Yuan, G7/G20, Pigs and Chicken

Multilateral meetings of the G7 and G20 and IMF/World Bank begin at the end of the week. There is little doubt that either formally or informally, explicitly or implicitly, there will be calls on China to adopt allow the yuan to appreciate. If one thinks, as some do, that China won't move without international pressure, one might expect an imminent move. International pressure is likely to be ratchet up in the coming days.

Leaving aside these international meetings, note that the EU trade commissioner is scheduled to visit China next week. Even before that the Senate Banking Committee is slated for hearings on Thursday in which China's exchange rate will be discussed. Yesterday the Chair of the House Ways and Means Committee said the US would take action if the G20 and multilateral efforts fail to redress China's under-valued currency.

Meanwhile, there is some speculation that under industry pressure, the US Commerce Department may formally investigate claims that the under-valued yuan is an unfair subsidy to Chinese aluminum exporters.

At the same time, China appears to be threatening its own anti-dumping action against US chicken producers. A preliminary report found US producers were selling chicken below market prices. US producers provided around 335k tons of chicken to China last year (3rd place, behind Russia and Mexico).

The aggressive regulatory and administrative measures being implemented that target specific sectors--like real estate--suggests a desire to avoid, or at least, delay rate hike. The same may be true about willingness to accept a stronger currency.

Chinese officials worry about inflation, but one key source of inflation appears to be easing and that is food prices. We note that pork prices have fallen for 14 weeks and now are at their lowest level in nearly four years, according the Ministry of Agriculture. In fact, while the gigantic monetary reserves rightfully draw attention, Chinese officials appear to be bolstering their frozen pork reserves to absorb supply and stabilize prices. These reserves were established a few years ago for precisely this purpose. China's pork production is reportedly larger than the next 43 producers combined. Two years ago, there were about 420 mln swine in China. Today the swine population is estimated at 480 mln.

Bottom line: We do not think a move on the Chinese currency is imminent. We expect China to wait a bit longer, as the base effects account for a good part of the improved export data and inflation pressures may subside further. Chinese officials, like many private sector economists, are not sure that the global economic momentum will be sustained through the second half.