1. China’s President Hu Jintao visits the United States. This is an official state visit and there will be an official state dinner as President Hu comes to Washington D.C. and then travels to Chicago.
Yesterday, he answered submitted written questions from both the WSJ and WaPo. WSJ question 4: What do you think will be the U.S. dollar's future role in the world? How do you see the issue of making the RMB an international currency? Some think that RMB appreciation may curb China's inflation, what's your view on that?
Here are the salient bullets on the currency:
- The monetary policy of the United States has a major impact on global liquidity and capital flows and therefore, the liquidity of the U.S. dollar should be kept at a reasonable and stable level.
- …making the RMB an international currency will be a fairly long process.
- Changes in exchange rate are a result of multiple factors, including the balance of international payment and market supply and demand.
- In this sense, inflation can hardly be the main factor in determining the exchange rate policy.
The takeaway is straightforward: The Federal Reserve is too easy in its monetary policy and this is creating inflation in China. China has a program to address inflation, but allowing the currency to appreciate significantly is not the central answer to the problem. Like most of EM, China has an inflation problem that requires deft monetary and fiscal response. They are and will be cautious. As long as the US Federal Reserve’s monetary policy remains stimulative and China moves cautiously to tighten, inflation will build throughout the year and bond yields will continue to increase.