This morning brings this headline from the Wall Street Journal (page A12 in the print version):
Rising Reserves Worry China's Central Bank
That article is available to subscribers only, so here's the scoop from the China Daily, available free to one and all:
China has stepped up its efforts to set up a more flexible foreign exchange regime, fearing that capital being kept overseas could flood back into the country, the central bank said Tuesday in its annual report.
The central bank's comments did not suggest any imminent, sudden change in policy. However, they appear to make a case for urgent reform of the foreign exchange policies, which keep the Chinese currency, the yuan, trading within a narrow range around 8.28 yuan per U.S. dollar.
Some of the capital that has left the country in the past decade is "unstable," and could shift back into China "at any time, putting pressure on the yuan exchange rate mechanism, buffeting domestic financial markets and insidiously affecting financial stability," the report said.
The central bank did not say how much money it believed could potentially flow back into the country. However, it said China recorded net capital outflows each year from 1994 to 2003. The accumulated net outflow for those years was 1.72 trillion yuan (US$208 billion; euro172 billion), the annual report showed.
The bank said it had intensified studies on setting up a more flexible foreign exchange system to handle a "reasonable" level of foreign exchange from companies and individuals.
In a probably-not-unrelated story, the Financial Times has this report:
China’s May industrial output grew 16.6 percent from a year earlier, a higher-than-expected rise that analysts said probably reflected the country’s strong exports and consumer spending...
... the strength of the latest industrial data may also cast doubt on government attempts to rein in heated investment growth it fears could unbalance the whole economy.
“Our view has always been that administrative measures have had some impact, but they have not been sufficient,” said Yiping Huang, a Citigroup economist in Hong Kong.
“Economic activities, if you look at the whole set of data last month, all of them have been picking up, not slowing.”
If dollar-support from Asia is about to end, we may finally get our test of how disruptive the adjustment everyone has been expecting is going to be for the U.S. economy. But it sure looks like the broader global context is, at the moment, tending toward a regulator on how fast the supply of financial capital into the U.S. is likely to erode. Again, from the Financial Times:
The dollar hit a fresh high of $1.2018 in early Asian trade, but the huge option barriers said to exist at the $1.20 level once again held firm, and the dollar softened marginally to $1.2043.
Nevertheless the dollar’s Tuesday surge from an intra-day low of $1.2155, even despite the release of modestly soft retail sales and factory gate inflation data, was indicative of the dollar-bullish, euro-bearish sentiment currently at large in the market.
UPDATE: bc at Cynic's Delight seizes the moment to provide a retrospective on the breakdown of Bretton Woods (the first, that is).