China Pulls Away

Inflation or deflation which will it be? There are people smarter than me on both sides of the argument, but until now nobody with their butts on the line has had to make a move one way or the other. For the past few months China has made some guttural uttering about internationalizing their currency a move which was derided by Mish. But now all the brains that butts on the line can muster have the Chinese are making a real move in that direction.

China has officially opened a pilot program to allow companies to settle imports and exports in renminbi in selected regions, marking a major step toward eventually internationalizing the Chinese currency.
Three pairs of Shanghai companies with their Hong Kong and Indonesian counterparts signed contracts on Monday to be the first to settle business deals in the Chinese currency. Executives said the move would save costs and avoid exchange rate risks.

Bank of China and Bank of Communications were the first lenders to clear transactions in renminbi, considered a lucrative business given China’s expanding economy and huge presence in international trade.

Hong Kong also kicked off the long-awaited yuan settlement program on Monday.
HSBC said it completed its first renminbi trade settlement with Shanghai and its first cross-border credit transaction.

There are some kinks to be worked out for sure.

Caught off guard and partly lacking the skills to hedge against foreign exchange volatility, many small Chinese exporters have closed after China revalued the renminbi by 2.1 percent against the dollar in July 2005. The renminbi has appreciated by a further 19 percent against the dollar since then.

But the Chinese were gladly work out their own kinks rather than massage a beat to near-dead US dollar off of life support even as the federal reserve tries to snuff out what little life remains.

Caught between a rock and a hard place the Chinese can ill afford to hastily divest their US dollar denominated assets without severely diminishing divide you of those assets by the sheer weight of their own selling, and often cited fact by US government officials and deflationists alike. Nor can they simply hold tight as the Fed reduces the value of their holdings for them.

Despite the deflationists ramblings by Mish and Keynesian apologists like Paul Krugman the Chinese are certainly afraid of something and I doubt that it's deflation.