"I've long believed that China's currency is due to appreciate notably against the buck," says currency expert Jack Crooks, upon returning from speaking at a Forex seminar in Beijing.

In his World Currency Alert he explains, "Until now, there's been no straight-forward, highly-liquid way to play it. Now there is: the WisdomTree Chinese Yuan Fund (NYSE: CYB)."

"I now think it makes sense to secure some exposure to the Chinese yuan. There's been a major U.S.-China dynamic that's drastically altered the global economic landscape over the last several years. It goes a little something like this:

• China sends goods to the U.S.
• The U.S. sends dollars to China.
• China sends dollars back to U.S.
• The U.S. sends treasuries to China.

"Ultimately, China supplies the globe with liquidity. Behind this capital flow is an artificially undervalued Chinese yuan. This exchange rate situation is why China has become a major supplier of goods and capital to the rest of the world.

The U.S.'s recent economic doldrums, combined with a 4-year-plus economic expansion that produced less-than-optimal-results in several statistical categories, has caused investors' recollection of robust economic times to fade from memory.

For a refresher, albeit not an ideal case study, regarding what a robust economy looks like, consider China's economy: China's retail sales surged 21.6% in May compared to a year ago, Bloomberg News reported Friday, a rate seven times faster than May retail sales growth in the United States.

Retail sales increased to 870.4 billion yuan or $126 billion in May after rising 22% in April, on strong auto sales and building material purchases, Bloomberg News reported Friday.

China let the yuan rise to a record level versus the dollar Friday, Bloomberg News reported, in a sign Beijing may be modifying its currency stance in order to regain control of inflation.

The yuan strengthened to 6.9907 yuan versus the dollar Friday, its strongest level since the Chinese Government moved from a fixed or "dollar pegged" currency rate to a system that limits the yuan's currency appreciation to about 5% per year.

China has kept the yuan artificially low -- or not set by free-market, foreign exchange forces -- in order to stimulate economic growth and protect its young economy. The low yuan keeps the cost of Chinese exports low -- a major factor in both China's record trade surplus with the United States and its surging manufacturing export revenue. Critics charge that the low yuan gives China an unfair advantage versus foreign manufacturers: many of these producers, among others, argue that the yuan would appreciate to 5 or even 4.5 yuan to the dollar if allowed to float freely.

China's government said it hopes to limit inflation to 4.8% this year, but said it could have trouble doing so after January 2008 snowstorms worsened food shortages, the Associated Press reported Friday.

The storms, which disrupted food ships, might keep inflation high in February 2008, said Zhou Wenjun, an official of the cabinet's National Development and Reform Commission, The AP reported. Prices increased at annualized rate of 7.1% in January 2008.

CPI goal: 'good luck'

Economist David H. Wang told BloggingStocks Friday that China's effort is admirable, but structural and monetary policy factors will make it nearly impossible to hold inflation to the government's stated objective. (Wang lived in China for more than 20 years before moving to the United States for graduate school; he still studies China's economy.)

China's central bank let the yuan appreciate slightly Tuesday night to 7.1452 yuan to the dollar from 7.1580 yuan, China's Xinhua News Agency announced Wednesday. The report also provided a hint regarding the pace of future currency appreciation.

"We will further improve monetary policy controls, continue to use quantitative measures, widen usage of price-related policy tools and increase innovation in monetary policy measures,'' the central bank said in the report, without elaborating, Bloomberg News reported.

Zhou Xiaochuan, head of the People's Bank of China, China's central bank, has said repeatedly in recent months that the yuan rate would gradually reach a "balanced" level and help bring equilibrium to the balance of payments.

At issue: The yuan

China is facing pressure on a number of fronts to appreciate its currency. Both the United States and Europe would like China, which maintains the yuan's rate in an artificially low trading band, to float its currency or at least let it come close to reflecting a fair-value rate in the years ahead. China keeps the yuan artificially low to reduce the cost of goods exported, which boosts exports sales. Both the U.S. and Europe say that rate gives China an unnatural competitive advantage in trade. China counters that it needs a low-valued yuan to increase wealth and protect young sectors of its developing economy.

China's inflation rate accelerated to its highest level in more than 11 years in January, rising to a year-over-year rate of 7.1%, up from a 6.5% pace in December, China's National Bureau of Statistics announced Tuesday.

The NBS said food prices surged 18.2% in the year-over-year period, as record snow storms blocked food transport, forcing prices higher.

Officials said the food shortages had eased, but that consumer prices were likely to continue to rise due to higher wage costs and higher costs for coal and other industrial materials.

China's government is attempting to cool its economy, in part to take pressure off wholesale prices, particularly commodities, but also to lower retail inflation. China's economy grew 11.4% in 2007. Many economists expect 8.5-9.5% GDP growth in 2008.

Is China's trade surplus finally trending lower? One economist specializing in China's economy said possibly. but we won't know for certain for a few months.

China's trade surplus totaled $19.4 billion in January 2008 -- the first time the surplus has been below $20 billion in the last three months, The Associated Press reported Friday, citing the government's Xinhua News Agency. Exports rose 26.7% to $109.7 billion, while imports grew 27.6% to $90.2 billion.

U.S. consumer pullback?

"We may be starting to see the impact of the U.S. consumer pullback on China's exports to the U.S.," economist David H. Wang told BloggingStocks Friday. Wang was born and lived in China for more than twenty years before moving to the United States for graduate study. "If the U.S. economy continues in slow-growth mode, I suspect China's sales to the U.S. will continue to slow."

Inflation: "An increase in the amount of money and credit in relation to the supply of goods and services; An increase of the general price level; An excessive or persistent increase in wages and costs causing a decline in purchasing power."

Recession: "A temporary falling off of business activity during a period when such activity has been generally increasing."

(Source: Websters New World Dictionary, Third College Edition)

Rather than an opinion piece, which is what I generally write, this little snippet is meant more as a discussion generator than a statement of my own economic view. I earnestly invite our readers to weigh in on the matter. Inflation or recession, are we now experiencing either or both?

Someone might want to explain this to me because it defies nearly all palatable logic that I can apply to it. I read earlier this week that China carries a large debt portfolio and that about 70% of it is American debt. Additionally, China is buying up American debt at break-neck speed, while possibly neglecting their own populace in order to do so.

As I was taught, there are two potentially profitable reasons to buy debt obligations. The first (and best) reason is because there is a reasonable expectation that the debt will be repaid, supported by documentation, collateral security, and research. The second reason is because there is an expectation that the debtor shall default, resulting in the expeditious seizure of pledged security assets that are desired.

I've become aware of an unsettling third scenario regarding the value of buying debt. You can easily use it to buy control of the debtor's assets through their weakness.

Here's a concept at least one economist (and probably others) would like to see: a of shift some GDP growth from China to the United States.

China reported that Q4 GDP growth totaled a blistering 11.2%, with 2007 GDP growth coming in at 11.4%, China's fourth consecutive year of double-digit GDP gains.

China approaches U.S, E.U.

China's GDP is now $3.4 trillion, still behind the U.S. and the European Union. However, in purchasing power parity terms, China's GDP is roughly the same as the U.S. and E.U.'s.

Moreover, China's 2007 GDP gains came despite the fact that the Chinese government has undertaken several measures -- from interest rate hikes, to price hikes, to limits on investment, among other decisions -- to slow its overheated economy.

China, which has kept its currency, the yuan, artificially low in order to keep the cost of its exports low and promote a domestic economic boom as its nation develops, is finding that the strategy has a negative effect: domestic inflation.

Unlike market-based currencies characteristic of the foreign exchange, China's government sets the yuan's value -- allowing it to trade in a tight band, currently at about or near 7.2730 yuan to the U.S. dollar. China argues that the yuan/dollar peg is necessary to promote economic growth and protect young, developing businesses and sectors.

And the strategy is working: China has registered +10% GDP growth for more than four years; has the world's third-largest economy, in purchasing power parity terms, behind the European Union and the United States; and has generated massive trade surpluses, particularly against the U.S.

Still, the U.S. counters that the peg keeps China's goods at artificially low prices and hence gives China's companies an artificial competitive advantage in trade. China has turned aside those and other U.S. concerns, particularly the trade deficit, arguing that if the U.S. wishes to lower its trade deficit, its citizens should save more and consume less, and the U.S. government should eliminate its budget deficit.

The new year should experience a sight not seen in currency markets for several years -- a rally by the U.S. dollar -- currency traders and economists told BloggingStocks on Thursday.

The euro, which traded Thursday at $1.4620, is up about 13% vs. the dollar this year, and about 21% since January 2006. The British pound, which traded Thursday at about $1.9930, is up about 2% vs. the dollar this year, and 11% since January 2006.

Independent currency trader Michael Murphy told BloggingStocks on Thursday that the market fundamentals "do not justify a dollar at these levels," and that the dollar has been oversold in the currency markets, particularly against the euro and the pound.

"U.S. economic fundamentals have been weak the past several years, as they relate to the dollar, but the market has compounded this by speculative shorts, pushing the dollar down. But the economic fundamentals are improving, so when the these speculative shorts unwind, the dollar will rebound in 2008," Murphy said. "The U.S. trade deficit's decline will be a big factor in the dollar's rise in 2008."

Murphy added that he expects the dollar to improve to $1.30 vs. the euro and $1.85 vs. the pound by the end of 2008.

China increased benchmark interest rates for the sixth time this year Thursday, the Chinese government announced, in the government's latest attempt to slow surging growth and rising inflation in the world's second-largest economy, Reuters reported.

The People's Bank of China increased its benchmark one-year deposit rate by roughly one-quarter percentage point, or 27 basis points, to 4.14%, and also raised the one-year lending rate about one-fifth percentage point, or 18 basis points, to 7.47%. The central bank's last interest rate increase occurred in September, Reuters reported.

Earlier this year, China's monetary officials shifted their monetary bias from "prudent" to "tight' to slow the nation's double-digit GDP growth economy.

Economic boom

China's GDP has grown more than 10% for more than four years, serving as a centerpoint for not only emerging market development in Asia, but also as an engine for global growth. Low-cost labor and the nation's weak currency, the yuan (which is fixed at an artificially low rate, a trading band, by the Chinese government), have fueled an export boom and a large trade surplus. That surplus has led to many benefits for the world's most populous nation, including rising real incomes, an expanded middle class and historic economic development, but has also stoked inflation.

Further, monetary and industrial officials in the world's other major economic regions in the United States and Europe have urged Chinese officials to slow the nation's economy -- and implement other reforms -- to take price pressure off commodities (such as oil) and resources.

China and the United States on Wednesday agreed that the relationship between the world's two largest economies is becoming increasingly interdependent but again differed on the pace of Chinese currency reform, as trade talks between the two nations continued in Beijing, The Associated Press reported.

Separately, U.S. officials pronounced as a success a side process Tuesday during which the two sides signed several agreements, including one on food safety, calling for U.S. health inspectors to play a greater role in inspections in China itself, the International Herald Tribune reported.

China announced Wednesday it will tighten its monetary policy in 2008 for the first time in a decade to slow its surging economy, Channel News Asia reported Wednesday.

China said it would shift monetary policy from prudent to tight, but gave few specific details regarding the policy.
At the same, The Wall Street Journal reported that China's State Information Center, a think tank under the National Development and Reform Commission, said in a report published in the China Securities Journal that China should let the dollar-yuan rate move as much as 1% above or below the central parity rate [subscription required] in each daily trading session, up from 0.5% now.

China's sizzling economy has grown by over 10% annually for more than four years, and many economists expect another double-digit GDP gain in 2007, despite the Chinese government's effort to cool the economy. In 2006, China's GDP totaled $10.2 trillion in purchasing power parity terms and $2.5 trillion in real terms, according to research by the U.S. Central Intelligence Agency.