The bang of the buck

From “The real case for revaluation” by UBS Asia Chief Economist Jonathan Anderson, July 13 2007:

A stronger yuan  would have only a small effect on mainland exporters, since they have demonstrated their ability to raise prices to the final consumer. But keep in mind that things look very different on the import side of the equation. Unlike low-end manufactures where China is a dominant force, every single heavy industrial product category has a multitude of overseas competitors. And while mainland exports tend to rely on imported components, thus diluting the impact of revaluation in the final cost structure, goods like chemicals, metals and machinery have a much higher domestic value-added component. As a result, any increase in the value of the renminbi has a much larger “bang for the buck” in these sectors, making imports immediately more competitive... Renminbi revaluation (i) helps reduce the trade balance, (ii) lowers the incentive for further excess industrial capacity creation, (iii) acts in a targeted way against the most energy-intensive and polluting sectors, and (iv) redirects spending towards higher imports from China’s Asian neighbors.

From “PBOC raised rates; further hikes unlikely” by JPMorgan Asia Pacific Chief Economist Frank Gong, July 20 2007:

The central bank announced a 27-basis point hike in both the benchmark one-year lending and deposit rates, effective July 21st... We do not expect significant rate hikes for the rest of the year. While there have been growing concerns about the risk of general overheating of the economy, the fact that non-food inflation remains well contained (0.7% one-year average in June), and that fixed investment is fundamentally supported by healthy corporate profit growth, should provide some comfort to policymakers that the overheating concerns may not be as severe as in past cycles. Indeed, considering that the strength in the export sector and that widening trade surplus have been one of the crucial factors behind the economy’s impressive strength in the first half of this year, raising interest rates significantly may not be the most desirable policy tool to slow overall growth.

From “Issuance of special bonds to PBOC” by Deutsche Bank Hong Kong Chief Economist Jun Ma, July 3 2007:

The Ministry of Finance has clarified that special bonds [worth US$204.9 billion] would be issued to the People’s Bank of China (PBOC), who would gradually sell these bonds to banks, insurance companies and the National Social Security Fund... It was thought that special bonds, if issued directly to financial institutions... would cause sharp spikes in market rates and overtightening of monetary conditions... Issuing special bonds to the PBOC... avoids coordination problems between the PBOC and finance ministry because the liquidity management program will be solely run by the former. Secondly, M2 [the broad money supply] and  growth targets are unaffected by the special bonds. In other words, the issuance of special bonds does not represent additional monetary tightening.