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China to Print Money, Devalue Currency to Combat Deep Slowdown

Economics / China Economy Dec 14, 2008 - 08:40 AM GMT

By: Mike_Shedlock

Economics

Best Financial Markets Analysis ArticleDeflation talk is surfacing in China as Chairman Liu Mingkang says China December Producer Price Index to Drop .

China's producer price index is expected to drop "sharply" in December, China Banking Regulatory Commission Chairman Liu Mingkang said. The world's fourth-biggest economy is shifting toward deflation, Liu told a financial forum in Beijing today. Capital inflows may shift to outflows, with gross domestic product projected around 8 percent next year, he said.


China's producer-price inflation slowed to half the pace estimated by economists in November as commodity and energy costs fell, raising the possibility that the country will slide into deflation as demand wanes at home and abroad.

Prices at the factory gate rose 2 percent in November from a year earlier, the statistics bureau said Dec. 10, after gaining 6.6 percent in October. That was the slowest pace in two years and less than the 4.5 percent median estimate of 15 economists surveyed by Bloomberg News.

Massive Overcapacity In China

In the wake of a slowing global economy and export demand diminishing, China Suffers From "Overcapacity In Just About Every Industry" .

China's economic slowdown is deepening, with overcapacity in almost all industries, and won't bottom out until after the first quarter of next year, two senior officials said today.

Exports fell for the first time in seven years last month, imports plunged and manufacturing contracted by a record as the global recession pushed the world's fourth-biggest economy into a slump. The slowdown will deepen before a 4 trillion yuan ($585 billion) stimulus package kicks in from the second quarter of next year, Liu He, a senior economic policy official, said at a conference in Beijing.

China will support nine industries, including steel, telecommunications and automotive by cutting taxes, offering subsidies for technological upgrades and helping smaller companies get credit, Li, the industry minister, said.

China's industrial-production growth cooled in October to 8.2 percent, the weakest pace in seven years.

China may help steelmakers hurt by weaker demand for automobiles and electric appliances by purchasing steel stockpiles, offering subsidies for plant upgrades and increasing export-tax rebates, Li said.

“Just about every industry” has overcapacity, he said.

Purchasing Stockpiles Is No Solution

Governments cannot cure overcapacity problems by purchasing stockpiles. The idea is insane. Such maneuvers will increase inventory putting negative pressures on prices down the road.

China to increase supply of money to boost economy

Taking a page straight out of the Bernanke Deflation Fighting Playbook, China will increase supply of money to boost economy .

China said it plans to increase the amount of money circulating in its economy next year in a new effort to spur consumer spending and shield the country from a global downturn.

Saturday's announcement by the country's State Council, or Cabinet, comes on the heels of a multibillion-dollar economic stimulus package announced last month that calls for injecting more government money into the economy through spending on construction and other projects.

There are mounting signs that China's economic slowdown is sharper and deeper than expected. Exports fell in November for the first time in seven years and the industry minister warned Friday that worse was to come.

China will increase its money supply by 17 percent next year, the Cabinet said in a statement on its Web site. It said that would be 3 to 4 percentage points above the total growth of economic output and consumer prices.

Beggar Thy Neighbor

A global game of Beggar Thy Neighbor in now in progress.

Beggar Thy Neighbor: An international trade policy of competitive devaluations and increased protective barriers that one country institutes to gain at the expense of its trading partners.

The US does not want a strong dollar, China does not want a strong Renmimbi, and Japan does not want a strong Yen.

Note: The following is from Asia Times. The site has some nasty pop-ups at times.

Please consider China plays beggar thy neighbor .

The latest summit between the United States and Chinese officials graphically illustrates that China has learned to play two games from the West: hardball and beggar thy neighbor.

In fact, China's new policy represents both retaliation and a bargaining chip. The retaliatory part of the hardball message has been aimed directly at US Treasury Secretary Henry Paulson, who, much to the displeasure of the Chinese, continues to repeat his demand for Chinese currency reform.

As for the beggar thy neighbor, it has become clear over the past week that Chinese government officials intend to export their way out of the global economic crisis. This is all too readily apparent in the recent downward movements of the Chinese yuan relative to the dollar. Stripped of any rhetoric, this movement represents a "competitive devaluation" designed to boost Chinese exports to the US at the expense of both domestic US manufacturers and competing countries such as South Korea and Japan.

In fact, Chinese currency manipulation represents "beggar thy neighbor" on a grand scale. By grossly undervaluing the Chinese yuan relative to the US dollar over the past five years, China has grown its economy on the backs of American workers and helped to decimate the American manufacturing base.

Today, it is almost impossible for American manufacturers to compete against their Chinese counterparts when the yuan is undervalued by 30% or more. Add to this an extensive array of illegal Chinese export subsidies, and it becomes easy to understand how China has been able to offshore so many American jobs to its own factories.

The author claims the RMB to be undervalued by 30% or more. How would he know? The only way to find out for sure would be if China freely floated its currency. I think the RMB would more likely crash than rise 30% if China floated it at this point.

Furthermore, currencies have little to do with the inability of American manufacturers to compete against China. Wage differentials are 12-1 to 30-1 or higher and it is impossible to make that difference up with a RMB revaluation alone.

Nonetheless, it is clear that China is playing a game of Beggar Thy Neighbor, "competitive devaluation".

Then again, the US seems hell bent on destroying the dollar to boost exports and/or to get consumers spending again, and Japan has threatened to get in on the act by selling Yen and buying dollars. Brown is certainly hellbent on destroying the British Pound. With everyone in on the act, or threatening to get there, the dollar is far more likely to enter a trading range than to crash.

Does anyone want a strong currency?

Beggar Thy Neighbor tactics are a hallmark of deflationary times. When and how this madness ends no one knows. In the meantime, the ongoing competitive currency devaluations make a good fundamental case for owning gold.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2008 Mike Shedlock, All Rights Reserved

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