difficult to know whether an asset’s price is in line with its fundamental value,” he said today in response to audience questions after a speech in New York. “It’s not obvious to me in any case that there’s any large misalignments currently in the U.S. financial system.”

The U.S. central bank chief didn’t address asset prices outside of the country. Financial officials in Japan and China, Asia’s two largest economies, said this week that the Fed’s interest-rate policy risks spurring speculative capital that may inflate asset prices and derail the global economic recovery.

“The best approach here if at all possible is to use supervisory and regulatory methods to restrain undue risk-taking and to make sure the system is resilient in case an asset-price bubble bursts in the future,” Bernanke said.

Bernanke said in his speech that the “headwinds” of reduced bank lending and a weak labor market will probably restrain the pace of the U.S. economic recovery, warranting continued low borrowing costs. Bernanke also said the Fed is “attentive” to changes in the dollar’s value and “will help ensure that the dollar is strong.”

Gold going to $2000?

To view the video clip by Tech Ticker with Jim Rogers, click here


Famed investor Jim Rogers is "quite sure gold will go over $2000 per ounce during this bull market."

Rogers' confidence gold will continue to rally stems from a view the U.S. dollar is on its way to losing status as the world's reserve currency.

"Is it going to happen? Yes," Rogers says. "I don't like saying it [and] I'm extremely worried about it but we have to deal with the facts. America is not getting better [and] the dollar is going to be replaced just like pound sterling [was]."

Rogers didn't offer a timetable, and it's likely gold would exceed $2000 per ounce if the dollar were to lose its reserve status.

Still, "I wouldn't buy gold today," Rogers says. "I think I'll make more money in other commodities, which are cheaper," as discussed in more detail here.

Among many others, Rogers is "worried about the fact the U.S. government is printing huge amounts, spending gigantic amounts of money it doesn't have," the investor and author says. "People are very worried [and] skeptical about paper money [and] looking for places to protect themselves. The best way is to buy real assets. [That] has always protected one during currency turmoil, and it will again."

Inflation Inevitable?

In an interview with Rogers by Tech Ticker (For Video Clip, click here), Rogers expressed the following concern:

Given the Fed's extremely easy policies, runaway government spending and shortages of many commodities, inflation pressures are building and destined to get much worse, according to famed investor Jim Rogers of Rogers Holdings.


"The Federal Reserve has laid the groundwork for some serious inflation down the road by printing all this money," Rogers says. "So have many other central banks."

Although "the U.S. government lies about inflation" in its official data, inflationary pressures are already evident in nearly everything, excluding energy, Rogers says. Inflation is "going to continue, going to accelerate," he says. "We're going to be paying more for just about everything down the road."

Asked if he foresees a 1970s-style stagflation period ahead, Rogers chuckled and gave an ominous reply: "I hope it's that good. It might be much, much worse."

Given that view, Rogers remains very bullish on commodities as we discuss in subsequent clips.