Cheng Siwei Feng Shui

It looks as though the U.S.-China disagreement over how fast the Chinese currency should appreciate is turning into one giant game of "Chicken". Does the Treasury Department really think that a stronger Chinese currency is going to solve our problems?

While other countries are dropping, or talking about dropping, their currency pegs due to a rapidly weakening dollar and, hence, rapidly rising domestic prices, the Chinese have been reluctant to allow the yuan to appreciate at more than a snail's pace.

This report from Reuters tells of the latest developments as the vice-chairman of China's parliament, Cheng Siwei, apparently favors a feng shui approach to ther foreign exchange reserves rather than a stronger currency in response to the dollar's slide.

China delivered a one-two punch to the dollar as a top lawmaker suggested a bigger role for the euro in its $1.43 trillion hoard of foreign reserves and a central banker said the dollar is losing its global currency status.

The euro hit a record high above $1.47 following remarks on Wednesday by Cheng Siwei, vice-chairman of the standing committee of the National People's Congress, China's parliament, pointing to diversification of the country's reserves.

"In terms of the structure of our foreign exchange reserves, we should take advantage of the appreciation of strong currencies to offset the depreciation of weak currencies," Cheng told a financial forum.

"For example, in the current foreign reserves structure, I mean the bonds we bought, the euro is appreciating against the yuan while the U.S. dollar is depreciating against the yuan. So we should make a balance between the two," Cheng said.

Cheng's position gives him influence in Beijing, where he holds a rank equivalent to vice premier. However, he does not have real authority over financial matters and has been known to speak on a range of subjects, from the stock market to foreign acquisitions, on which he does not control policy.

Cheng Siwei has been speaking out about the dollar for some time now. In this story from early in 2006 he called for China to "trim its holdings of U.S. debt and to stop buying dollar bonds" - a reasonable stance given the decline in the dollar since that time.

Also in this report, Xu Jian, the vice head of the People's Bank of China's Communist Party school (they have very long titles, don't they?), commented on surging oil and gold prices while dumping on the dollar as well.

"The U.S dollar's global currency status is shaky and the creditworthiness of dollar assets is falling," Xu, who said he was speaking in a personal capacity, told the same forum.

He said he expected the dollar to weaken further in 2008 under the impact of the gaping U.S. trade deficit. That could push the price of gold to $1,000 an ounce from a 28-year peak of $840 scaled on Wednesday, Xu said.

As noted at the end of this report, all the Chinese have to do to see what impact a rapidly strengthening currency might have is to look at the Japanese experience following the Plaza Accord in 1985.

If you think there are bubbles in China today, a rapidly rising currency and reduced capital controls would make the situation much, much worse and then they might get decades of "deflation", just like the Japanese.