China Plans to Align Policies, Cut Trade Surplus

China plans to better coordinate fiscal and monetary policies in 2008 to reduce its trade surplus and mop up excessive liquidity, Vice Finance Minister Li Yong said today.

This year's fiscal policy will focus on structural adjustments and help essentially solve the problem of excess liquidity, Li said at a conference in Beijing. Monetary policies should focus on quantitative controls to win more time for structural reforms. China also needs to use administrative measures to tackle these issues, he said, without being specific.

China's money supply grew at the slowest pace in seven months in December, the central bank said yesterday, after it took measures to cool inflation and prevent the economy from overheating. China may face pressure from Europe and the U.S. to allow faster gains by its currency after the nation's trade surplus surged 48 percent to a record $262.2 billion last year.

Fiscal policy can play a bigger role, said San Feng, an economist at the State Information Center in Beijing. The government this year needs to cut its fiscal deficit and debt issuance for long-term construction projects, and it should lower taxes on sectors affected most by price controls.

The government will adjust resource prices this year to rectify a distorted energy-pricing system and boost domestic spending as its top priority, Li said. Weakness in the U.S. dollar will limit China's ability to raise interest rates and reserve ratios further, he added.

Inflation Target

China's central bank has pledged a tight monetary policy this year, after six interest-rate increases in 2007, to curb lending and prevent escalating asset prices.

We will decisively fight against inflation and implement tight monetary policies, said Yi Gang, vice governor of the People's Bank of China, at the same conference today. But we will do it prudently to ensure economic stability.

Consumer prices jumped to an 11-year high of 6.9 percent in November, prompting Premier Wen Jiabao to announce on Jan. 9 a freeze on energy and utility price gains in the near term.

The government needs to avoid high inflation expectations, said Xu Lin, head of the fiscal and financial department of the National Development and Reform Commission, at today's conference. If price increases slow down, the temporary measures to curb prices can be eased.

China has set a preliminary target for the full-year inflation rate at 4.6 percent in 2008 and that for annual economic growth at 8 percent, Xu said. Both targets need to be officially set at the sessions of the National People's Congress, or the country's parliament, which are scheduled to be convened in March, he added.

Yuan Appreciation

The yuan rose for a fifth week, reaching the strongest level since China scrapped a fixed exchange rate to the dollar in 2005, on speculation China is seeking faster gains to cool the economy. The U.S. and Europe say the yuan, even after recent advances, is still at a level that gives local companies an unfair advantage in overseas markets.

The December trade surplus shrank to $22.7 billion from $26.2 billion in November, as exports grew at the slowest pace in two years, indicating recent yuan gains, the cooling global expansion and cuts to export-tax rebates on polluting industries are beginning to bite.

The banking regulator last quarter banned Agricultural Bank of China and six other banks from making new loans, according to the official Shanghai Securities News.

China's economy probably expanded 11.5 percent in 2007, the fastest pace in 13 years, according to government forecasts.

Dollar Posts Biggest Drop Versus Yen in Almost 2 Months on Jobs

The dollar posted its biggest decline against the yen in almost two months as a slowdown in hiring raised concern that U.S. economic weakness will spread globally.

The U.S. currency fell this week against the euro and Swiss franc as traders priced in for the first time a more than 50 percent chance the Federal Reserve will cut borrowing costs by a half-percentage point on Jan. 30. Import prices were unchanged last month, easing concern inflation is accelerating, the government is forecast by economists to report next week.

The dollar is going to remain on the defensive, said Robert Sinche, head of global currency strategy in New York at Bank of America Corp. He says the U.S. currency may approach the all-time low of $1.4967 per euro reached Nov. 23.

The dollar weakened 3.3 percent this week to 108.60 yen, the biggest drop since November. It decreased to $1.4743 per euro from $1.4723, extending a 2.4 percent plunge the previous week that was the biggest since April 2006, and fell 1.6 percent to 1.1083 Swiss francs.

The yen rose against all of the 16 most actively traded currencies this week as the slowdown in U.S. hiring encouraged investors to cut back on holdings of higher-yielding assets funded in Japan. The Standard & Poor's 500 Index fell 4.5 percent this week, its biggest drop since July.

Japan's currency jumped 3.2 percent to 160.09 per euro, the biggest increase since the week ended Aug. 17, the day the U.S. central bank cut the discount rate to mitigate a global rout in credit markets.

Yen's Advance

The yen increased 3.9 percent against the Australian dollar and 4.4 percent against the South African rand, two favorites of the carry trade.

If the U.S. is going to fall into recession, the world economy will slow down significantly, said Matthew Strauss, senior currency strategist in Toronto at RBC Capital Markets Inc., a unit of Canada's biggest bank by assets. Investors will shun risky assets and carry trades.

Japan's benchmark lending rate of 0.5 percent, the lowest among major economies, compares with 11 percent in South Africa, 6.75 percent in Australia and 4 percent in the 15 countries that use the euro. In the carry trade, investors borrow in countries with lower lending rates and use the cash to buy assets where higher returns are offered. The risk is that currency fluctuation can erase profits.

U.S. employers added 18,000 positions to their payrolls last month, capping the worst year for job creation since 2003, the Labor Department said yesterday. The median forecast of 74 economists surveyed by Bloomberg News was for 70,000 new jobs. The unemployment rate rose to 5 percent, a two-year high.

`Risk Appetite'

Clearly the labor market is weakening, said Jay Bryson, global economist in Charlotte, North Carolina, at Wachovia Corp. This is not good for global risk appetite.

The U.S. Dollar Index traded on ICE Futures in New York declined 0.6 percent this week to 75.793. The index, valuing the currency's performance against those of six of the biggest U.S. trading partners, has had the worst start of a year since the turn of the millennium.

The chance the Fed will reduce the benchmark lending rate of 4.25 percent by a half-percentage point on Jan. 30 rose to 66 percent from 34 percent two days ago and no chance a week ago, interest rate futures contracts on the Chicago Board of Trade showed. The odds of a quarter-point cut were 34 percent.

Prices of goods imported into the U.S. were unchanged in December after a 2.7 percent increase the previous month, according to the median forecast of 35 economists surveyed by Bloomberg News. The Labor Department report is due Jan. 11.

China's yuan advanced against the dollar for a fourth week, rising 0.4 percent to 7.274 per dollar, as a local newspaper reported that the central bank signaled it will allow faster gains in the currency to help curb inflation.

Source - Bloomberg

G-20 Draft Highlights Inflation, Growth Risks

The Group of 20 nations will say oil and food prices threaten to spur global inflation even as higher credit costs damp the outlook for economic growth, according to an official from a G-20 country.

Rising energy and food prices will remain an important source of price pressures, a draft of the G-20 communiqué says, according to the official, who asked not to be identified. The G- 20 will release its statement around 1:30 p.m. in Kleinmond, near Cape Town, today. While the official said currencies were not mentioned in the draft, Canada's central bank governor David Dodge told reporters yesterday there was a frank sharing of views on the matter.

Central bankers around the world are trying to curb inflation just as fallout from the biggest U.S. housing slump in 16 years spreads through financial markets and a weaker dollar threatens to hurt growth. While the U.S. Federal Reserve has cut interest rates twice since September to shore up U.S. expansion, policy makers in India, China and the 13 euro nations say they are worried about accelerating inflation.

The price of oil has surged 58 percent in the past year and wheat prices have increased 60 percent in the same period. European inflation accelerated to the fastest pace in two years last month and Chinese inflation matched the quickest pace in a decade.

Monetary authorities in the G-20 will need to assess the effects on the inflation outlook, the official quoted the draft statement as saying.

U.S. Treasury Secretary Henry Paulson, European Central Bank President Jean-Claude Trichet and Chinese central bank Governor Zhou Xiaochuan are among the G-20 finance ministers and central bankers meeting this weekend in South Africa.

The credit collapse that began in August is likely to force banks, brokerages and hedge funds to cut lending by $2 trillion, risking a substantial recession in the U.S., Goldman Sachs Group Inc. economist Jan Hatzius wrote in a report dated Nov. 15.

Dodge told reporters yesterday that the impact of market turbulence is likely to be more prolonged than forecast at last month's meeting of the G-7 nations.

Downside risks to the near-term outlook have increased as a consequence of recent financial-market disturbances, the G-20 draft says, according to the official. While the likely slowdown in global economic outlook is expected to be modest, its extent and duration remain to be seen, the statement says.

Slower Growth

Slower U.S. growth has dulled the allure of dollar investments, prompting some investors to shift capital into other currencies. With China still controlling the yuan's exchange rate more than two years after abandoning a peg to the dollar, money has flooded into Europe and Canada.

The U.S. currency has dropped about 11 percent so far this year, based on the Federal Reserve's U.S. Trade-Weighted Major Currency Index. It fell this month to its weakest against the euro since the European currency's debut in 1999, the lowest against Canada's dollar since it was floated in 1950 and to a 26- year low versus the pound.

There was a genuine concern on the part of a lot of countries on the turbulence in the currency markets, Dodge told reporters yesterday. Bank of England Governor Mervyn King said Nov. 14 he's concerned that China's foreign exchange policies are stoking great currency tensions.

OPEC countries meeting this weekend in Riyadh, Saudi Arabia, have been debating the dollar's decline, which is making it harder for them to manage inflation and keep their pegs to the currency at the same time. Gulf states including Saudi Arabia and the United Arab Emirates may revalue their currencies in as soon as in a month's time, a person familiar with Saudi monetary policy said yesterday.

The G-20 comprises Argentina, Japan, Australia, Korea, Brazil, Mexico, Canada, Russia, China, Saudi Arabia, France, South Africa, Germany, Turkey, India, United Kingdom, Indonesia, United States, Italy, European Union.

Source - Bloomberg

French, Canadian Officials Call for China Yuan Shift

France and Canada said China must allow the yuan to appreciate faster after a meeting of policy makers from the Group of 20 nations.

The yuan, where it is, is causing tensions, French Finance Minister Christine Lagarde said in an interview at the G- 20 meeting in Kleinmond, near Cape Town, today. Canadian Finance Minister Jim Flaherty told reporters yesterday that China and a number of other Asian countries need to do more.

G-7 officials have strengthened their rhetoric on China in the past month as concern mounts it isn't shouldering enough of the dollar's slide, garnering an unfair advantage for its exporters. The European and Canadian currencies have soared to records against the dollar, threatening to hurt economic growth. By comparison, China has allowed the yuan to rise about 5 percent against the dollar this year and it has fallen against the euro.

While Lagarde said the G-20 didn't point out any specific currencies and wants to operate by consensus, she added that erratic movements of currencies are not welcome.

The French and Canadian officials are meeting counterparts such as U.S. Treasury Secretary Henry Paulson, European Central Bank President Jean-Claude Trichet and Chinese central bank governor Zhou Xiaochuan at this weekend's meeting in South Africa.

There was a genuine concern on the part of a lot of countries on the turbulence in the currency markets, Canada's central bank governor David Dodge said yesterday.

Correct Direction

International Monetary Fund Managing Director Dominique Strauss-Kahn echoed some of the concerns expressed by Canadian and French officials. He told reporters today the euro, the Canadian dollar and Brazil's real have on their shoulders a much larger part of the adjustment than they should, even though the U.S. currency has moved in the correct direction.

Paulson has signaled to U.S. trading partners that the dollar will rebound, predicting it will reflect long-term strength in the American economy.

The U.S. currency has dropped about 11 percent so far this year, based on the Federal Reserve's U.S. Trade-Weighted Major Currency Index. It fell this month to its weakest against the euro since the European currency's debut in 1999, to a 26-year low versus the pound and the lowest against Canada's dollar since it was floated in 1950.

OPEC countries meeting this weekend in Riyadh, Saudi Arabia, have been debating the dollar's decline, which is making it harder for them to manage inflation and keep their pegs to the currency at the same time. Gulf states including Saudi Arabia and the United Arab Emirates may revalue their currencies in as soon as a month's time, a person familiar with Saudi monetary policy said yesterday.

Source - Bloomberg

Dollar May Extend Drop After G-7 Fails to Address Record Slide

The dollar, trading at an all-time low against its major trading partners, may extend the decline after the Group of Seven failed to address the drop following a meeting of finance officials.

The policy makers, representing the U.S., U.K., Japan, Germany, Italy, France and Canada, stuck to language in prior statements by saying excess volatility' in currencies is undesirable and that currencies should trade in line with fundamentals. They also intensified calls for China to let its currency strengthen, during yesterday's gathering in Washington.

The dollar is going to be under pressure as the growth outlook weakens. Risk aversion is the focus now. The dollar dropped this week by the most in two months versus the yen, on concern the U.S. housing slump will rekindle a credit market sell-off.

The yen rose against the 16 most-actively traded currencies this week as a decline in global stocks prompted investors to sell assets funded by loans in Japan. A report next week is forecast to show existing home sales in the U.S. fell to the lowest since 2001 in September.

Sell the Dollar

The dollar fell 2.6 percent to 114.51 yen, from 117.61 on Oct. 12, the biggest weekly decline since the period ended Aug. 17. The U.S. currency weakened 0.9 percent to $1.4301 per euro. It touched an all-time low of $1.4319 yesterday.

The statement gives the market a green light to sell the dollar, said Brian Dolan, chief currency strategist at FOREX.com, a unit of the online currency trading firm Gain Capital in Bedminster, New Jersey, which has about $250 million of funds under management. With no comment from the G-7 about its weakness, the dollar could decline to $1.45 per euro in a month.

An Oct. 24 report from the National Association of Realtors may show sales of existing homes fell to an annualized 5.25 million last month, from 5.5 million in August, according to the median estimate of 64 economists surveyed by Bloomberg News.

The International Monetary Fund cut its forecast for 2008 U.S. economic growth to 1.9 percent from 2.8 percent on concern the sell-off in the credit markets will cut business and consumer spending.

Risk Aversion

Increased risk aversion caused investors to pare carry trades financed by yen. In such transactions, investors get funds in countries with lower borrowing costs and buy assets in nations with higher rates.

The trades have pushed the yen down 8.9 percent versus the euro and 12 percent against the Australian dollar in the last 12 months. The Japanese currency gained 1.8 percent to 163.79 versus the euro this week, the biggest increase since the period ended Aug. 17.

The Bank of Japan's benchmark borrowing cost is 0.5 percent, the lowest among major economies, and compares with the European Central Bank's 4 percent, the Federal Reserve's 4.75 percent and Australia's 6.5 percent.

Interest-rate futures traded on the Chicago Board of Trade show a 92 percent chance the Fed will cut its benchmark interest rate a quarter percentage point to 4.5 percent on Oct. 31. The odds were 32 percent a week ago. The chance of another rate cut in December to 4.25 percent is 74 percent, up from 15 percent on Oct. 12.

Source - Bloomberg