China’s growth slows as Geithner stirs currency concerns

Chinese Shares in U.S. Fall to 2-Month Low on Growth Concern(Bloomberg): Chinese stocks trading in the U.S. fell to the lowest in two months, led by commodity producers, after the world’s third-largest economy grew at the slowest pace in seven years.

The nation’s leaders “will do anything” to maintain an economic expansion of about 8 percent, the government’s target for creating jobs, said Huang Yiping, Asia economist at Citigroup Inc. in Hong Kong. The economy grew 9 percent for all of 2008 after a 13 percent expansion in 2007.

China Is ‘Manipulating’ Yuan, Geithner Tells Congress (Bloomberg): Timothy Geithner, President Barack Obama’s nominee for Treasury secretary, said the new U.S. administration believes China is “manipulating” its currency.

From Geithner’s confirmation hearing…

I do believe it is a significant issue. As I said earlier, I believe it is important for the United States and the global economy that our major trading partners operate with a flexible exchange rate system and that market forces determine the level of those exchange rates. I think that’s very important, and …when I have some time to think through how best to achieve that objective look forward to a chance to work with you and your colleagues on the committee on how we do that.

On Thursday, Geithner submitted written answers to the Senate Finance Committee.

Obama believes China manipulating yuan: Geithner(Reuters): President Barack Obama believes China is “manipulating” its currency, his choice to head the U.S. Treasury said on Thursday using a term the Bush administration had deliberately avoided for years to describe Beijing’s foreign exchange practices.

Under U.S. law, labeling China as a currency manipulator would require the Treasury Department to begin “expedited” negotiations with Beijing — either bilaterally or through the International Monetary Fund — to reduce China’s huge trade surplus with the United States and eliminate any “unfair” currency advantage.

 

Comments from Andrew Busch, global currency strategist with BMO Capital Markets in Chicago…

Rookies make rookie mistakes.  Our new President is not immune to this disease.
This is a situation where the US has known for a very long period of time that China has managed it’s currency.  The US chooses not to name China as a manipulator for two reasons.  One, China doesn’t meet the Treasury’s narrowly defined criteria.  Two, China owns a lot of US Treasury, Agency, and overall debt securities.  To engage in any action that would lead the Chinese to misunderstand actions by the US and therefore sell these holdings would be dangerous.  But rookies do what rookies do:  they make mistakes.
If this is indeed the new tactic being taken by the Obama administration, they will generate a weaker US currency and higher US bond yields.  Not exactly what they should be doing in their first 100 days in office.  This is the Obama’s first brush with the markets and they will quickly learn to exercise discretion in the future.

Short View: Currency interventions(John Authers with the Financial Times): See Authers’ report on the global currency situation.

During his trip to China in December, Henry Paulson handled this issue with care while making the U.S. interests felt among Chinese leaders. Geithner has pushed the envelope. Nothing may come of this as both countries are stuck in an economic recession. The concern that China will sell its Treasury portfolio may be exaggerated. Who would they sell to and what would they buy?

Civil unrest can test emerging markets, Mobius says

Civil unrest biggest threat to emerging markets (Financial Times): Civil unrest could be one of the biggest risks facing the emerging markets sector in the next 12 months, according to Franklin Templeton’s Mark Mobius.

He said Brazil, China and Turkey were very attractive markets in the current environment, as these economies stood to gain from monetary changes. “In Turkey, exports have been impacted by what’s happened in Europe, but they have quite a vibrant domestic economy and tourism,” he explained. “The key factor is the global decline in inflation and interest rates – Turkey has suffered from high interest rates in the past,” he said.  “This decline is very good news for Turkey, which is one of the reasons why we’re pretty bullish.”

 

Pemex Oil Output Declines at Fastest Rate Since World War II(Bloomberg): Petroleos Mexicanos, Mexico’s state oil company, will probably report its fastest drop in production since 1942, eroding revenue as plunging crude prices limit the amount of cash available to drill for new reserves.

Brazil Stocks Drop on Economic Growth Concerns; Bolsa Tumbles (Bloomberg): Brazilian stocks dropped the most in a week, wiping out this year’s gains, as materials companies and banks slid on concern a global economic slowdown is worsening.

Russia’s currency edges closer to disaster

Ruble Drops to Pre-1998 Crisis Low on 6th Devaluation This Year (Bloomberg): The ruble fell below the weakest level during the 1998 Russian crisis after the central bank devalued the currency for the sixth time in seven days to protect reserves.

Deripaska, Potanin Propose Russian Metals Merger (Bloomberg): Billionaires Oleg Deripaska and Vladimir Potanin proposed merging OAO GMK Norilsk Nickel with five other Russian metals producers including Evraz Group SA to create the world’s second-largest mining company.

Shanghai glistens in the gloom (Reuters): Shanghai was the only bright spot in a gloomy week for Asia-Pacific equities as sentiment improved amid growing bank loans and hopes for a stimulus plan for China’s machinery makers.

Satyam scandal

Satyam executives arrested (Financial Times): The Chief Financial Officer of India’s Satyam Computer Services was arrested, Hyderabad police said on Saturday, as authorities seek to unravel India’s biggest corporate scandal.

Satyam’s Raju Faces Charges as Government Reconstitutes Board (Bloomberg): Satyam Computer Services Ltd. founder Ramalinga Raju and his brother Rama faced charges of criminal conspiracy and breach of trust in an alleged $1 billion fraud as the government assembled a new company board.

Satyam saga jolts Sensex (Economic Times): The Satyam financial fiasco has dragged down the Indian stock market to its fifth biggest fall in percentage terms in the last 14 years, a SundayET analysis. Even the recent Mumbai terror attack (26/11), attack on America’s World Trade Centre (9/11), and dot com bubble burst had lesser impact on Dalal Street.

The Sensex fell as much as 7.25% on January 7, 2009, after Satyam Computer Services’ erstwhile chairman B Ramalinga Raju confessed to an accounting fraud. The analysis captures how the Indian equity market behaved in the face of major events in Indian history. For the calculation, closing index figures have been considered since 1995.”

Emerging Markets – Economic stimulus plans aid stocks, bonds (Reuters): Emerging market stocks, bonds and currencies rose on Monday on expectations of interest rate cuts in the new year and a major U.S. economic stimulus package that would help lift the global economy out of its doldrums.

Brace yourself: Political-market risks in 2009 (Reuters): There are a number of macro risks that will continue to grab headlines in 2009, including the conflicts in Afghanistan and Iraq, cross-border tensions and state instability in Pakistan, and Iran’s 
ongoing quest to develop advanced nuclear technologies.

Chinese companies go abroad (Seking Alpha): Just as a good China strategy is increasingly important to the continued growth and competitiveness of MNCs worldwide, expansion overseas is a top priority for many of China’s leading firms.

By Shaun Rein with China Market Research Group.

Lessons from India and China

Talking Business How India Avoided a Crisis (NYT): “What has taken a number of us by surprise is the lack of adequate supervision and regulation,” Rana Kapoor was saying the other day. “This was despite the fact that Enron had happened and you passed Sarbanes-Oxley. We don’t understand it. Maybe it’s because we sit in a more controlled economy but ….” He smiled sweetly as his voice trailed off, as if to take the sting off his comments. But they stung nonetheless.

India has avoided direct exposure to the credit crisis with a cultural aversion toward credit and with an anti-inflation, anti-Greenspan central banker, Y.V. Reddy.

China to the Rescue? Not! (NYT): I had no idea that many of those oil paintings that hang in hotel rooms and starter homes across America are actually produced by just one Chinese village, Dafen, north of Hong Kong. And I had no idea that Dafen’s artist colony — the world’s leading center for mass-produced artwork and knockoffs of masterpieces — had been devastated by the bursting of the U.S. housing bubble. I should have, though.

We’re going to have to get out of this crisis the old-fashioned way: by digging inside ourselves and getting back to basics — improving U.S. productivity, saving more, studying harder and inventing more stuff to export. The days of phony prosperity — I borrow cheap money from China to build a house and then borrow on that house to buy cheap paintings from China to decorate my walls and everybody is a winner — are over.”

Thank you Mr. Friedman.