In a speech to the Heritage Foundation in Washington today, US Treasury Secretary Henry Paulson suggested that protectionism is growing in both nations of the US and China. Further escalation of such relationships will likely damage current trade flows exponentially as a trade war potential looms. According to Paulson ‘we who believe in open economies are swimming against a strong protectionist tide these days….protectionism isn’t’ a growing force only in the United States. It is playing a role in domestic politics in China as well." The statements don’t come as a surprise as rhetoric has been less than encouraging from both sides in recent months, even leading up to the strategic economic dialogue that took place last month. The significance of this, however, is in the fact that it seems the situation may be spiraling out of the hands of both countries as policy makers gear up for political counterpunches, notably current legislation on currency intervention by the US. One thing is for certain, and that is Chinese officials may ultimately have to revalue in order to shift the focus, or come up with further concessions to appease US politicians.



Deputy Governor Wu Sees Market Rise as "Inevitable"

In response to recent routs in Chinese shares, over the past couple of sessions, the People’s Bank of China Deputy Governor Wu Xiaoling commented that the current advance in shares is "inevitable" and noted that investors should have confidence in the current system and Chinese economy. "In a situation where the economy is growing, the stock market’s advance is inevitable and long term gains in the Chinese market is inevitable." Incidentally, the comments have a considerably different tone from a couple of months ago, when policy makers were indicating a stock market bubble in the Chinese markets. However, it seems the tide has changed as leaders are now viewing the bigger picture: further statements of a larger than life speculation may open the road to a stock market crash. The idea has sparked other comments similar to Wu’s in recent days including the deputy director of the national pension program. According to Gao Xiqing China’s markets enjoy "good long term prospects." Subsequently, it was speculated yesterday that the government is in works of establishing a fund in order to stem any precipitous declines in the overall benchmark index. The rumor helped to spark some support from the otherwise bearish market fall in the morning trade.

Regional Markets Move Lower as Chinese Shares Rebound

Asian regional markets fell despite the Shanghai share rebound in the overnight session. The Straits Times index declined for a second day, falling 9.15 points to 3,563.75, as investors continued to pare back on positioning, taking profits on the idea of overall market overextension. Leading decliners were Singapore Exchange Ltd, the operator of the country’s stock market. Shares of Singapore Exchange dropped 10 cents to trade lower at S$8.60. Subsequently, the Hang Seng Index additionally fell on the day from a two week high. Leading speculation on the negative bias were rumors that a relatively large investor was ready to unload shares of Cnooc Ltd., a benchmark contributor. As a result, the Hang Seng lost 23.54 points to 20,818.61 at the close of trade. Incidentally, shares of Cnooc, China’s largest offshore oil producer, actually rose 2 cents to HK$8.07, propped up by higher crude oil prices.

Richard Lee is a Currency Strategist at FXCM.