US Treasury Secretary Henry Paulson today pledged to be “more creative” when it came to approaches regarding the Chinese yuan policy. At a hearing in Washington today, Paulson noted that he will continue to support the International Monetary Fund decision announced just days ago, pushing for a more “rigorous” monitoring of currency exchange rates. “We have room to be more creative and accomplish a good deal more…I share your frustration on the pace of change in China.” The comments were made in front of US lawmakers following a scolding by legislatures on inquiries into why the US Treasury avoided labeling China as a currency manipulator, which most had expected. Defending his position, the Treasury Secretary indicated that the US economy remains “strong” with inflationary pressures relatively controlled at the present moment. Rising at a healthy pace, consumer spending seems to be in line with rising business investment, spelling a healthy combination for the world’s largest economy. As a result, both factors are helping the American economy remain competitive globally, countering previous contentions by US political leaders. “We cannot continue to compete with this kind of subsidy”, stated Democratic Representative Luis Gutierrez who later alluded to disappointment in Paulson’s decision. Whether creative or not, plans by Paulson may need to be more aggressive in the near term as it seems that he will likely bear the brunt of the protectionism that is slowly erupting on Capitol Hill. Incidentally, the effects were widely felt in the FX market as the Chinese yuan was higher on the US dollar on further revaluation speculation. The USDCNY pair traded lower into New York, currently at 7.6175.



Shanghai Shares Move Lower, Retraces From Record
Shares in China were battered down during the overnight session as the benchmark index fell from a record high. Prompting the New York late night selloff was mass speculation that interest rate increases would be on the horizon in the very near term. Validation is coming from recent reports that the Chinese economy continues to churn ahead at an alarming speed, helping to boost consumer spending, a record trade surplus and rapidly accelerating inflation. Incidentally, the rate hike speculation took the wind out of PetroChina sails as the company announced that it would seek to raise as much as $5.6 billion in a share sale on the Shanghai exchange. Standing as the country’s largest oil company, PetroChina is set to sell as many as 4 billion shares, hoping to boost funding for further resource exploration. Unfortunately, with Merchants Bank, having the biggest weighting on the index and sliding 4.5 percent, the overall CSI 300 index declined by 95 points to close at 4,157.60.

Stock Markets Mixed
Regional equity benchmarks were mixed on the session with the Singapore Straits Times Index falling from a record close hit just yesterday. The key stock index dropped 0.88 points to close at 3,628.67, after being positive for most of the session. Profit taking and position readjustment contributed to the overall decline as shares in City Developments Ltd. declined the most in a week. Sparking the selloff was the removal of the stock from Merrill Lynch’s top recommendations list, lending a bearish undertone to shares. Comparably, Hong Kong stocks were higher on the day, advancing on the busiest trading day ever. During the session $15.5 billion was traded on as shares of PetroChina skyrocketed on announced plans of Shanghai listing. As a result, the Hang Seng was able to add 101.78 points to close at 21,684.67. With the announced share sale PetroChina will now overtake Royal Dutch Shell Plc, currently standing at a market cap of $257 billion, ranking the Chinese producer as the world’s second largest behind Exxon. Post transaction capitalization has the company standing at an impressive $269 billion with shares at HK$11.74.

Richard Lee is a Currency Strategist at FXCM.