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Macro Economics
Fed Supporting China?

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By washcomp
March 18, 2009

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OK guys and gals - remember when Sen. Chuck Schumer was ranting about how the Chinese should raise the value of the Yuan (RMB) to make American products more accessible? Well guess what - they have. Quietly, over the past year, the value of the RMB has crept upward against the greenback. So here we are a year or two later and the RMB IS STILL PEGGED TO THE DOLLAR! Most other major currencies have dropped by 30% +/- AND THE RMB IS STILL PEGGED!

We all know the Chinese are feeling pain. They exist by exporting (and we have fallen off the face of the earth as an importer) and they are getting clobbered by weak currencies in Europe, Australia, Canada, etc. AND STILL IT STAYS PEGGED.

A few weeks ago, gold shot up to $1K per ounce. H. Clinton drops into China "because she happens to be in the neighborhood" and gold drops (but not as if there is mass selling) and AIG gets a big bailout. AIG coincidently is where the Chinese pensions lay. I'm figuring that the Chinese had started buying gold instead of T Bills (and a "little" buying goes a long way as far as gold prices are concerned). After a pleasant chat, we poured more into AIG and they (didn't sell the gold they bought, but) started buying T bills again.

The Chinese are macro people. They are suffering, where even a 10% cut in their currency would ease their pain a bit (from their standpoint, it matters little what it would do to their Asian competitors at this stage of the game).

They have warned repeatedly that a decrease in the value of the greenback would not be appreciated (to say the least).

OK, so why? I'm figuring the Chinese are buying equity and mining rights on the cheap. They are possibly being supported by the FED buying their own securities (maybe turn around is fair play). I am certain that they have negotiated an "out" so that they will not suffer if (when) the dollar falls. The high dollar is very detrimental to US business and at some point, after their borrowing spree is over (after tax season?) the FED has to let the dollar loose to spur employment.

While there is no honor amongst thieves, I would venture to say that the Chinese will be properly supported if their holdings of our bonds deteriorates in value (or there will be hell to pay). This will be a political hot potato as the American public will look at a "bailout" of the Chinese with a jaundiced eye, but they have been "standup guys" (as they used to say where I grew up) and deserve our gratitude.

Just wondering why no one else seems to have noticed this (at least in the media).

Jeff