SLOW, STEADY APPRECIATION OF CHINESE YUAN CONTINUES

U.S. Treasury Secretary Henry Paulson wrapped up his now twice yearly meetings with Chinese officials yesterday. Some progress regarding the appreciation of the Chinese currency, the yuan, and food and product safety for Chinese exports to the United States seems to have been made.

From Reuters:

"The Chinese recognize growing inflationary pressures in their economy and that a more flexible currency expands their ability to use monetary policy to stabilize their economy," Paulson said at a closing news conference.

China's central bank, which keeps the currency on a tight leash, let the yuan rise on Thursday to its highest level since it was revalued and depegged from the dollar in July 2005. The bank is battling inflation of 6.9 percent, an 11-year high.

A highlight of the talks was an agreement to increase safety standards for Chinese food and product exports to U.S. markets -- a highly sensitive topic after millions of Chinese-made toys were recalled and American indignity over tainted food and pharmaceuticals from China ran high.

I find it interesting that Paulson is stating that the Chinese recognize that a flexible currency allows them to better fight inflationary pressures. That is a concept that freshman business students seem to grasp, so I would hope that one of the world's economic powers understands it. They have tried fixing prices on some goods and raising the bank reserve rate to slow inflation. When will they try the more economically sound principle of a flexible currency?

As for the increase in safety standards for Chinese food and other products that are exported to the United States, there was plenty of room for improvement. We will have to wait and see if the reports of unsafe Chinese products decrease.

SENATOR CLINTON EXPRESSES CONCERN ABOUT FOREIGN-OWNED U.S. DEBT

Senator Hillary Clinton expressed concern about the "economic vulnerabilities" posed by foreign interests owning large amounts of U.S. debt. On the Senate floor, and in letters to Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson, Senator Clinton said that President Bush's economic policies have contributed to an "erosion of U.S. economic sovereignty" and added that it is "undeniable that the exponential growth of foreign debt in the last six years has undermined our economic standing."

From The Wall Street Journal:

Currently, the U.S. imports more goods than it exports from places like China, resulting in a trade deficit, and it borrows heavily from abroad to finance its domestic investment. Foreign interests own about $2.2 trillion of U.S. Treasury securities -- or about 52% of the public debt not held by the U.S. government, compared with about 20% in the early 1990s, during the Clinton administration. The U.S. has come to rely on foreign capital because Americans don't save enough to finance the nation's domestic investment.

...there is broad concern that the growing reliance on foreign investors puts the U.S. at risk, and some say the way to address it is to begin saving money at home by erasing the current $248 billion budget deficit, moving into a surplus and putting money aside to pay for costly obligations like Social Security and Medicare.