The Rebalancing Act

The Yuan is still up while the USD continues to lower in value.  What does this mean for China? According to this article, huge losses (Billions) for the People's Bank of China. China's surplus situation is forcing the country to sell its RMB to buy dollar assets, and then turn around to buy back its RMB through sales of local currency bonds. The rising Yuan against the USD translates to losses in interest on new and accumulated reserves.

The USD falls not only in comparison to the Yuan, but also against the Euro and Yen. This in a landscape where China is positioned to trade with any of the numerous countries knocking on its door. A weak US economy may slow China's export market, but will not affect its overall demand.

Amidst all this, US Congress is knocking on Beijing's door with threats of retaliatory action if it does not enable the RMB to rise on the dollar. It seems there is little action the US can take to work proactively toward strengthening its economy while China looms large.  Hamid Faruqee for the IMF Research Department prescribes adjustment in the following areas:

• In China, a faster rate of renminbi appreciation would allow for more broad-based exchange rate adjustment and would create much needed space for monetary policy tightening to keep inflation pressures at bay. In addition, advancing fiscal plans to support domestic consumption would help rebalance demand and support the global economy in the event of a sharper slowdown.
• In Saudi Arabia, rising inflation pressures suggests maintaining spending priorities in key areas such as infrastructure to help relieve supply bottlenecks.
• In the euro area, large losses suffered by European banks stemming from the U.S. subprime crisis draw attention on the need not only to deepen integration but also to strengthen financial stability arrangements. Effective product market reforms are needed to improve the business climate and sustain growth. Also, labor market reforms (including improving mobility) are needed to boost productivity and labor utilization.
• In Japan, with limited policy space to address a possible economic slowdown, structural reform measures remain central to enhance growth prospects and strengthen domestic demand, with priorities on enhancing labor flexibility and participation and to boost productivity through deregulation.
• And finally, in the United States, a slowdown in activity is challenging the steady progress made in reducing the federal deficit. But longer-term pressures on public finances from aging and entitlements underscore the importance of adhering to the authorities' medium-term fiscal consolidation objectives. Thus, while timely fiscal stimulus is justified by the cyclical situation, it should be kept strictly temporary and targeted, to effectively insure against a deeper downturn without jeopardizing medium-term budgetary goals.