Money

As we approach a new year, many economic commentators are spreading fear about the flat, or even inverted, yield curve. They claim it’s a sign of recession just ahead. The yield curve is a graphical depiction of interest rates on bonds of different maturities. Normally, longer-term bonds have higher yields than short-term debt instruments because of inflationary expectations and because more risk and uncertainty are to be found over longer periods of time. It’s true, an inverted yield curve often is a warning sign of recession. But only when other real-time market indicators, like commodity prices, confirm it. In the late 1990s and early 00s, the yield curve was for long stretches inverted — higher short term rates than long Read More ›

When the biggest two news items during President Bush’s China trip were his bike ride and his attempt to exit a locked door, it’s clear any contentious conversations happened, well, behind that locked door. This is good news, especially on China’s currency, the yuan. Both the U.S. and China reiterated their basic views, without directly contradicting the other side. President Bush said in his press conference with President Hu Jintao that “We’ll continue to work with China to help implement its July commitment to a flexible, market-based currency.” But Yi Gang, an assistant central bank governor, said that “China would keep the yuan basically stable….” The status quo of stable exchange rates is good for now, though at some point Read More ›

Although Mao Zedong’s presence still superficially dominates the main public space here in Beijing–his mausoleum at one end of Tiananmen Square and his portrait guarding the Forbidden City at the other–almost everything else in China’s capital city refutes Mao’s life, legacy, and ideas. Once ubiquitous, gray and brown Mao jackets have now been utterly replaced by a new national garment–colorful North Face ski jackets. The other place you’ll see Mao is on all the money, known as yuan or renminbi, or simply RMB. Hundred-yuan bills, 50s, 20s, 10s, ones–it’s all Mao. The irony is that Mao was not, shall we say, a terrific economist. Yet for the last 27 years, China’s management of its economy and this massive transformation of Read More ›

The Wall Street Journal notes Monday that “U.S. Treasury Secretary John Snow struck a surprisingly conciliatory tone after talks with China’s top economic leaders,” and that his comments “seem to put to rest speculation that the administration of U.S. President George W. Bush might declare China a ‘currency manipulator’ in a coming report as many in Congress are demanding.” This jibes with our view, expressed yesterday, that the chances of a continued high-intensity currency and trade battle have diminished. The Journal also notes, however, that “Mr. Snow’s new stance could draw increased opposition from Congress, where a number of lawmakers are threatening to impose large tariffs on Chinese imports unless Beijing lets the yuan appreciate more sharply.” The Treasury and Read More ›

Has John Snow’s China trip turned from expected blizzard to a light dusting instead? Secretary Snow and other U.S. Treasury officials in China are attempting to broaden their message beyond criticism of a supposedly undervalued yuan. Snow has spent the last few days urging China to modernize its financial, credit, equity, debt, and commodity markets. This is all fine advice, as far as it goes. China knows it must establish advanced financial institutions, markets, and services. It wants to do so. It is doing so. The process is already well underway, with functioning stock markets in Shanghai and Shenzhen, a new commodities market about to open in Shanghai, and rapidly developing consumer credit and mortgage markets. Of course, many interior Read More ›

U.S. Treasury Secretary John Snow is in China for a nine day visit. But which nation’s leader is offering supply-side economic advice? If you guessed Chinese President Hu Jintao, you are correct. Citing evanescent “imbalances,” Snow continues his calls for de-linkage of the yuan from the dollar and subtly still pushes for a major yuan appreciation. The U.S. thus inexplicably continues its weak dollar currency policy. Hu, on the other hand, believes that “All countries, major economies in particular, should keep major currencies reasonably stable and prevent trade protectionism.” Bingo. Over the past decade, the dollar-yuan link has been a key source of growth and stability not only for the U.S. and China but also across the global economy. China’s Read More ›

This week the Bank of China clarified the world’s understanding of its new monetary regime. Its small 2-percent revaluation of the yuan vis-a-vis the U.S. dollar, the BoC said, “does not in the least imply an initial move which warrants further actions in the future.” Bottom line: we should not expect significant changes in the value of the yuan. This confirms my view that China is shrewdly dousing a political tinderbox, not fundamentally altering its successful sound money principles and policies. Our friend John Rutledge, who was initially worried about China’s move, now believes 1999 economics Nobelist Robert Mundell may be closely advising the Chinese, and Rutledge is relieved. I agree there are lots of reasons to believe Mundell is Read More ›

John Rutledge, a key economist in the early Reagan administration and since a super smart watcher of financial markets, doesn’t like China’s currency change. He and I agree that China’s U.S. dollar peg has been a boon for both nations over the last decade. (I first wrote about the Chinese monetary issue and urged them to retain the dollar link after visiting China two years ago.) Our mild disagreement now hinges on politics. Were American politicians smarter about economics, and were our own Treasury Department not agitating for a Chinese currency change, I would be perfectly happy for China to continue its dollar peg. The idea that floating and flexible exchange rates are somehow “free market economics” is wrong. The Read More ›

China today dealt a blow to the protectionist sentiments building in the the U.S. Congress and thus did a great favor to the global economy, especially American technology companies. China slightly changed it currency’s (the yuan) value against the U.S. dollar, from 8.3/US$ to 8.1/US$. The move is immaterial economically but allows China to claim it has “revalued.” The large revaluation so many U.S. politicians were seeking, but did not get, would have been bad for both China and the U.S. China has fixed the yuan to the dollar since 1994, a brilliant move by then-economic minister Zhu Rongji. The peg created a single economic fabric stretching across the Pacific, kept China from catching the Asian flu of 1997-98, helped Read More ›