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Saturday, 7 March 2009

Commentary by Boris Schlossberg: All China Worries Will Dollar Be in Trouble?

Chinese central bank Governor Zhou Xiaochuan pledged today to act assertively in restoring confidence in China’s badly shaken financial sector noting that, “If we act slowly and less decisively, we’re likely to see what happened in other countries: a slide in confidence.” Mr. Zhou’s comments may have simply been a rearguard action after markets were clearly disappointed with Chinese Premier’s Web Jiabao speech on Tuesday that failed to offer any new stimulus spending plans aside from the $800 billion program already announced last summer.

Although the world’s third largest economy continues to expand, Premier Wen Jiabao’s assertion yesterday that China’s growth will reach 8% this year struck many analysts as overly optimistic. China’s internal demand is simply not mature enough to generate organic growth and its critical export sector is reeling from very sharp fall off in demand from G10 nations.

The quick reaction from Chinese monetary officials indicates the high level of anxiety amongst the country’s policymakers regarding the economic outlook in 2009. China simply cannot grow if US and EZ consumer demand continues to erode. To that end, today’s US NFP numbers could be a crucial data point for global capital markets. If unemployment rises, as some uber bears fear, by nearly 1 million jobless, the impact on consumer spending is likely to be catastrophic greatly reducing Chinese export income.

Under that scenario the dollar may come under tremendous amount of stress in the near future. We have long argued that the worst case scenario for the greenback in 2009 would a failed Treasury auction. If Chinese are forced to repatriate some of their $700 Billion portfolio of US Treasury securities in order to support domestic demand, they will in effect cut off one of the primary sources of financing for US government debt. US officials may have no choice but to engage in a massive quantitative easing program with the Fed becoming the buyer of last resort for US government paper. Such a move would almost certainly drive the dollar lower as panic will spread in the currency market over the massive dilutive impact of such policy.

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