China's trade surplus already bigger than 2006's full-year figure

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Expected to exceed USD275bn for the year. Exports are up about 23% on 2006, imports up about 16%. The US trade deficit with China will likely come in around USD225-250bn for the year.

Unless China radically restructures its central bank priorities, total forex reserves at year end should exceed USD1.5tr - more than 80% of it in USD.

The yuan is up about 9% on the dollar over the past year. It seems reasonable (if cynical) to expect China to let it drift up another 5%ish after Paulson's next visit as a show of goodwill. It's less likely - and more cynical - to suggest that they might allow that repegging to happen alongside a sell-off of US dollar holdings to fund purchases of more euros...

Hope that's of interest,
H

 

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Yuan, Rupee Rise at Record Pace in Fight on Inflation (Update1)
By Bo Nielsen

Oct. 15 (Bloomberg) -- Asian currencies from the Indian rupee to the Chinese yuan are rising at a record pace as central banks turn to the foreign-exchange markets for help in fighting inflation.

The rupee's 12 percent gain this year is its biggest since at least 1974 and surpassed the predictions of all 26 economists surveyed by Bloomberg News at the start of 2007. The yuan has climbed 3.9 percent, its fastest appreciation since China ended a peg to the dollar in 2005. The Singapore dollar has reached a 10-year high after its biggest monthly gain since 2001.

By allowing their currencies to strengthen, Asian countries are attempting to reduce the cost of importing coal, iron ore and wheat, ingredients essential to their booming economies. The risk is that the goods they produce may become too expensive. In China, consumer prices rose 6.5 percent in August, the most since 1997. Singapore consumer prices hit a 12-year high in August, and India's inflation rate this year reached the highest since 2005.

``Asian central banks are balancing tremendous pressure from exporters to keep exchange rates cheap while keeping an eye on inflation,'' said Kenneth Rogoff, an economics professor at Harvard University in Cambridge, Massachusetts, and the former chief economist at the International Monetary Fund. ``They must let their currencies go before they suffer too much from inflation.''

Coordinated Effort
Some members of the Group of Seven industrialized nations, including the U.S. and Germany, may propose a coordinated effort to boost Asian currencies at their meeting in Washington starting Oct. 19, Rogoff said. European Union Monetary Affairs Commissioner Joaquin Almunia on Oct. 12 said China should allow its currency to appreciate more against the euro.

Asian central banks are finding that raising interest rates and selling debt aren't enough to soak up the cash that generates higher wages and fuels inflation, said Lawrence Goodman, head of emerging market foreign-exchange strategy at Bank of America Corp. in New York.

``The response will be stronger currencies because they'll buy fewer dollars,'' Goodman said.

The People's Bank of China increased rates five times this year, while the Reserve Bank of India has boosted its target seven times in two years. China's money supply still has expanded more than 18 percent in the last three months. Salaries in India will climb an average of 14.5 percent in 2007, the most in Asia for the second year in a row, according to Hewitt Associates Inc., a Chicago-based human resources company.

Singapore Takes Action
The Monetary Authority of Singapore said Oct. 10 it ``will increase slightly'' the pace of appreciation for its dollar against a basket of currencies to curb inflation. The Singapore dollar rose 2.4 percent in September, and reached S$1.4610 on Oct. 12, the highest in a decade.

``Currency appreciation addresses the inflation problem and reduces the cost of intervention as well,'' said Rajeev De Mello, who helps manage $600 billion as head of the Singapore office of Western Asset Management Co. in Pasadena, California. He predicts the rupee will strengthen 5 percent by year-end and the yuan will rise 10 percent by the end of 2008.

Central banks intervene when they buy and sell currencies to influence exchange rates. China's purchases of dollars pumped yuan into the economy, where foreign-exchange reserves climbed $101 billion in the third quarter to $1.43 trillion, the most in the world; India's climbed by a record $34.2 billion in the period to $248 billion.

Scaling Back
Central banks in Singapore, Taiwan and Korea have scaled back intervention in recent months in what may signal a move toward stronger currencies in the region, said Jens Nordvig, a strategist with Goldman Sachs Group Inc. in New York. The firm estimates that the Malaysian ringgit and Taiwan dollar are 15 percent undervalued, the Indonesian rupiah 11 percent.

Goldman on Oct. 11 raised its forecasts on six Asian currencies, saying the Philippine peso will gain 6 percent over the next 12 months. It previously estimated a decline of 2 percent. The same day New York-based Morgan Stanley boosted its forecasts for six of the region's currencies, including an 11 percent jump in the Singapore dollar to S$1.30 by the end of next year.

``These countries have become more confident about the growth of their economies and that allows them to loosen the grip on currencies,'' said Gabriel de Kock, chief currency economist at New York-based Citigroup Global Markets Inc., a unit of the biggest U.S. bank by assets. ``And if they are seeing everyone around move at the same time it's not such a big deal for them.''

Growth Forecast
Asia's economy, excluding Japan, will expand 9.3 percent this year at almost twice the global average, helped by a 15.7 percent rise in exports, according to Deutsche Bank AG. The U.S. will slow to 1.9 percent, the Frankfurt-based bank said. Investors have since mid-August poured money into Asian equity funds at the fastest pace since at least 2000, data from world- wide fund tracker EPFR Global show.

Currencies in Asia are rising so fast that manufacturers in Asia are demanding reassurances from policy makers that their exports will remain competitive. India's export growth slowed to an average 14.4 percent in the first eight months of this year, compared with 22.4 percent in the same period in 2006, according to data compiled by Bloomberg.

``If the rise in the rupee continues, people will lose their jobs,'' said Ganesh Kumar Gupta, president of the Federation of Indian Exporters in New Delhi last month. ``The government's measures to curb the rupee have thus far been half- hearted.''

India's Example
In Malaysia, exporters met with the central bank and concluded the exchange rate wasn't a concern because ``the ringgit has strengthened at the same time as other currencies,'' said Paul Low, vice-president of the Kuala Lumpur-based Federation of Malaysian Manufacturers.

India's currency climbed 2.6 percent last month, even though the Reserve Bank of India said it purchased the most dollars since 2000. Asian countries added $2.1 trillion to reserves in the six years ended in 2006, New York-based consulting company McKinsey & Co. said in a report this month.

The yuan's 3.9 percent appreciation in the first nine months of this year was the most since it started trading on currency markets. The 11 percent gain in the rupee in that period was the most since a peg to the British pound ended in September 1975.

Elsewhere in Asia, the Philippine peso has gained 6.1 percent the last month and Malaysian ringgit 3.1 percent. Last week, the peso climbed to a seven-year high of 44.015, while the ringgit reached 3.3545 and the rupee 39.27 per dollar, both the strongest in 10 years.

`Massive Underperformance'
The rupee's surge helped cut India's inflation rate to an annual rate of 3.4 percent in September, from a two-year high of 6.7 percent in January. Price increases will rebound to 5 percent by March next year, according to the median estimate of 9 economists surveyed by Bloomberg.

Asian central banks that want faster appreciation in their currencies are getting some help from international investors, who are pumping money back into emerging markets after pulling away in July and August. Stock market indexes in India, China, the Philippines, Indonesia and Singapore rose to records in the last month.

``People are waking up to the fact that there has been a massive underperformance of the Asian currencies,'' said Paul Barrett, chief foreign-exchange trader at JPMorgan Private Bank in New York, which oversees about $430 billion. ``Asian currencies are cheap.''

 

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I wonder... Currency stuff is black magic to me so this is hardly a professional opinion: China has no political problems tightening the money supply, raising interest rates or tightening bank lending rules. If you're a Chinese business expanding through anything other than cashflow, you're an oddity.

Also, China's explicit goal is to source more of its raw material supplies from other regional countries (including Australia) and Africa.

China might be happy to let the yuan rise another 5%+ against the dollar but I wonder if there really is enough pressure to take it much higher, given the increasing regional/bloc trade China is engineering?

Now that I've committed that to the web, I fully expect to see the yuan bounce 20% in the next three months, just to remind me to keep my nose out of currencies...

H

 

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H.-
What can I say?
Security.........................Holding Period (Years)...... Cost Per Share..... Current Price........ × Cost
LUKoil CO HOLDING................... 4.3.............................18.79.................88.89............... 4.7 ×
PETROCHINA CO LTD................ 4.3.............................28.98................241.98...............8.3 ×
ALLEGHENY ENERGY.................. 5.0.............................4.53...................55.79..............12.3 ×
PETROBRAS PREFERRED "A"........ 3.6.............................12.23..................73.91...............6.0 ×
AO TATNEFT........................... 2.7............................ 32.09.................116.25............. 3.6 ×
OAO GAZPROM........................ 2.5............................ 13.42...................47.58..............3.5 ×
SHERRITT INTERNATIONAL........ 1.5............................ 10.03.................. 17.60..............1.8 ×


Ignoring, of course, the "core" XOM, BP, RDSA/B, COP, TOT, CVX, et al.

 

[Handprints]

Ignoring, of course, the "core" XOM, BP, RDSA/B, COP, TOT, CVX, et al.

Employer: Emerging markets are a very volatile environment, you know.
Handprints: When do you need me to start?

An actual flashback, brought to you by a core holdings list...

H