Chinese Leader Firmly Defends Currency and Trade Policies

BEIJING — Premier Wen Jiabao sharply defended China’s currency and trade policies on Sunday against what he called foreign “finger-pointing,” charging instead that the developed world seeks to force unfair changes in those policies “just for the purposes of increasing their own exports.”

Mr. Wen’s remarks, which echoed a rebuke on Thursday by one of China’s central bankers, were perhaps the sharpest yet in a brewing disagreement between Beijing and Washington over the two nations’ economic positions.

In a more than two hour news conference at the close of China’s annual legislative session, Mr. Wen repeated that China will keep its currency, the renminbi, “basically stable” despite calls by the United States and other developed nations to let its value increase.

He also repeated the concerns he voiced a year ago, at China’s last legislative session, that the United States is failing to rebuild its own economy and maintain the value of the dollar. Protecting the dollar, which dropped sharply since the global crisis began in late 2008, is a matter of “national credibility” for the United States, he said.

“Any fluctuation in the value of the U.S. currency is a big concern for us,” he said. “I hope the United States will take concrete steps to reassure investors. It is not only in the interests of the investors, but also the United States itself.”

Chinese leaders fear that the United States’ vast budget deficits will lead to inflation that effectively devalues the dollar, and thus the value of China’s vast foreign-currency reserves. Those reserves exceeded $2.4 trillion at the end of 2009, with nearly $900 billion of that in dollar-denominated Treasury bills.

Mr. Wen’s most pointed remarks, however, were aimed at critics of China’s economic policies, led by the United States. Those critics accuse China of keeping the value of its currency artificially low, so that its exports will remain cheap compared to other nations’ competing products. That boosts China’s economy, but at the expense of other trading partners, they say.

China has pegged the renminbi to the declining value of the dollar since the economic crisis began in late 2008. Were it to let the market judge the renminbi’s value, critics say, the currency — and the cost of Chinese products — would rise.

In Sunday’s news conference, Mr. Wen bluntly rejected that view. Instead, in remarks that seemed aimed at the United States, he accused unnamed competitors of trying to bail out their own slumping economies by hamstringing the Chinese juggernaut.

“I understand some economies want to increase their exports,” he said, “but what I don’t understand is the practice of depreciating one’s own currency and attempting to force other countries to appreciate their own currencies, just for the purpose of increasing their own exports.”

That amounts to trade protectionism, he said, and “all countries should be fully alarmed by such developments.”

Some economic analysts were struck by the comments.

“I think it’s my first time hearing government officials saying that. Basically, Premier Wen said it’s a kind of protectionism to ask other countries to appreciate their currency and depreciate their own currency,” Shen Minggao, the chief China economist for Citibank in Hong Kong, said in a telephone interview. “In that sense, it’s a new understanding of currency policies.”

Mr. Wen argued that the renminbi is not unfairly valued, citing government calculations that suggested that, measured in real terms, China’s currency had actually risen in value at the height of the economic crisis.

One leading Chinese economist, Bai Chong-En of Beijing’s Tsinghua University, said in an interview on Sunday that for a broad range of technical reasons, he does not believe that the renminbi is seriously undervalued. But he also suggested that Western jawboning to revalue the currency is having the opposite effect.

“The greater the outside pressure, the more difficult it is for the Chinese government to raise the exchange rate, and the more difficult it is for the Chinese people to accept a revaluation of the Chinese currency,” he said. “People don’t like to be forced to change things. They have be willing to do it.”

In his wide-ranging news conference, which drew on both Chinese and foreign questioners, Mr. Wen repeated some boilerplate government positions — China is an underdeveloped nation that will need a century or more to reach advanced status, he said — and a few new ones.

Addressing a chorus of complaints by foreign investors, he said China will “put in place institutional arrangements to level the playing ground” for foreign companies in China, and promised to personally meet with foreign business leaders during his final years in office. Some of China’s economic stimulus measures, such as subsidizing purchases of new automobiles and home appliances, applied to products by foreign as well as domestic manufacturers, he noted.

He also said that he had been excluded from a crucial meeting of world leaders at last year’s Copenhagen conference on climate change, and had not deliberately skipped the meeting, as some at the conference charged. Mr. Wen’s absence from that session, which was attended by President Obama and other leaders, has been touted by critics as a symbol of China’s intransigence on climate issues at the conference, which ended without reaching many of its key goals.

“Why was China not notified of this meeting? So far no one has given us any explanation about it, and it still is a mystery,” he said.

Mr. Wen’s news conference was broadcast nationally, but in Beijing, that reply and several following minutes of the broadcast were abruptly cut off by what was described as a loss of the television signal.

Update: Citigroup Says Feds Ordered 7 Day Restriction On Bank Withdrawals

Announcement stokes fears of old fashioned bank runs if economy takes a turn for the worse

Paul Joseph Watson
Prison Planet.com
Monday, February 22, 2010

A new advisory being sent by America’s third largest bank to its account holders has stoked fears that major financial institutions could be preparing for old fashioned bank runs if the economy takes a turn for the worse.

Originally reported by John Carney over at the Business Insider website, Citigroup is sending the following information to customers along with their bank statements.

“Effective April 1, 2010, we reserve the right to require (7) days advance notice before permitting a withdrawal from all checking accounts. While we do not currently exercise this right and have not exercised it in the past, we are required by law to notify you of this change.”

An almost identical advisory to the one being sent out can be read on page 22 of Citbank’s Client Manual effective January 1, 2010, which can be read here from Citibank’s own website.

“We reserve the right to require seven (7) days advance notice before permitting a withdrawal from all checking, savings and money market accounts. We currently do not exercise this right and have not exercised it in the past,” states the manual.

According to the Future of Capitalism blog, Citigroup originally claimed that the warning was only sent nationwide as a result of a mistake, but that the measures do apply to account holders in Texas.

However, in a statement, Citigroup confirmed that they had reserved the right to impose the new 7 day rule on all account holders nationwide, but claimed they had no plans to enforce it. The bank stated that they had been forced to enact the new policy as a result of federal regulations.

“When Citibank moved to unlimited FDIC coverage in 2009, we had to reclassify many checking accounts to allow for immediate withdrawals in order to ensure all customers qualified for the additional coverage. When we moved back to standard FDIC coverage with most major banks in 2010, Citibank decided to reclassify those accounts back to make them eligible again for promotional incentives. To do so, Federal Reserve Reg D requires these accounts, called NOW accounts, to reserve the right to require a 7-day notice of withdrawal. We recently communicated this technical requirement to our customers. However, we have never exercised this right and have no plans to do so in the future,” reads a statement released by the bank.

Over the last 18 months, numerous rumors of bank runs, “bank holidays,”  and limitations on access to cash at ATM’s have been floating around. Citigroup’s new policy to restrict withdrawals won’t do anything to calm such fears.

As we reported back in 2008, the Federal Deposit Insurance Corp., which guarantees individual accounts up to $100,000, only has about $50 billion to “insure” about $1 trillion in assets across the nation’s financial institutions.

This revelation prompted fears that an accelerating amount of bank closures could absorb FDIC funds and leave holders of money market and traditional savings accounts exposed.

Beware the 4 new asset bubbles

NEW YORK (Fortune) -- Here we go again.

Less than two years after the housing market collapsed, the U.S. economy is threatened by a new bubble in asset prices. This time, four billowing balloons are hovering: two commodities -- gold and oil -- stocks, and government bonds.Don't be fooled into thinking that last week's 5% drop in the S&P, and the recent sell-off in oil, remotely makes them fairly valued, let alone bargains. Equities and commodities, as well as Treasuries, which actually rallied as stocks dropped, still have a long way to fall. The reason: They've already seen huge run-ups that put their prices far above their historic averages, and far above the levels justified by fundamentals.

Two examples: Most companies can't possibly grow earnings fast enough to support their lofty valuations, and oil and gold are so expensive that we'll see what high prices always bring, a surge in new supply. That makes a price-pounding glut inevitable.

Since the start of 2009, oil has returned to the danger zone by jumping 63% to $75 a barrel, and gold has risen more than 20% to set astounding new records by climbing above $1,100 an ounce. After briefly returning to historically normal valuations in March, stocks are now selling at price-to-earnings multiples 40% above their historic range of 14, and 10-year Treasuries are so pricey that they yield 1.5% less than they did in 2007.

What's causing this resurgence of speculative fervor? One view blames the same policy that caused the real estate rampage -- incredibly low interest rates that are flooding the banks with cheap funds that, in theory, are available for loans. (The current Fed target rate is between 0 and 0.25%.)

"Investors can borrow at extremely low rates to buy assets," says Brian Wesbury, a monetary specialist at mutual fund manager First Trust. "So they're using cheap debt to bid up prices. The Fed's expansionary policies are making assets look a lot less risky than they really are."

Other prominent economists dispute that we're in bubble territory, at least right now. Allan Meltzer, the distinguished monetarist at Carnegie Mellon, argues that even though banks are loaded with cheap money, they aren't lending -- which is why we have a credit crunch. "I would be a lot more concerned if loan demand were higher," says Meltzer.

The one asset that definitely isn't bubbling is housing. There, prices have fallen to a level where new buyers buy a house for the same total monthly cost as rental. That's gravity operating.

So how do you spot a bubble? My view is that we're now seeing the same signs that exposed the frenzy in real estate: prices flying far above their historic averages, measured either in inflation-adjusted dollars (commodities) or as a ratio of the income they produce (stocks and Treasuries). Watch for gravity to take over, just as it did in housing.

Treasuries

The rate on the 10-year Treasury is now a mere 3.6%, well below the 5.5% rate that it averaged between 1993 and 2007, a period where inflation ran at an annual 3% clip, meaning that the "real rate" after inflation, stood at about 2.5%.

So let's assume that future inflation also averages 3%, about where it stood in the second half of 2009. At today's prices, Treasuries are offering a real yield of just 0.6% -- 1.9 points below our 14-year average.

But as the economy recovers and the threat of inflation causes the Fed to tighten monetary policy by raising rates, the yield could rise to 5.5%, handing investors a big loss. Reminder: When yields rise, bond prices fall.

Yet even that scenario is optimistic. Given the huge deficits from the bailouts, it's likely that investors will want a far bigger cushion for expected inflation -- which suggests, says Wesbury, that the yield on 10-year bills could go over 6% in 2011.

Oil

At around $75 a barrel, oil may look like a bargain compared to the record of $147 in July 2008 (see editor's note). But we've simply moved from an immense bubble to a moderate one.

For oil, as in all commodity markets, the highest-cost unit that customers are willing to buy to "clear the market" sets the price. Indeed, prices can go far above cost for short periods, since it takes time for producers to drill new wells or because they hoard inventories.

So how much are oil companies paying to produce the world's most expensive barrels of oil? A good estimate is $55 to $60 a barrel. That's what it costs Anadarko Petroleum (APC, Fortune 500) to extract oil from deep wells in the Gulf of Mexico, according to Anadarko CEO Jim Hackett.

Hence, the world's highest-cost producers are now earning 30% to 40% margins. It won't last; to take advantage of the prices, oil companies will ramp up production, and that extra supply will cause prices to fall back into the $55 range, or even lower.

Gold

Investors are rushing to gold, because they rightly fear far higher inflation in the next couple of years and want to hedge against both rising prices and a declining dollar with a commodity that, they claim, has a fixed supply.

Since early 2009, the price has jumped to $1,100 an ounce from $875, triple its average price between 1990 and 2004. Yet the supply of gold is far more fluid than the gold bugs admit, partly because mining companies are investing heavily to increase production.

The real threat: Prices are so high all over the world that people who once treasured their gold jewelry are now rushing to sell it. Swiss refiners are offering irresistible prices for bracelets and brooches, "cash-for-gold" stores are in Chicago malls, and suburbanites are hosting Tupperware-style parties where neighbors show up to hock their gold teeth.

When this happened in the early 1980s with silver, prices plummeted from $50 to $15 in less than a year. Look for gold to end up below $500 an ounce within two years.

Stocks

Let's assume that investors want a 10% return from stocks (a 7% real return plus 3% gains from inflation). But at current prices, there is no way that the S&P can deliver those kind of gains in future years.

Here's why: Think of the S&P as one company that provides a total return in two components, a dividend yield and a capital gain. Together, the two should equal 10%. But the two are inversely correlated. The lower the dividend yield, the higher the earnings growth rate must be to get you to that 10%. When yields are extremely low, those growth rates become mathematically impossible.

Right now, the P/E multiple for the S&P is an extremely high 20, based on a formula developed by economist Robert Shiller that removes the constant gyrations that can under or overstate the ratio, and the dividend yield is just over 2%. So to hit that 10%, earnings must rise 8% -- assuming 3% inflation, 5% annually in real terms.

But earnings tend to track GDP, which rises about 3% a year over long periods, though far more slowly in a recession. So 3% real GDP growth isn't nearly enough to lift profits 5%. That implies that stock prices must drop sharply: A fallback to their historic P/E of around 14 would require a 29% correction, taking the S&P from its current level of 1,092 to around 770.

"Stocks will disappoint us if we buy them when they're expensive and delight us if we buy them when they're cheap," says Rob Arnott, chief of asset manager Research Affiliates. Now, they're extremely expensive, and destined to disappoint.

An earlier version of this story incorrectly stated that oil had hit a record price of $148 in mid-2007. 

By Scott Lanman

Oct. 1 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said U.S. economic growth next year probably won’t be strong enough to “substantially” bring down the jobless rate, which may remain above 9 percent at the end of 2010.

“Most forecasters including the Fed are currently looking at growth in 2010, but not growth so rapid as to substantially lower the unemployment rate,” Bernanke said at a House Financial Services Committee hearing today in Washington. Growth of 3 percent means the rate would “still probably be above 9 percent by the end of 2010,” Bernanke said.

Fed policy makers said Sept. 23 they plan to keep the benchmark interest rate near zero for “an extended period,” suggesting Bernanke may not withdraw the central bank’s unprecedented monetary stimulus until he secures a recovery.

“Is there anything else we should be doing to make sure that we bring the unemployment rate more quickly?” asked Representative Leonard Lance, a Republican from New Jersey. Bernanke replied, “I don’t have any magic bullets to offer. If I did, I would have offered them by now.”

The former Princeton University economist said one of his top concerns is the “exceptionally high” number of people out of work for more than six months, who are at risk of losing their job skills.

Bernanke’s comments mark little change from the most recent projections of Fed policy makers, in June, for the jobless rate to average 9.5 percent to 9.8 percent in the fourth quarter of 2010. Officials predicted economic growth of 2.1 percent to 3.3 percent at the time.

Tightening Credit

Some Fed officials may not want to wait for unemployment to decline before tightening credit, with the Fed’s main interest rate in a range of zero to 0.25 percent since December.

In an interview today, Richmond Fed President Jeffrey Lacker said the central bank will need to raise interest rates when the economic recovery is “firmly” in place, even if unemployment lingers near 10 percent.

“I think the growth outlook, particularly the consumer spending outlook, are more fundamental than labor-market conditions,” he said.

Bernanke said at the hearing that the commercial real estate market, while posing “a very serious problem,” is unlikely to cause another financial crisis.

“We are concerned both because the fundamentals are weakening, and because the financing situation is bad,” Bernanke said. Loans may cause “a lot of stress” for “small and regional banks,” he said.

Watch Carefully

Asked by Representative Gregory Meeks, a Democrat from New York, if there’s a “crisis brewing,” Bernanke said, “I don’t think so, but we’ll have to watch it carefully.”

The Fed in August extended by six months an emergency program aimed at cushioning the commercial real-estate industry from rising defaults and falling prices. So far, it’s failed to meet the goal of supporting issuance of new commercial mortgage backed securities.

Bernanke said he doesn’t see an “immediate risk” to the U.S. dollar’s status as the world’s main reserve currency. Asked in the hearing to comment on remarks this week by World Bank President Robert Zoellick, Bernanke said he also agrees with the official that “if we don’t get our macro house in order, that that will put the dollar in danger and that the most critical element there is long-term fiscal stability.”

Reserve Status

Asked about the effect of losing reserve status or the rise of a possible “super-currency,” Bernanke said such changes “would weaken the dollar clearly, and we would have to watch for any inflationary consequences from that.”

“But again, I want to reiterate that I don’t see this as a near-term risk, so long as we as a country take the appropriate steps to manage our fiscal position and keep inflation low,” he said.

In Bernanke’s prepared testimony, the Fed chief told lawmakers that protecting consumers of financial services is “vitally important,” while omitting prior criticism of an Obama administration proposal to shift such powers from the Fed to a new agency. “Strong consumer protection” helps preserve savings and promote confidence in financial firms and markets, he said.

Bernanke didn’t discuss the proposal for a separate agency in the testimony, after saying in July that there would be disadvantages to creating one. That may soften a clash with Representative Barney Frank, the panel’s chairman, who said at a hearing yesterday that the Consumer Financial Protection Agency must be created because the Fed and other bank regulators did little to police lending abuses.

“I wouldn’t pretend to tell Congress what to do” on a consumer agency, Bernanke said under questioning.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.

Dollar under scrutiny at G20 summit

PITTSBURGH, Pennsylvania (AFP) – The embattled US dollar is expected to come under scrutiny at a summit of developing and industrialized nations following China-led calls to review its role as a reserve currency.

The dollar issue is bound to surface at the two-day meeting in Pittsburgh as US President Barack Obama and other leaders of the Group of 20 economies debate a new framework for tackling the so called global "economic imbalances" blamed for fuelling the latest financial crisis.

"Though not clear how the plan would be enforced, it would involve measures such as the US cutting its deficits and saving more, China reducing its reliance on exports and Europe making structural changes to boost business investment," analysts at French bank Societe Generale said in a report.

Some argue that the financial crisis resulted from imbalances between savings and investment in major economies, which have led to large current deficits, as evident in the United States, and surpluses, as enjoyed by China.

Beijing was the first to call for a new global currency as an alternative to the US dollar as the US deficit rocketed -- the White House estimates it could reach nine trillion dollars over a decade.

Chinese Premier Wen Jiabao expressed concern as early as March over the safety of his country's huge US bond holdings now worth more than 800 billion dollars, making it the largest creditor to the United States.

Then, Chinese central bank governor Zhou Xiaochuan, who supervises more than two trillion dollars worth of dollar reserves, the world's largest, raised the stakes by calling for a new reserve currency in place of the dollar.

He wanted the new reserve unit to be based on the SDR, a "special drawing right" created by the International Monetary Fund, drawing immediate support from Russia, Brazil and several other nations.

"These countries realize that they would suffer losses if inflation eroded the value of the dollar securities they own," said Richard Cooper, a professor of international economics at Harvard University.

But he said there were no feasible alternatives to the US dollar as a widely used international currency, discounting even IMF's synthetic SDR currency, comprising a basket of the dollar, euro, yen and the pound.

"The dollar will remain the dominant world currency, thanks to the stability of our political system and the rule of law that isn't a feature of many other economies," said Irwin Stelzer, director of economic-policy studies at the Washington-based Hudson Institute.

Some groups, he said, were buying euros and other currencies from time to time, "but not in amounts that threaten the dollar's primacy."

Even the Chinese are stuck with nearly a trillion dollars worth of US bonds and are not likely to drive down the value of that hoard by selling large amounts of dollar-denominated assets, Stelzer said.

But what is baffling analysts is that a key UN agency -- the United Nations Conference on Trade and Development, or UNCTAD -- has joined the chorus of calls for a new reserve currency.

An UNCTAD report this month endorsed a proposal that IMF-issued SDRs "could be used to settle international payments."

Until the current global economic crisis, SDRs issued by the IMF have been used by IMF member nation states "primarily as a reserve account to support international trade transactions, not as an alternative international currency available to settle international debt transactions in danger of default," said political scientist Jerome Corsi in "Red Alert," a global financial newsletter.

China, meanwhile, continues to flex its muscle.

It has proposed that the G20 economies consider setting up an international wealth fund that would invest a portion of its members' current-account surpluses in developing economies.

"These comments reinforce their desire to diversify out of dollars and to encourage other nations to do so as well," said Kathy Lien, chief strategist for Global Forex Trading.

A few Chinese deals were recently seen accepting payment in the currency of the buyer rather than in dollars, especially with Brazil, which the Asian giant is wooing as a future oil supplier.

In addition, China -- the first nation to sign an agreement to buy IMF bonds -- took the unsual step of paying for the papers equivalent of 50 billion dollars with its yuan currency rather than dollars, which Beijing uses for much of its trade and other foreign transactions.

Carl Weinberg, chief economist of High Frequency Economics, said he was surprised by the move but did not see it having any major impact on the dollar.

"The transaction can now be clearly seen as a political move by Beijing to get more traction in the governance of the IMF, not as an effort by the PBOC (Chinese central bank) to reduce the share of dollars in its reserve asset," he said.