Peg through my heart! The Chinese central bank appears worried about a sharp slowdown as the country took steps to reignite their softening export market. The Peoples Bank of China, according to the Wall Street Journal, set the dollar-yuan central parity rate at a seven-week high following the U.S. dollar's broad strength against most major currencies overnight amid concerns about a weakening global economic recovery. The move had the yuan drop sharply against other major currencies and may draw attention from China's critics that the move will give China a continued unfair trade advantage.
This is especially true after the US trade deficit jumped by a whopping 18.8 percent hitting to $49.9 billion dollars, highest level since 2008. Yet at the same time, China, the great hope for commodity bulls, has some major economic problems on their own. China's growth was at 11.9% and has fallen abruptly to 10.2% in the second quarter. Recent data on Chinese industrial output reports it fell to 13.4%.
China's real estate bubble is alarming. China has raised interest rates to try to reign in property speculation. Reuter's News says that after an unprecedented state-ordered 9.6 trillion yuan lending spree in 2009, the normalization of credit and money growth has been strained since the fourth quarter. Annual M2 money growth has slowed to 17.6 percent from a peak of 29.7 percent in November. Loan growth has fallen to 18.4 percent from 34.2 percent in October.
To just focus on China would be missing the point that the Fed just flopped. It seems quite clear that if the Federal Reserve wanted to restore confidence in the global economy, they failed miserably. Global markets got smashed. Now some of the big sell-off was because of soft data in China, yet the truth is the market is worried that the Fed just isn't doing enough.
While the Fed, in their statement, said that in order to support the economic recovery in a context of price stability, the Fed will keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term treasury securities. They will continue to roll over the Federal Reserve's holdings of treasury securities as they mature feeding printed money back into the economy as opposed to reducing the money supply in the hopes that banks will use that money to lend.
Yet because the market is worried about a double dip and the Feds gloomy outlook, now the market wants more. If the dollar continues to rally, the commodities will fall raising the fears of deflation. They may force the Feds hand which could have them running to the printing presses even faster! Because as the Fed said, "The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability." And falling prices is not stability.
OPEC had a better year! Based on projections from the EIA August 2010 Short-Term Energy Outlook (STEO), members of the Organization of the Petroleum Exporting Countries (OPEC) could earn $752 billion of net oil export revenues in 2010 and $821 billion in 2011. Last year, OPEC earned $571 billion in net oil export revenues, a 41 percent decrease from 2008. Saudi Arabia earned the largest share of these earnings, $153 billion, representing 27 percent of total OPEC revenues. Now don't you feel better!