Chinese Inflation Heats Up Again As PBoC Takes Another Step To Establish Yuan As Reserve Currency

Tyler Durden's picture

That China's February inflation just came out at a consensus-beating 4.9% is no surprise. After all, the country miraculous slipped just below the consensus so the Department of Truth had to keep things somewhat symmetric. And yes, while this is the 5th consecutive month that Chinese inflation is higher than the official target of 4%, this is not the news of the evening: a press release just issued by the PBoC however is...

But before we get there, here is Bloomberg's brief take on the latest Chinese number, which will likely have an adverse impact on the market:

Investors are concerned that monetary tightening to tame inflation may slow the Chinese economy, weakening a global expansion already hampered by elevated unemployment in the U.S. and sovereign debt woes in Europe. Stocks tumbled globally yesterday as the Asian nation reported weaker exports, U.S. jobless claims rose and Moody’s Investors Service cut Spain’s debt rating.

“Inflation and overheating are still a bigger risk in China than an sharp economic slowdown,” Yao Wei, a Hong Kong- based economist with Societe Generale SA said before today’s release. “The economy has strong momentum.”
China’s economic data is distorted in the first two months of each year by a weeklong holiday to celebrate the Lunar New Year. The customs bureau yesterday cited the event as a factor in an unexpected $7.3 billion trade deficit for February, the nation’s biggest in seven years.

Premier Wen Jiabao’s campaign to cool real-estate and consumer prices after the economy surged back from the financial crisis has included three interest-rate increases since mid- October. Producer prices rose 7.2 percent in February after a
6.6 percent gain in the previous month, today’s report showed.

What is the big news is that a short week after the PBoC made it clear it would start allowing CNY in all cross-border transactions, a direct affront to the dollar's reserve status, it just stepped up its rhetroic materially with the following press release on its website:

From: "Zhang Xiaohui: to promote the interest rate, exchange rate formation mechanism reform and monetary policy transmission mechanism"

The key selection Google-translated:

Promote the reform of RMB exchange rate formation mechanism, improve the managed floating exchange rate system is based on China's national conditions and development strategies to make the choice, improve the socialist market economic system consistent with the direction of reform, in line with our long-term and fundamental interests of promoting China's economic restructuring , curb inflation and asset bubbles, maintaining the development of strategic opportunities and international trade environment has a positive effect. Meanwhile, as the development of a large open economy, further enhance the effectiveness of monetary policy is to achieve our internal and external macroeconomic balance, keep the economy stable and healthy development of the necessary requirements of a managed floating exchange rate system will also help improve China's implementation of financial macro regulation of the initiative and effectiveness.

"Eleventh Five-Year" period, the RMB exchange rate formation mechanism reform an orderly fashion.To achieve unification of exchange rates in 1994, China began to implement a market-based, managed floating exchange rate system, only after the outbreak of the Asian financial crisis narrowed the floating band of RMB exchange rate. July 2005, after full argument and preparation, our implementation of the RMB exchange rate formation mechanism reform, the implementation of the basis of market supply and demand with reference to a basket of currencies, a managed floating exchange rate system. Second half of 2008 to further deepen the international financial crisis, many of the national currency devaluation against the dollar, the RMB exchange rate maintained basically stable, and global economic recovery in Asia has contributed to demonstrate our efforts to promote global economic balance. June 19, 2010, under domestic and international economic and financial situation and China's international balance of payments situation, the PBOC announced that further advance the reform of RMB exchange rate formation mechanism, focusing on the basis of market supply and demand persist, with reference to a basket of currencies. July 2005 to exchange reform since the end of 2010, the RMB against the U.S. dollar has appreciated 25% against the euro has appreciated 14%, according to BIS data, to the end of 2010, the RMB appreciation of 14.8% in nominal effective exchange rate, real effective exchange rate appreciation of 22.6%.

RMB exchange rate formation mechanism is also supporting the work of other steadily. First, the foreign exchange market and vigorously promote the construction, based on market supply and demand mechanism of RMB exchange rate formation system of support. Inquiry into trading and market maker system and improve the RMB exchange rate formation way, and to develop inter-bank RMB forward, swaps and options markets, innovation and exchange rate hedging instruments, enhance risk management capabilities. Spot foreign exchange market in 2010, forward and swap transactions were 3.05 trillion U.S. dollars, 32.7 billion and 1.28 trillion U.S. dollars, respectively, 4 times in 2006, 2 times and 25 times. The second is to strengthen and improve foreign exchange management, and continuously expand the channels for foreign investment, gradually introduced a series of policies to relax the companies held by residents of foreign exchange restrictions, speed up the pace going. While also strengthening cross-border financial supervision and prevent large-scale short-term arbitrage capital flows. The third is closely monitoring the economic situation, to observe the business capacity, while maintaining stable and rapid economic growth while actively and steadily promote the reform of RMB exchange rate formation mechanism.

Since the reform of RMB exchange rate formation mechanism of RMB exchange rate fluctuations in two-way, significantly enhanced flexibility, the market supply and demand in the exchange rate fundamental role in further strengthening. View from the operation of the real economy, the exchange rate formation mechanism reform the overall impact is positive in promoting China's foreign trade structure adjustment, economic structural optimization and industrial upgrading to achieve sustainable economic development to the positive role gradually. Micro-enterprises and financial institutions, the main initiative to adapt to the heightened sense of exchange rate fluctuations, changes in the market should also have greater flexibility and capacity to improve. The rapid development of the foreign exchange market, interbank foreign exchange market quotation active trading volume grew rapidly, such as derivatives swaps and long-term steady development of the foreign exchange market efficient allocation of resources and further enhanced. Financial institutions, exchange rate flexibility in adapting the same time, strengthen risk management and improve the ability of independent pricing, improve financial services and innovative financial products. These were to some extent, reinforce the transmission of monetary policy and market micro-foundation base and enhance the effectiveness of monetary policy.

Steady progress in interest rate reform, the exchange rate formation mechanism reform is an important part of our financial system, but also to establish and improve the socialist market economic system component. Play a good interest rate, exchange rate effect of price signals, for optimizing resource allocation, promote balanced and sustainable development of economic significance. "Eleventh Five-Year" period, the area of ??reform has achieved remarkable results, the People's Bank monetary policy system has improved constantly, and gradually shift to price-based indirect control tools, significantly enhance the flexibility of RMB exchange rate, money market, the rapid development of the foreign exchange market, the market With the further expansion of the depth and breadth of the micro subject of monetary policy are also constantly enhancing the sensitivity, flexibility and effectiveness of monetary policy be improved. Transmission mechanism of monetary policy more smoothly.

The next stage, the People Bank will "Twelfth Five-Year Plan" of the general requirements and basic conditions, interest rates continue to steadily promote market-oriented reform and the reform of RMB exchange rate formation mechanism, and enhance the policy relevance, flexibility and effectiveness, improving macro-control capacity. In accordance with the requirements of prudent macro management, establishment of prudent financial companies must have qualified the hard constraints; guide financial institutions to further improve the pricing power, market pricing of infrastructure to promote continuous improvement; gradually liberalized the prices of alternative financial products, banking products to avoid excessive cross-subsidies, to achieve a variety of products in the market pricing. Through interaction and mutual promotion in many fields, especially to speed up the cultivation of the financial markets, from the start of building a mechanism to create conditions for the market to play a greater role in interest rate decisions. In accordance with the initiative, controllability and gradual manner, to further improve the RMB exchange rate formation mechanism, market supply and demand in the exchange rate to play a basic role in reference to a basket of currencies, exchange rate more flexible and keep the RMB exchange rate at a reasonable and balanced level the basic stability and promote basic balance in international payments.

Simply stated while China says it will follow a prudent monetary policy, which however means to keep the Yuan stable and thus not revalue, further pissing TinyTaxFraud off even more, reiterates it will expand Yuan use in cross-border trade, and will rush to improve its international balance of payments even with the current rate.

All of which simply means that China just took another big step toward instituting the Yuan as the next reserve currency.

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buzzsaw99's picture

All of which simply means that China just took another big step toward instituting the Yuan as the next reserve currency.

That's what the bernank and turbo want too.

dlmaniac's picture

China bought so much gold and silver recently they had a trade deficit.

Weisbrot's picture

in respect to the Chinese divesting themselves of the devaluating fiat dollar it is, for them.

william the bastard's picture

At least they are avowed communists.

reader2010's picture

Not exactly. Bernanke's owners want China's RMB to be a part of the soon-to-be-created world currency. If China rocks the boat by going alone with other countries, you should expect nasty large-scale wars with China. Soro just hinted that in his recent FT video interview.

buzzsaw99's picture

They try to raise the price of my undies and it's on bitchez!

jeff montanye's picture

exactly.  whereas the nineteenth century saw the british empire fight the good fight to keep the chinese addicted to opium and the pound, the twenty first must see the american empire go to war over keeping them addicted to hopium and the dollar.  what better use of blood and treasure (well, not literally treasure...)?

malikai's picture

Any shooting war between the US and China will result in certain catastrophic loss for both. The next empire may very well be Djiboutian in the world of post China-US war.

Translational Lift's picture

No one in their right mind would get into a ground war with China and their 1.3 Billion population.  The winner will be the one that pulls the nuke trigger first!

Weisbrot's picture

does that mean after the Chinese become the world currency the FRB will print their fiat? (just as they counterfit so many US items)

dracos_ghost's picture

Given that the yuan is pegged(aka a foodstamp), the FRB already is printing their fiat.

Snidley Whipsnae's picture

Not exactly, not exactly... What Soros said was that the US wants China's participation in the IMF to increase. The IMF is a puppet of the US.

Soros also confirmed Triffin's Paradox, but he failed to lable it as such.

China has it's own organisation, the SCO, and is more interested in boosting the strength and prestige of the SCO.

No one is going to start 'a large scale war with China'... China has an impressive nuclear arsenal, the war would be fought in the SE Pacific within striking distance of China's most effective weapons, and no one would win such a conflict...the result would be mutually assured destruction.

The current 'war' is economic and will remain so. As China gains economic clout it will pull more nations into it's sphere of influence...while Western Socialist Soverigns gradually, or not so gradually, decline, and lose influence.

PMs are the key factor in the economic war and all central banks recognize that fact. The worlds central banks are not holding, and adding to, their PM reserves for no reason.


reddog's picture

You have it tight but for one thing.


Would that western nations were Socialist;

they would be working for their larger populations

and not just the new robber barons.

reader2010's picture

The weakest link for China is energy, food and water. It aint gonna end in an orderly fashion when the shit hits the fan. Indeed, China is the biggest Paper Tiger.

rapier's picture

Once commercial quantities of RNB exist offshore then it will start trading.  At which point how can they 'manange' the exchange rates, meaning dictate them, any longer?

I don't believe they can but maybe I'm wrong.  Anybody have any opinions?

Also it probably isn't much an issue short term but I wonder what the effect on global liquidity will be when Chinese based credit finds its way out into the world?

malikai's picture

The exchange rate could be eaily managed by controlling the gold/silver/whatever ratio to currency. Be sure the Chinese would do this, and it would not stop inflation, it would only be better managed than the current system, which is to say it would be slightly less evil than the current system, but not by much.

Oh regional Indian's picture

Yup. But I think China is more likely readying the world for soomething other than the dollar, but probably not the Yuan. You have to have a lot more than gold backign to become a global reserve currency. China has waaaaaay too many internal problems to deal with.

The US will fire a shot from the shoulders of EMEA into the heart of CHina when the time is right. Till then, keep on jawboning.

It's the IMF we have to keep our eyes on, it's the other hand.


slewie the pi-rat's picture

hi, ori, you shithead! i had to look up "EMEA":

}Paste{ : Europe, the Middle East and Africa, usually abbreviated to EMEA, is a regional designation used for government, marketing and business purposes. ...{

so, of course, you are right, again...  but this is pretty crypto:  "The US will fire a shot from the shoulders of EMEA into the heart of CHina when the time is right. Till then, keep on jawboning." 

once, in asia, when i was in the wrong place at the wrong time with the wrong people, i had the opportunity to observe chinese gamblers.  and vietnamese, also, but the chinese, down along the river were something to behold.

the depiction in "the deer hunter" where, along that very river, as the story goes, there is the Russian Roulette Casino, is quite accurate as far as the gambling goes.  i have been escorted thru rooms like that.  terry & the pirates, big time.  not a show of weapons, either, just a heluva lotta action, and people looking like badbad leroy brown all over the place.  piles of 'money' and great drama.

if the chinese are looking at 4.9% inflation, and here the ice is thin, indeed, but IF, ori, the chinese inflation is 2X the USA inflation, those riverboaterZ are devaluing their currency twice as fast as uncle sugar and the FED!  and they are playin for huge pots all over the place.  they got the printer goin, they got the fractional thing goin, they gotta just love the kinda "plays" that get aired on zeroHedge.  in a few years, they will wipe everybody else completely out.


well, thanks 4 the new acronym, whatever it was...


reader2010's picture

You don't need to visit Asia to see those actions. Because all you need to do is to visit Vegas.

Oh regional Indian's picture

Hey Slooie, thanks for the brain fart.

if I may add to the mysteriousness:

Taking a higher perspective, it becomes quite obvious to the trained eye which way tensions are buildiing with-in a system. Once the limits and locus are determined, it's fairly simple to exptrapolate....

The arrow will fly for sure, a Broken Arrow perhaps.

How rouge!



Green Leader's picture

You know what I think regarding the next global reserve currency--and its Biblical relationship.

Indeed, the is IMF the one doing the tricks. They have distracted the world with all this Amero, Bancor, SDR, talk when the Denario is coming up. But, by the time it comes, we will have the devil on our backs, feeling his breath on our shoulders.

Oh regional Indian's picture

I feel it GL. Looks like we are in for a little fire and ice.


4D's picture

Hmm, and retail sales were only up 15% on expecations of 19%, only 11% year on year.

No wonder CPI wasn't too bad, the people are running really short of cash!


PPI was way above forecast at 6.6%, so another wave is coming anway. 

Good luck with the switch to a consumer economy!

waterdog's picture

Sounds like an ugly fight for the spoils following the death of the only person in the family that had money. Those who were not at the funeral are at the homestead putting name stickers on the furniture.

China is screwing with monkey man because it can. All central banks are lost. No country is going to accept a communist country's currency as a benchmark.


Harlequin001's picture

China is  sitting on a mountain of nothing.

That's what happens in a default, just ask a Bernie Maddoff investor,...

Oh regional Indian's picture

No country is going to accept a commie benchmark. True.

Unless we're all communists? Seems to the our 'planned" future, yes?


Guy Fawkes Mulder's picture


As you often do, you cut to fundamental issues here.

I assume you don't mean "commie" "communist" with all the connotations that has for the typical American. I assume you mean "oligarchy" "dictatorship" "fascism" "corporate over individual" "new world order" etc.

There is no getting around this planned future neatly. Sometimes I find it hard to suffer the fools who frame the present in old thinking, old memes, old strawmen issues. Yes, there are ancient issues plauging the world right now. But Marx, Joe McCarthy, Lenin, "commies"... these are bullshit piñatas for fools to swing at while the real issues are being decided behind the fools' backs.

I've been thinking about writing something publishable about this issue of the Chinese model versus the American model. Addressing both the perceived images of America and China and the reality.

Bob's picture

You likewise cut to some fundamental issues here, including the fools heroically fighting the Cold War.  Please write that article!

Guy Fawkes Mulder's picture

The news tonight is scaring me.

Hope the world is here when I wake up... I live in several kill zones (big city, pacific rim, no bunker, not much food, etc)...

Is this Friday the day?:

Bob's picture

Nah, it's all good until the bernank stops printing. 

reddog's picture

Reality is good; most function on faith.

Hope to read it soon.

Oh regional Indian's picture

Yes GFM, I did mean the "real' communists, the steel fist in the collective glove.

I think a genuinely insightful take on American style Capitalism vs. Chinese style communism would be really well received. Write away and do share.


bankonzhongguo's picture

There are many new machines in China, all being run by a disposable/replaceable workforce that operates at 5% of US labor costs and zero environmental laws.

When you have the likes of Buffet, Soros and Murdoch all marveling at a State run like a Corporation, you can see TPTB will send their money to any regime under any circumstances.

One need only look to the growth of CYN denominated Corporate bonds from HK to see where this is going.

I used to feel the same way about China 15 years ago. Not anymore.

I have seen too many deals where the Chinese will just pull the rug out from under any direct investor, but the MTV generation will pour their faith into China, Inc.

If MINFIN and PBOC are serious about a reserve currency, they have to strike while the iron is hot.  Back the CYN with gold, silver, copper, rare earths and then relativize the EUR and USD as an average of the two then weighted with the PM.  Be the XDR.

If one yuan is backed by just a micro-gram of gold, the world will begin to orbit Zhongguo. Do the Chinese have the balls to go Austrian?

You guys can go down the road of the IMF/FRB, and continue to be just as exploited as from the Opium Wars, or create a real reserve currency - backed by - Real Reserves.


Non Passaran's picture

That's a very good question. I think they won't go Austrian because the fear of problems at home is greater than the desire to do well internationally (or in the long term). What politician would discard a tool that allows him to "fine-tune" domestic economy when it (or he) needs a little boost? ;-)

Harlequin001's picture

And does anyone really have more confidence in the yuan than the dollar.

Perhaps the paper quality is improved...

Misean's picture

Given the news on cotton used for currency, it's clear that at least they go through the bother of actually...printing.

Weisbrot's picture

more confidence in effency over corruption, you tell me.

falak pema's picture

If there is any truth in the macro report of Raoul Pal posted here on ZH, China's big banks are worse in debt than the TBTF-all-americans! WOW, oh wow!

bob_dabolina's picture

Tim Geithner sucks

Spalding_Smailes's picture


Farewell to the China price March 2011: Firms operating in China must reassess their business models in the light of impending wage inflation, says Harris & Moure's Steven M. Dickinson

By Steven M. Dickinson

The China price has dominated world markets for over a decade, but its reign is coming to an end as government planners pursue wider economic change. There are two principal objectives: First, to shift from an export-led growth model to one more reliant on domestic consumption; and second, to move the manufacturing sector up the value chain into product categories with more of an emphasis on technology than cheap labor. It all points to a dramatic increase in wages for Chinese workers, which will wipe out the longstanding cost advantage of manufacturing in the country. Salary gap Even though China has a large GDP, this is simply due to the fact that it has a large population. On a per-capita basis, the country ranks 99th out of 183 nations. It is no surprise, therefore, that wages are low.  But salaries in China aren't just low, they are abnormally low. Typically, a country's minimum annual wage is 58% of its per capita GDP; in China it is 25% of per capita GDP, good enough for 158th place out of the aforementioned 183 nations.  The gap between the GDP and minimum wage rankings – 99 versus 158 – is perhaps the most telling statistic. For the majority of countries, there is a close correlation between the two rankings; the disparity in China's case points to grossly inequitable income distribution.  This is borne out by the Gini coefficient numbers, a widely accepted measure of economic disparity. China's coefficient is 0.47 on a range of 0 (perfectly equal) to 1.0 (perfectly inequal), putting it 83rd out of 134 countries measured.  According to Gini, China's level of income inequality is higher than in almost every industrialized country in the world. Foreign fallout The obvious easy target is foreign-owned enterprises and privately owned export-orientedmanufacturers. Wages are already increasing in these sectors and it appears that the process has only just begun. Governments in Guangzhou, Shanghai and Beijing are already experimenting with mandatory union collective wage bargaining, with the hopes of 80% coverage within three years.  While the end result is of course unknown, Liu's proposal for a doubling of worker wages within five years appears to be entirely reasonable. In fact, the increase could be much more significant in the foreign and export-oriented sector. What does this mean for foreign firms? Much of the attractiveness of China as a location for manufacturing has relied almost entirely on abnormally low wages. Recent estimates indicate that on average labor accounts for about 50% of the cost of manufactured goods globally; in China this figure has been as low as 10% over the past 10 years. As wages increase, the attractiveness of China to low-end factory owners will fall.  The raw numbers Recent studies have shown that: • Wages of civil servants are abnormally high. The average salary of a civil servant in China is six times the minimum wage, compared to a global average of two times. • Management level salaries in state-owned enterprises (SOEs) are abnormally high. The average SOE manager in China makes 98 times the minimum wage, compared with a global average of five times. • Within the state sector itself, wage disparity is abnormally high. An SOE banker on average earns 3,000% more than his counterpart at a construction company, compared with a global average disparity of 70%.
The pressure is compounded by costs of necessary items being abnormally high relative to wages.  • The UN recommends that it should be possible for an average worker to purchase a home with three to six years of annual income. In Beijing, it is estimated that the average worker would have to toil for 74 years just to buy a place in a suburban multi-story condo block, unfinished, unfurnished and without any amenities. • The cost of electricity is a good index of the basic utility costs for urban residents. The average cost of 1,000 kilowatt-hours as a proportion of the average monthly wage in the US, South Korea and Japan is 2.67%, 3.19% and 8.19% respectively. In China, by comparison, it is 30.68%. • The US Department of Agriculture estimates that the average Chinese family spends 28% of its total monthly income on food. While this compares favorably with other developing countries, the number is far higher than America's 6.1%. Food prices remain the key driver of inflation in China, rising 10.3% year-on-year in January as the newly revised consumer price index rose 4.9%. The figure is well above the traditional central government target of 3%, and even above its revisedtarget of 4% for 2011. This makes wage growth an even more pressing social issue.For other businesses, the situation is less clear. Even taking into account impending wage inflation, it will be many years before Chinese salaries rise anywhere near the level of the developed world. And a wage increase commensurate with China's overall economic development will not, on its own, make the country an unattractive place in which to do business.  On the other hand, it may well be possible that abnormally low wages have masked other, more fundamental issues related to manufacturing in China. For example, recent data suggests that the economy is remarkably inefficient and its workers unproductive. Once the artificial inducement of low wages is removed, it is entirely possible that these inefficiencies will cause some businesses to decide that operating in China makes no economic sense.  This kind of analysis needs to be done immediately, since there is little question as to the direction of wages over the next five years.


Misean's picture

I sure hope you're getting paid for all the spamming you do.

I'd ask you to be polite and just post a link, but I suspect that is beyond your capacity.

Spalding_Smailes's picture

I really don't give a shit what your opinion is ... Book it.

Misean's picture

Yes, rude blowhards rarely care about politeness or propriety. Though, I'd not book from you, as I've come to the opinion you do NOT get paid for spamming. Is it a fetish?

Spalding_Smailes's picture

No, I just don't like Communist ....

Who named you the police of Zero Hedge ? If you don't like my post, don't read it ....



Misean's picture

Well, see, that was my whole point. If you wouldn't spam like a monkey flinging his feces at the crowd, it would be quite easy to roll past you. Capiche?

It has nothing to do with me being the police, but with you being impolite.