Sense on Cents

Liu Mingkang, Chairman of China Banking Regulatory Commission

With friends like this, who needs enemies?

That trite saying is far too simplistic in defining the diverse and convoluted nature of U.S.-Chinese relations. That said, as President Obama prepares to arrive in the People’s Republic of China for the first time during his Presidency, he is faced with an extremely aggressive overture from Liu Mingkang, China’s chief banking regulator.

What does Mr. Mingkang have to say? Well, let’s just say he has a drastically different opinion on U.S. monetary and fiscal policy than his counterparts in Washington. While our wizards in Washington, Messrs. Bernanke, Geithner, and Summers would lead us to believe that the rebound in markets is a precursor to a rebound in our economy, Mr. Mingkang has a decidedly different take. The Financial Times sheds light on this topic in writing, China Says Fed Policy Threatens Recovery:

The US Federal Reserve is fueling “speculative investments” and endangering global recovery through loose monetary policy, a senior Chinese official warned just hours before President Barack Obama arrived in China for his first visit.

Liu Mingkang , China’s chief banking regulator, said the combination of a weak dollar and low interest rates had encouraged a “huge carry trade” that was having a “massive impact on global asset prices”.

The comments came as China and the US sparred at the Asia Pacific Economic Co-operation summit over exchange rate policies amid rising international criticism that China’s currency is undervalued.

Mr Liu’s unusually blunt remarks underscore how China – the largest US creditor because of its massive holdings of Treasury bonds – has become a trenchant critic of monetary and fiscal policy in the US.

Since the start of the financial crisis, China has issued a number of warnings that the US should not inflate its mounting debt burden. Before these latest comments, however, Beijing had generally been most critical of US fiscal policy, urging Washington to spend less.

But speaking at a conference in Beijing, Mr Liu said the Fed’s policy of maintaining low interest rates together with the weak dollar posed a threat to the global economic recovery.

Why so aggressive on Mr. Mingkang’s part? Two reasons. The weakening greenback negatively impact’s China’s massive dollar-denominated holdings, primarily in U.S. Treasury securities. Additionally, the weak greenback negatively impacts China’s balance of trade.

Despite assertions by Secretary Geithner to the contrary, I firmly believe a weakening greenback is a central tenet of the Obama administration’s economic policy. In fact, our government officials would never say it but they are likely somewhat envious of the benefits of the weak and undervalued currency policy practiced in China.

While those on Wall Street and Washington are reluctant to address ‘huge carry trades’ and ‘asset bubbles,’ our largest creditor pulls no punches on these topics and provides a healthy dose of ‘sense on cents’ in the process.

Welcome to China, Mr. President. How nice to see you. About your currency, we are not so happy.

LD

This entry was posted on Monday, November 16th, 2009 at 8:21 AM and is filed under China, currencies, General, Obama Administration, U.S. dollar, Wall Street, Washington D.C.. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.