China

Part and parcel with its overall slide, the US dollar has fallen to its lowest level against the Chinese yuan since late May. Even within the narrow ranges that have prevailed this year, there is scope for additional albeit minor dollar losses against the yuan. Still, there is no sign that Chinese officials are going to let the yuan resume its float any time soon.

Domestic economic data and the stronger than expected jump in US retail sales should help ease Chinese official concerns that the economic recovery was losing momentum. Indeed by many economists' reckoning, just like the economic downturn was synchronized, so too is the upturn. Yes countries have different "betas", as it were, but some kind of recovery seems evident in most countries.

Yet if Chinese officials may have one less thing to worry about as the 60th anniversary of the PRC approaches (Oct 1) Chinese officials have a new worry and a simmering problem may require greater attention.

The new problem is the shot across the bow by the Obama Administration on the trade front. The duties on steel pipes are in the range of normal trade tensions and could be challenged. The tariff on tires is a horse of a different color. For the first time, the US invoked Section 421 of its agreement to sanction China joining the WTO in 2001. This clause, was a concession demanded by the Clinton Administration and simply allows the US to protect those markets against a surge in Chinese imports. It does not require any discussion of unfair practices or illegal subsidies. Because of this, it could be invoked against many Chinese goods and Chinese officials are concerned that there will be a deluge of accusations now.

This elastic clause does not expire until the end of 2013. Some Chinese officials have intimated that there was an unwritten agreement that although such a clause was needed to appease a hostile Congress, it would not be invoked.

China claims it will cost 100,000 jobs and around $1 bln. Even though China is not a democracy, the government needs to placate its own constituents. The reaction has thus far been relatively modest: appeal to the WTO and investigate auto and poultry imports from the US. However, China is unlikely to retaliate in a way that cuts its nose to spite its face. It is not about to dump Treasuries or the dollar. And it would not be surprising if, at their upcoming meetings, US officials reassure their Chinese counterparts that Section 421, which China agreed to, will not be used willy-nilly.

Meanwhile, there are a number of measures China could take that would frustrate US policy makers. One obvious area is Iran. Imagine if China offers to sell gasoline to Iran, or encourage directly or indirectly another country to do so. Alternatively imagine vetoing US efforts in the UN Security Council.

Many observers were excited about the $90 bln in yuan-swap lines that China established with a number of trading partners early this year. What if China offered dollar-swaps instead ? No one but China has yuan debt so yuan-swap lines are largely meaningless at this stage. Taking those dollars from its coffers and putting them back out in the market, now that would be news.

Lastly, an issue that Chinese officials appear to be increasingly concerned about the prospect of bad loans. Although the explosion of loans in H1 09 is too recent to show up in current data on the nonperformance loans, China officials privately are expressing concern. Today, data released shows rising credit card strains. There was roughly 162 mln credit cards in China at the end of H1,and CNY187 bln (~$31 bln) outstanding balances. Of this some CNY5.8 bln or 3.1% is 6-months or more overdue.