In 2011, Chinese policy with respect to currency and inflation will probably look like it did in 2010.
Waverly Advisors observes in its daily Macro Report:
Wang Qishan’s rhetoric about supporting Europe through the crisis garnered the majority of headlines
overnight with beleaguered countries like Portugal (who are facing a two step downgrade by Moody’s) now apparently placing their hope in the seemingly endless Chinese state coffers. The decision by the National Development and Reform Commission to increase gasoline and diesel consumer prices by 4% today however was more interesting to us, as it reminds us that Beijing is still focused on micro managing the fuel complex as it attempts to address significant refining capacity issues. Consumer price fixing and direct intervention in specific commodity markets seem likely to remain a preferred mechanism for dealing with inflation and imbalance, with significant currency policy adjustment seeming unlikely despite Hu Jintao’s upcoming diplomatic visit to Washington.
Note that we see Beijing as anxious to retain the status quo as we head into the new year, currying political favour abroad through strategic debt purchases and development deals as they continue to seek to shield primary export industries from rebalancing shocks. This approach will likely intensify the politicization of trade policy debate in Washington and should be a primary market narrative for 2011.
Of course this will end badly for the Chinese, as it distorts its economy through a million little adjustments here and there, while letting huge distortions continue to build.
Unless they’ve really figured out state-run capitalism.
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