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

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.