Jude Wanniski
December 12, 2003


If you did not catch the Lou Dobbs interview with China`s Premier Wen Jiabao, a transcript is available now at His discussion about China`s $130 billion trade deficit with the U.S. is most interesting, topped off with the following promise at the end of the interview: "You can look forward to some measures that China is prepared to take quite soon."

Quite soon? We can only speculate, but if we were running the show in Beijing, we would repeg the currency after announcing a significant appreciation of between 10% and 15%. This would short-circuit the inflation now brewing in China with the yuan`s link to the dollar. Because debt maturities are shorter in China, it takes less time for the rising yuan/gold price to ripple through the economy. With the dollar/gold rate at $408, it might take several months for commodity prices in general to catch up to equilibrium and a few years before the broad price indices reflected a 15% rise. Non-commodity prices would climb faster in China, adding to concerns of "over-heating."  

Of course the dollar value of its imports also would increase by that amount, which means China`s imports of oil and other commodities would be bought with fewer yuan. At its double-digit annual growth rates over the last five or six years, China has been increasing its imports of minerals by 15% a year. The economy is now big enough to support a central, more liberalized commodity futures market that would permit foreign capital and expertise. This may be another of the "measures that China is prepared to take quite soon." Instead of having to buy its nickel, alumina, copper and other industrial metals on the spot market, industrial China could bid for them on its futures market and take delivery at maturity.

The current futures market in China is in its infancy. Only seven types of commodity futures trade on three exchanges. Average annual turnover on the three exchanges is approximately $360 billion, compared with the $3 trillion in average daily turnover in U.S. futures markets. A year ago, the Chinese Embassy discussed the possibility of a much larger futures market, but indicated that its creation would be three to four years off. This process may be speeded up.

The establishment of an expanded futures market in China may move commodity prices up in other futures markets, but it would take some of the volatility out of the spot markets. It would not really have an effect on the dollar/gold price, which will continue to inch up until the Fed signals its readiness to raise the 1% funds rate. Eurodollar futures which had been seeing a 175 basis-point addition to funds a year out as recently as two weeks ago, now sees only 125, after the less-than-aggressive statement by the Fed at its meeting Tuesday. Treasury Secretary John Snow certainly did not help matters today with his comments about "an orderly decline" of the dollar. 

In any case, Premier Wen definitely signaled Lou Dobbs that something is afoot "quite soon," which might mean within a week or two, before the end of the year. 

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