Monday, 8 May 2006

China to continue rapid growth, may dump dollar peg, but job creation remains worry

China expects to see continued rapid economic growth in 2006. From Reuters:

China's vice finance minister, Li Yong, said on Saturday economic growth could reach 9.5 percent in 2006 but did not rule out a slowdown to below 9 percent if the country tightened monetary policy further.

Li said at the annual meeting of the Asian Development Bank that he expected rapid growth in China's foreign exchange reserves to slow and said Beijing would implement prudent fiscal and monetary policy this year, adjusting interest rates if necessary.

In his latest Bloomberg article, Andy Mukherjee makes reference to Li Yong's remarks at the ADB meeting on foreign exchange.

Li Yong, China's vice minister for finance, said he had heard a "rumor" that the U.S. dollar was headed for a 25 percent drop. If the gossip was true, the consequences would be "shocking," he said.

Li's comment, which he made at a discussion on global financial imbalances last week at the annual meeting of the Asian Development Bank in the Indian city of Hyderabad, was aimed directly at fellow panelist Tim Adams, the U.S. Treasury undersecretary of international affairs.

The unspoken message was: "Don't try to talk the dollar down." And Adams knew better than to ask, "Well, what are you going to do about it?" The answer to that question has already begun taking shape: Asia may be getting ready to fix its currencies to a local anchor, dumping the region's unofficial dollar peg.

Even as they continue to pile up U.S. debt in their foreign- exchange reserves to keep their currencies stable against the dollar, Asian nations, China among them, are preparing for a scenario where the dollar does indeed collapse under the weight of a record U.S. current account deficit.

At the Hyderabad meeting, finance ministers of China, Japan and South Korea got together with their counterparts from the Association of Southeast Asian Nations, or Asean. The 13-nation group said it would sponsor a research project, titled "Toward greater financial stability in the Asian region: Exploring steps to create regional monetary units."

A stronger Chinese currency is inevitable in my opinion, regardless of whether an Asian currency unit is formed. And yet, a stronger currency has potentially deflationary effects. China has to be mindful of the fact that, despite its rapid economic expansion, it may not be creating enough jobs. From the People's Daily Online:

China will face serious employment difficulties during the next two quarters with 60 percent of new graduates facing unemployment, according to a report published by the National Development and Reform Commission.

The number of graduates will increase by 22 percent over the previous year to reach 4.13 million while the job market can only soak up 1.66 million new graduates, down 22 percent on the previous year.

1 comment:

China Law Blog said...

I just don't see China allowing the Yuan to float. Not yet. China must create jobs at a frantic pace and it just cannot risk a slowdown. China acts like it wants a slowdown, but I think it really wants simply to shift from so much exporting to more of a consumer/service economy. China needs to create jobs to survive.

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