Chinese Yuan Depreciates Against The US Dollar, Yuan Rise Seen As Detrimental
Although advancing shortly after the consumer price report, the Chinese yuan pared back and fell to 7.5812 following comments by a high ranking official that noted appreciation in the yuan is not what is desired. The official stated that any “big appreciation” would hurt the Chinese economy and slow job growth. The overnight comments dulled expectation of a near term revaluation in the currency but heightened the likelihood of a near term rate hike.

Chinese Consumer Price Inflation Rises To Highest In 10 Years
Consumer prices in the world’s fastest growing economy rose to the highest level in 10 years. Remarkably, the economic gauge surged far past consensus estimates of 4.6 percent, printing 5.6 percent for the month of July according to the National Bureau of Statistics. Attributed to the extraordinary rise were food prices that jumped a whopping 15.4 percent after shortages in pigs and thinned out crops lent to reduced supplies. Price increases seem to be rising out side of food as well, as noted by the central bank on August 8th. As a result, the report has prompted further speculation by the market that rate increases will surely follow in the near term. Heavy estimates are for another round of tightening by the People’s Bank of China, the fourth in 2007, as well as more inventive measures of controlling what seems to be an overheating economy.

Foreign Direct Investment Continues To Power Economy
Investment on the part of overseas companies continued on a healthy pace for the first seven months of the year. Increasing by 12.9 percent, actual FDI increased by $36.9 billion compared to last year’s results, according to the Ministry of Commerce today. In the month of July alone, foreign direct investment rose by $5 billion, higher by almost 18 percent. Surprisingly, however, the number of new foreign funded companies declined against last year’s assessment by 4.81 percent. The finding suggests that foreign companies may be paring back exposure in the economy, at least in the near term, on concern of market dynamics.

China Promises No Dollar Dump
Released over the weekend, a Chinese central bank official was quoted as saying that China had no intention of dumping dollar reserves in the near term. The assurances come but a weekend after it was reported by the Daily Telegraph that Chinese officials may exercise their “nuclear option”, selling off the world’s largest investment in US Treasuries. Subsequently, the official noted that China remained a “responsible investor” and seeks to manage its foreign currency reserves in a long term perspective. Although news to the markets, traders had already expected as much considering the irreparable damage such an event may have on Chinese reserves. A dumping of US dollar assets would accelerate the current pace of appreciation in the underlying yuan as well as reducing the value of remaining reserves, totaling $1.33 trillion as of June.

Regional Markets Advance On The Session
Stock markets advanced in both Hong Kong and Singapore as investors returned from last week’s global crisis. Equity advances were led by United Overseas Bank Ltd. as investors deemed the recent rout as overextended, helping other banking sector stocks higher. As a result, the Straits Times Index added 21.43 points to close at 3,380.61. Shares Hong Kong additionally rose, bouncing from the biggest weekly drop in almost five months as investors attempted to bargain hunt for valued stock. As a result, the benchmark Hang Seng was able to gain 98.39 points to 21,891.10.

Richard Lee is a Currency Strategist at FXCM.