We know the US is printing money, the Fed chairman made it very clear for the last 2 years with the 2008 bailout and QE II. But China? Well, to fight inflation they first increased the banks’ reserve requirements to curtail lending. That would have maybe slowed down inflation but then they go and buy tons of US dollars with freshly new printed yuan to keep the peg going. Since Bernanke is devaluing fast – the Chinese have to buy more, fast. In the 4th quarter of 2010, their foreign currency reserve jumped $199 billion to $2.85 trillion. This suggests that China is printing more than $2B RMB per day. The problem is that when they print yuan – those yuan stay in the country – unlike US dollars (lucky Mr. Bernanke) – bidding up prices. Oh next thing of course (it is in every politicians’ manual) they will try – à la Nixon – price controls which won’t work.

On the other hand, many commentators in the US, politicians, even Donald Trump (!) want to “stick it” to China and say – impose big tariffs on Chinese goods (yes that went very well with Smooth & Haley during the Great Depression). They say China is not playing fair play. Well who is? One would be tempted to say that it’s not nice to threat your major creditor that way… they hold close to 50% of US debt. If and when China understands that it is not to their advantage to keep suppressing the yuan and stop buying US T-bills – making a few US exporters happy will pale in comparison to loosing your major debt pusher.

After a while (here 2 years of 100% yuan peg to the dollar) it is hard to maintain a peg that is not in harmony with market forces. At some point, China wants to stop acquiring dollars at the fixed rate – the yuan is too cheap at that rate and their money supply is booming (Chinese are recycling their dollars in yuan). We notice lately that China was trying to cool off a speculative boom in the Shanghai real estate market. There are also others consequences that many miss when they only look at the appreciation of the yuan in rebalancing trade:1- it means less demand for US Treasuries because now China does not need to buy loads of them to keep their yuan 100% fixed to the dollar. It will be pegged to a basket of currencies (which China has not disclosed yet) where the dollar’s role will be less. 2- If the yuan is allowed to float within a range it also means it could go lower against the dollar (the opposite of what Washington wants) because for example, recently, the yuan has risen against the euro and if the latter continues to depreciate, the yuan would be allowed to depreciate against the dollar (in a basket of currencies). 3- The appreciation of the yuan will not bring back manufacturing in the US because what brought the US job market to its knees is the collapse in the housing market. Be careful what you wish for…