Paulson Criticizes China; Yuan Appreciation Not Moving Quickly Enough

The Chinese yuan weakened slightly during the overnight as US Treasury Secretary Paulson placed pressure on Chinese officials, saying that the current pace of appreciation is not enough. Speaking in an interview with Charlie Rose, Paulson reiterated comments that were made last Friday, where he stated that Chinese officials “are not moving, in my judgment, quickly enough” on its currency regime. Subsequently, the tone matches the one expressed during the G7 meeting two weekends ago, and marks the potential end of the Treasury Secretary’s softer love stance on the currency. At the start of his tenure, Paulson approached the Chinese yuan appreciation topic with understanding and subtlety. However, now, with his back to the wall and obviously frustrated, Paulson is taking a more hardlined approach, siding with US Congressmen in requesting more tangible results. Although these recent statements would have sparked speculation on a potential revaluation, traders are siding with a more plausible domestic solution, ie higher interest rates. As a result, bidders took a backseat, albeit a temporary one, allowing the currency to come back to 7.7240 versus the 7.7100 hit last week.

The price action was similar in the Hong Kong economy as the HKD lost further ground against the US dollar. However, the directional bias was contrary to optimistic data that was released in the overnight. For the month of March, inflationary pressures rose the fastest in seven months as economic growth continues to foster higher consumer prices. With expansion in the air, producers and manufacturers are able to pass on higher prices with consumers fitting the bill. Notably, food imports from China are boosting wholesale prices in Hong Kong. For the month, food prices actually surged 7.8 percent on the month as an appreciating Chinese currency is making imports more expensive for Hong Kong consumers. Subsequently, property values and accelerated retail sales figures are propping up valuations. For the record, consumer prices jumped 2.4 percent on the year on year comparison, topping estimates of a 2.1 percent rise. With prices higher, the country’s central bank will ultimately look to ways of restricting money supply growth in order to curb inflationary pressures. The notion kept stocks underwater in the overnight session. Hong Kong’s Hang Seng index dropped 0.1 percent on the day, losing 10.02 points to close at 20,556.57. Leading decliners on the day were shares in China Mobile Ltd. and Jiangxi Copper Co. Both companies remained under the gun following some concerns over future near term earnings growth.