Well here’s a tricky one—China’s economy is showing real signs of slowing down.  According to a Bloomberg News article, China’s GDP dropped 0.5% in the second quarter of 2008, while consumer prices have simultaneously been rising at more than 7% for the last two months.  The emerging slowdown across the People’s Republic is the most significant since 2005.

China’s currency, the Yuan, also fell this morning, a surprising drop that suggests Beijing is concerned about maintaining its export-led economic orientation.  Because the Yuan is tightly managed by Beijing, it’s quite possible that government officials are trying to provide “breathing room for the export sector,” according to Jing Ulrich, JPMorgan’s chairwoman of China equities.  Bloomberg News quotes her as saying that “the performance of the export sector could influence the government’s approach to pacing the appreciation of the yuan.”

The tightrope that Beijing is now walking stems from their having pegged the Yuan to the dollar.  With the dollar now plummeting in world markets (breaking $1.60 per Euro, for example), China is on the receiving end of the same inflationary pressures as the U.S.  As Ulrich explains it, Beijing now faces “the cost of containing imported inflation from higher commodity prices.”

While an artificially low Yuan has helped China become the world’s fastest growing economy in recent years—and a manufacturing juggernaut—such a meteoric rise has also sewn the proverbial whirlwind.  Economic problems like rising energy costs, constraints on agricultural production, lagging rural incomes, and troubled global financial markets mean that, more than ever, China wants to keep its export engines running full tilt.  But maintaining a low Yuan is starting to bite hard, especially with higher oil prices.

It seems that Beijing is hitting a wall—damned if they do, damned if they don’t.  And so, while Congress frets and fractures over whether to take action on China’s undervalued currency, it’s quite possible that inside Beijing’s ruling regime, the same currency debate is taking place.

In the meantime, U.S. manufacturers continue to take a double beating, both from climbing energy prices and competition from China’s undervalued goods. 

It’s gonna get interesting…

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This entry was posted on Thursday, July 17th, 2008 at 7:30 pm and is filed under Currency Manipulation, Economic Security. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.