Week Sept 10-14

S&P 500: 1484.25 rose 2.1% this week

Investors aren't willing to put in big bets one way or another before the Feds meeting next Tuesday. The only thing worth mentioning is that CFC said that they have $12 billion line of credit from various sources lined up in case of emergency. That's a pretty good news as it shows that several investors/institutions believe that the housing crisis is not as bad as some people thought: they are still willing to invest when the terms are attractive. Let's see what Bernanke will do next Tuesday. My guess is the Fed rate will drop by 25 basis points.

Interesting article about how China can move the yuan:

Rising Euro Is What China Needs to Dump Dollar: Andy Mukherjee

By Andy Mukherjee

Sept. 14 (Bloomberg) -- Juxtapose China's latest trade statistics with a strengthening euro and you get a very real possibility of significantly quicker appreciation in the yuan against the U.S. dollar.

It isn't the 33 percent jump in the August trade surplus that leads one to that conclusion. That was hardly a surprise; analysts had expected a wider gap.

What was more interesting about the statistics this week was that they confirmed a geographical reshuffle in China's exports, away from the U.S. and toward the euro area.

And that shift may have an impact on how far the yuan is allowed to rise against the dollar.

The bloated trade surplus, by itself, may not be a strong enough reason to make China move. If the authorities had wanted to address that imbalance, which is causing a liquidity glut at home and fueling a bubble in the equity market, they would have done so much earlier.

They have deliberately chosen to live with all the consequences of an undervalued currency, including the threat of a full-blown trade spat with the U.S. So what has changed now?

For a start, inflation in China is looking ugly at 6.5 percent, the highest in almost 11 years.

To the extent a stronger yuan lowers the cost of imported commodities, especially for the ``three F's'' -- food, feed and fuel -- it might have a sobering impact on prices.

That isn't all.

With more Chinese goods now landing in the European Union than going to the U.S., the authorities will probably put a greater premium on retaining export competitiveness in Europe.

Exports to Europe

So if the European currency continues to rise against its U.S. counterpart, China can afford to let the yuan appreciate against the dollar. As long as the yuan manages to depreciate -- or even hold steady -- against the euro, the country's export engine won't stall.

For a second straight month in August, the EU trumped the U.S. as the biggest market for Chinese-made goods.

Strong consumption demand in the 13 euro-area economies -- not to mention the 10 percent slide in the yuan against the euro since mid-November 2005 -- has resulted in a 31 percent jump in China's exports to the EU so far this year.

That's almost double the pace at which Chinese shipments to the U.S. have grown in the first eight months of 2007.

This may have important consequences.

Dump the Dollar?

The dollar fell to a record low against the euro yesterday, as traders expected the U.S. Federal Reserve to cut interest rates in an effort to head off a recession caused by the subprime crisis.

China's motivation to keep the dollar propped up, by channeling its trade surpluses into U.S. government debt, is probably not as strong as it was even a year ago.

``As the most vocal group calling for yuan appreciation are the Americans, it suits China to have the euro go up,'' says Charles Dumas, a director at Lombard Street Research in London. ``The yuan can then be floated up gradually against the dollar while actually declining against the euro -- making Chinese goods more competitive in what is now both their largest and fastest-growing major market.''

The Chinese currency is selling for about 7.51 to the dollar. It has risen almost 6 percent against the U.S. currency in the past year while falling more than 3 percent against the euro, leaving the overall competitiveness of China's exports little changed.

Domestic Demand

Exports and investments are powering the Chinese economy, which expanded 11.9 percent from a year earlier in the second quarter, the fastest in 12 years.

Domestic consumer demand is tepid.

Once the official statistics on retail sales are stripped of the intermediate business expenditure masquerading as final consumer demand, the picture that emerges isn't very encouraging. ``Real'' retail sales grew 11.5 percent in July, their slowest pace of expansion since January, the World Bank said in a report this week.

China needs to pare the trade surplus to curb domestic liquidity and control inflation. It also must rebalance its economy and spur domestic consumption. Both these objectives will be well-served by a strengthening of the yuan against a basket of currencies. However, the authorities are unlikely to set about that task before the 2008 Summer Olympics are out of the way.

For now, all that one can reasonably speculate is that if the dollar goes down the tube against the euro, the yuan will probably not follow it.

Source: Bloomberg

Comment: While China wants to keep the economic growth by controlling the appreciation of yuan, they should realize that if they don't let yuan appreciate, inflation would only go up even more. That would only hurt the poor people even more. It is proven that an out-of-control inflation is a lot more dangerous for the economy than a slower-growth GDP.