I’ve been meaning to post a few words about Floyd Norris’ column from last week (Friday), titled "Who’s in Charge of Determining U.S. Interest Rates? It May Be Beijing."
Norris warns that the drumbeat in Congress to decouple the Yuan may have a unfortunate repercussions for interest rates:
"The Bush administration calls on China to allow its currency to rise and
Congress talks of punishment if China does not do so.
Be careful what you wish for.
As speeches of low-level Chinese bureaucrats are read with care for hints as
to just when China will allow its currency to rise, perhaps it would be better
for Americans to ponder the impact of China’s current policies.
Some might wonder just why the American politicians are upset. The way things
work now, China sells to the world most everything the world wants and then buys
United States Treasury securities. That helps hold down interest rates and
stimulates consumer spending.
You can understand why China might not like to keep doing that forever. Those
Treasury securities do not pay much interest, and they are sure to decline in
value, measured in Chinese yuan, when that currency rises. But the largest
vendor financing program ever has stimulated both the Chinese and American
In Washington, the theory is that China’s keeping the yuan low increases
America’s trade deficit. But the benefits to United States exporters from a
modest rise in the Chinese currency would most likely be small, while the effect
of higher interest rates could be larger if China cut back on its purchases,
particularly if other Asian central banks decided that they, too, wanted to sell
If that were to happen, the impact could be acute in the housing market.
Investors in housing stocks have been nervous for some time, happy to see
ever-higher profits but worried that the good times must end someday and fearful
that they could be left holding the bag when that happens."
Sharp observations from Norris. The textile industry in the U.S. is not where future growth will come from. Killing the rest of the economy to save a dying industry hardly seems all that bright . . .
Incidentally, the title of this post comes from Robert J. Barbera, the chief economist of ITG/Hoenig. It refers to Hu Jintao, the Chinese president, who is said to be debating whether to uncouple the Chinese currency and/or stop accumulating U.S. Treasuries. (I liked that better than "Careful Yuan You Wish For.")
Who’s in Charge of Determining U.S. Interest Rates? It May Be Beijing
NYTimes, May 13, 2005