Why China fears currency wars

13:02 11/3/2013 - Πηγή: BankWars

China was never likely to receive much sympathy by complaining about other countries engaging in so-called currency wars.

If there is a modern mercantilist blueprint Beijing surely wrote it — its longstanding dollar peg saw it rack up decades of double-digit export growth and the world’s largest pile of foreign reserves.

And on cue, February’s expectations-beating 22% surge in exports suggests China’s

exporters are still winning any trade skirmish.

On the surface, this makes repeated saber-rattling comments about currency wars by Chinese officials appear unnecessary, if not somewhat odd.

On Friday, Commerce Minister Chen Deming was the latest to raise concerns about competitive currency depreciation and the effects of excessive money-printing by central banks.

The head of China’s sovereign-wealth fund was less diplomatic, reportedly warning Japan against “treating their neighbors as your garbage bin and starting a currency war.”

There were some clues, however, as to what lies behind this escalation in rhetoric in economic reports out this weekend.

While China’s exports impressed, its economy is showing some disturbing trends: cooling industrial output, weakening retail-sales growth and a spike in inflation. Read: China inflation climbs; other indicators soften

Specifically, February’s consumer price index hit a 10-month high inflation rate of 3.2%, beating expectations, while industrial output in January and February expanded just 9.9% from a year earlier, below expectations. Retail sales growth, meanwhile, fell to 12.3% year-on-year in the January-February period, down from 15.2% in December.

One familiar area where activity is picking-up is in property and infrastructure. Investment in fixed assets accelerated to 21.2%, with real-estate investment growing at an even faster 22.8%.

The property market is showing renewed signs of overheating. Sales have been soaring, rising 77.6% from last year’s levels in value terms over the first two months of 2013.

The snapshot suggests China’s recent economic recovery is far from assured. The massive lending figures seen at the beginning of the year appear to be generating more inflation than growth. To concerns about property bubbles, some might add looming stagflation.

Clearly the last thing China needs just now is a surge in hot-money flows through quantitative easing (QE).

We are familiar with Chinese officials in the past protesting QE by U.S. Federal Reserve Chairman Ben Bernanke. With a large part of China’s $3 trillion foreign reserves held in U.S. dollars, Beijing has a keen interest in any greenback debasement.

Πηγή: MarketWatch