Page 4 of
5 More
than 20 years in the making: By Doug Noland
in US interest rates has
increased the conflicting pressures on Beijing’s
management of its economy and its simultaneous
efforts to stem potential losses of billions of
dollars in its foreign exchange holdings. To keep
the currency stable, the People’s Bank of China
buys almost all incoming foreign currency, and
then attempts to ‘sterilise’ the monetary impact
by issuing renminbi bills to take the funds out of
circulation. The US cut means China’s central bank
will pay almost 200 bps points more on the bills
it issues at home to manage its currency than it
will get on purchases of US Treasuries. The PBoC
pays about 4% on its so-called ‘sterilisation’
bills, while one-year US Treasuries now carry an
interest rate of 2.07%... ‘Things just got a lot more
complicated for the managers
of China’s economy,’ said Stephen Green, of
Standard Chartered bank…"
January 23 –
Bloomberg (Kenneth Wong and John Fraher): "Efforts
by China’s central bank to use interest rates to
cool inflation were ‘neutralized’ by the U.S.
Federal Reserve’s unexpected cut to its benchmark
interest rate yesterday, a former adviser to the
bank said… The relatively higher rates in China
may attract more capital from overseas and stoke
inflation. The Fed’s rate cut increases the
chances of ‘hot money’ flooding the economy, Yu
Yongding, director of the World Economics and
Politics Institute in Beijing, said… The interest
rate cut will ‘have a neutralizing effect on
China’s tightening monetary policy.’"
January 25 – Bloomberg (Josephine Lau and
Zhang Dingmin): "China’s insurers, among the
world’s biggest companies, risk ‘massive''
redemptions and liquidity problems in a credit
market slump, according to the regulator. ‘Once
the capital market heads for a downturn, we will
suffer very badly and face huge risk,’ Wu Dingfu,
chairman of the China Insurance Regulatory
Commission said… ‘There can be massive redemptions
and insurers may face liquidity difficulties.’"
January 21 – Bloomberg (Nipa
Piboontanasawat): "China’s urban jobless rate held
at 4% at the end of 2007, the government said."
January 23 – Bloomberg (Wang Ying): "China
has shut about 5% of its coal-fired power plants,
forcing 13 provinces to ration electricity as
snowfalls and transportation delays hamper
deliveries of the fuel. The five biggest
electricity producers have shut 90 power stations
with combined capacity exceeding 20,000 megawatts
in northern and central China… Coal stockpiles at
the plants have dropped below the ‘caution line’
of three days’ requirements. China, the biggest
coal producer, burns the fuel to generate about
78% of its electricity."
January 25 –
Bloomberg (Chia-Peck Wong): "The value of new
mortgages in HongKong rose 52% in 2007 to the
highest in a decade as falling interest rates and
accelerating inflation fueled demand for loans."
January 24 – Bloomberg (Nipa
Piboontanasawat): "Hong Kong’s export growth
accelerated in December as increased shipments to
mainland China helped make up for weaker demand in
the U.S. Overseas sales rose 8.2% from a year
earlier…"
Japan Watch January 25
– Bloomberg (Mayumi Otsuma): "Japan’s consumer
prices rose at the fastest pace in more than nine
years in December, as oil and commodity costs
surged. Core consumer prices, which exclude fresh
food, climbed 0.8% from a year earlier…"
Asian Bubble Watch January 23 –
Bloomberg (James Peng): "Taiwan’s export orders
increased in December as demand from China and
Hong Kong compensated for weakening sales to the
U.S. Orders, indicative of shipments over the
coming one to three months, rose 17.56% from a
year earlier…"
January 23 – Reuters:
"Singapore’s December consumer prices rose…0.5%
from November, taking annual inflation in the
city-state to over a 25-year high on rising food
and transport costs. From a year earlier, prices
rose 4.4% from the 25-year high figure of 4.2% hit
in November…"
Unbalanced Global Economy
Watch January 22 – Financial Times (Tony
Barber): "European policymakers…blamed the turmoil
in global equity markets on US economic and fiscal
policy… ‘The main reason [for the turbulence] is
the risk of a recession in the US. It’s not about
a global recession. It’s about a recession in the
US, because big imbalances have built up over the
years in the US economy – a big current account
deficit, a big fiscal deficit and a lack of
savings,’ said Joaquín Almunia, the European
Union’s monetary affairs commissioner… Mr Almunia
contrasted imbalances in the US economy with what
he described as Europe’s ‘solid, sound
fundamentals’. ‘We have a positive current account
position. We have a level of savings that is the
level required to finance our investments. We have
improved our fiscal positions a lot. Moreover, we
haven’t got subprime mortgages in our financial
systems,’ Mr Almunia said."
January 24 –
Bloomberg (Brian Swint): "U.K. mortgage approvals
declined an annual 38% to the lowest in at least a
decade in December as higher interest rates
discouraged people from buying homes."
January 21 – Bloomberg (John Fraher): "The
U.K.’s money supply growth rate unexpectedly
accelerated in December, a Bank of England report
showed. M4…rose 12.3% from a year earlier…"
January 25 – Bloomberg (Brian Swint):
"U.K. wage settlements rose to the highest in 15
years in the fourth quarter as workers demanded
more pay to compensate for faster inflation… The
median wage increase rose to 3.7% in the three
months ended in December…"
January 23 –
Bloomberg (Fergal O’Brien): "Growth in Europe’s
service industries, which account for about a
third of economic output, cooled this month to the
weakest in more than four years as the U.S.
economy slowed, credit tightened and the euro
neared a record."
January 23 – Bloomberg
(Tasneem Brogger): "Danish consumer confidence
fell to the lowest since 2003 this month after
global stock market declines ate into household
savings, threatening to crimp economic growth."
January 23 – Bloomberg (Jacob Greber):
"Australian core inflation accelerated to a
16-year high, adding to pressure on the central
bank to increase interest rates even as the U.S.
slashes borrowing costs to avoid a recession. The
Reserve Bank of Australia’s measure of underlying
inflation…surged 3.8% in the fourth quarter from a
year earlier."
Central Banker
Watch January 25 – The Wall Street Journal
(Greg Ip): "Federal Reserve Chairman Ben Bernanke
faces a perception problem: It looks like he is
too ready to respond to a falling stock market.
That criticism was sounded after the Fed moved to
cut interest rates Tuesday, in part because of
fears that an overseas stock-market plunge would
spill over to the U.S. The drumbeat grew more
intense yesterday as critics and others confronted
the possibility that the global selloff was at
least partly a false alarm, reflecting French bank
Societe Generale SA’s unwinding of a trader’s
unauthorized bad bets, and due less to economic
anxiety."
January 24 – Financial Times
(Ralph Atkins): "The European Central Bank made
clear yesterday it would not bow easily to
pressure for eurozone interest rate cuts…
Jean-Claude Trichet, ECB president, emphasised the
priority that the bank attached to combating
inflation and a belief that eurozone growth would
remain robust in remarks that revealed a widening
gulf between the bank and financial markets.
Markets have priced in several ECB interest rate
cuts this year. Mr Trichet’s comments also
highlighted the contrast between the ECB and the
US Federal Reserve, which on Tuesday slashed US
interest rates by 75 bps. During times of
financial market turbulence ‘it is the
responsibility of the central bank to solidly
anchor inflation expectations to avoid additional
volatility in already highly volatile markets’, Mr
Trichet told the European parliament."
January 24 – Bloomberg (John Fraher and
Andreas Scholz): "European Central Bank council
member Axel Weber said interest rates in the euro
region are still ‘accommodative’ and investors'
expectations of reductions later this year may be
‘wishful thinking.’ ‘We have a positive economic
outlook and as long as that doesn’t change I would
say that rates are still on the accommodative side
and in no way restrictive,’ Weber said…"
January 23 – Bloomberg (Svenja O’Donnell):
"Bank of England Governor Mervyn King said
inflation may match the fastest pace in at least a
decade this year and require an explanation to the
Treasury, a sign that policy makers have limited
scope to cut interest rates. ‘It is possible that
inflation could rise to the level at which I would
need to write an open letter of explanation,
possibly more than one, to the chancellor,’ King
said… ‘To put it bluntly, this year we are
probably facing a period of above-target inflation
and a marked slowing in growth.’"
January
24 – Financial Times (Delphine Strauss): "Worries
over rising inflation pressures mean the Bank of
England will be far less aggressive than the US
Federal Reserve in cutting interest rates, minutes
of the recent meeting of the Bank’s rate-setting
monetary committee signalled yesterday. The
committee felt that ‘the short-run inflation
outlook had worsened markedly’ as sterling’s sharp
decline exacerbated the effects of higher
commodity prices, and that a second period of
inflation significantly above target, after last
spring’s peak, could lead people to expect higher
inflation."
January 24 – Financial Times:
"Mervyn King, governor of the Bank of England,
likens the British economy to a ship buffeted by
strong crosswinds. From across the Atlantic blows
the credit squeeze, sapping output growth. From
the east a blast of higher energy and food prices
stirs up inflation. These forces resemble a
perfect economic storm."
January 23 – Dow
Jones (Oliver Klaus and Mirna Sleiman): "Arab oil
producers, despite facing rampant inflation, on
Wednesday followed the U.S. Federal Reserve and
lowered official interest rates to keep their
currencies aligned with the dollar and raised
banks’ reserve requirements to control liquidity.
Saudi Arabia, the United Arab Emirates, Qatar,
Kuwait and Bahrain followed the Fed's decision a
day earlier to cut interest rates by 75bps in
response to sliding international financial
markets and in anticipation of a weaker economy…
‘Increasingly lower rates run the risk of pushing
inflation higher and cementing inflation
expectations at increasingly elevated levels,’
Deutsche Bank said…"
Bursting Bubble
Economy Watch January 24 – Financial Times
(Jeremy Grant): "Christopher Dodd, the Senate
banking committee chairman, insisted…that any
economic stimulus package for the US must go
beyond short-term measures, proposing a new
$10bn-$20bn fund that would buy outstanding
mortgages at steep discounts to help distressed
homeowners… Mr Dodd’s proposals, as well as others
to emerge on Wednesday, appear to indicate that
Democrats are attempting to take advantage of the
recent break-out of bipartisanship in Washington
to push broader solutions that may involve
investment in the country’s crumbling
infrastructure, tackling energy independence, and
reforming the benefits system. Harry Reid, Senate
majority leader, said Congress should work on a
long-term plan to pay to build roads, utilities,
schools and housing. Mr Dodd’s proposals…also
included a suggestion that any stimulus package
should include passage of a bill to reform the
Federal Housing Administration, which provides
mortgage insurance on loans."
January 23 –
Bloomberg (Alison Vekshin): "Senate Banking
Committee Chairman Christopher Dodd proposed
creating a federal program to buy ‘very
distressed’ mortgages at steep discounts as part
of economic stimulus legislation being developed
in Congress. The Federal Homeownership
Preservation
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