China must curb import-dependence, and defend the yuan from speculators

March 13, 2008 – Foreign investment flows into China shot up over 75% year on year to $18.13 billion in January and February, and some of that inflow is speculative “hot money” deployed by hedge funds, betting on the continued rise of the Chinese yaun against the US dollar, Commerce Minister Chen Deming, told the press in Beijing during the National Peoples Congress session. Chen also emphasized that China has to curb its imports of vital necessities such as grain, energy, and iron ore, due to rapidly rising international prices. While some international slime mold-oriented economists are claiming that the rising Chinese yuan would “benefit” imports, in reality, this is just not true, Chen said. Some Chinese economists, including at Goldman Sachs, are trying to push China towards deliberate big increases in the yuan value to the dollar as alleged counters to internal inflation or defense against speculative inflows.

But Chen Deming told the press that, while such a policy might “theoretically” increase imports, it is “impossible” for a nation the size of China to depend upon imports for its vital supplies such as grain, iron ore, or energy. China must depend upon its domestic supplies for necessities. “If not, our huge demand will greatly push up prices, no matter how high the yuan is,” he said. The rising world prices would just fuel more internal inflation. China will now import an appropriate volume of commodities only in case of emergency, Chen told the press.

He said that the reason for the increased FDI inflow was the big increase in projects in China, and the stronger yuan. Flows from Europe were up 109% so far this year, and from the US, 44%. Chen acknowledged that what China Daily called “wild expectations abroad” that the rapid rise of the yuan – which is up 3% to the dollar already this year – will continue, is spurring the increased FDI flows.

China’s foreign reserves hit the all-time record of $1.59 trillion by the end of January, with all kinds of inflationary and other effects on the Chinese economy.

National Peoples Congress finance committee deputy head Wu Xiaoling told the press that collapse of the “subprime” bubble in the U.S. and the rising yuan will make world speculative funds flow into China to seek profits.)