CHINA

SOURCING

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ROUNDUP

Michael Pettis at China Financial Markets (site blocked on the mainland) on Wednesday made some significance of the first decline ('after many days of strength') of the RMB to the dollar.

Is this simply a random event or are the Chinese financial authorities warning European officials to stop pushing on the RMB front? If it is the latter, its likely to be a wasted warning.

According to Pettis, Europe's trade deficit is likely to rise even further over the next few months, and with anti-Chinese feelings already high in Southern Europe and a 'chill' in the air between China and Germany after Merkel's meeting with the Dalai Lama, at this rate its hard to see how China will avoid a nasty trade dispute with Europe. Yet though it makes sense for domestic reasons for the Chinese government to adjust the RMB more quickly, this is unlikely to happen without serious foreign pressure.

I think they are making a huge mistake, however. China's out-of-control monetary policy is already very likely to lead to domestic grief, and if we keep this pace of reserve accumulation up for another year, I think the chances of an ugly adjustment become extremely high.

Richard Brubaker at All roads lead to China on Saturday commented on the New York Times reporting on China agreeing to remove a dozen subsidies on WTO-disputed products. Quoting the analysis of Susan Schwab claiming the step as a victory for U.S. 'manufacturers, producers and their workers,' according to Brubaker the impact is likely to be insignificant as   

they are not clear on what is an American product, a Chinese product, and what is an American product made in China...and without this distinction, I do not think they would be able to correctly solve the imbalances that are present in the system.

American made cars and telecommunications equipment made for instance by Buick, GM, Cisco and others are doing well in China, yet none of these items are made in America and sold to China; manufacturers have found its more cost-effective to produce and sell in the same market.

Through this process, American manufacturers have in essence become their own competitors, and while I am not saying this is right or wrong, I am saying that the way the argument is being framed, the discussions conducted, and the solutions created to address these problems is wrong.

Discussing the same news report, Stan Abrams at China Hearsay today put the U.S. manufacturers' 'victory' in the following light:

 Illegal subsidies provoke quiet complaints in different bilateral venues. After that, you issue formal complaints and let the media get in on the action. Still no progress, you ratchet up some rhetoric. No movement? You then threaten to take the case to the WTO. Eventually you file a case and hope to settle at some point. This is ultimately what happened here. That's sort of what every U.S. administration would have done; its called cycling through your options. Even calling it a policy or strategy is rather embarrassing. I'm not sure how else you would do it.