China will revalue the Renminbi in Q4

Martin Wolf and Macro-man illustrate the difficulty China finds itself in by continuing to rely on the US as the consumer of last resort.  China is sticking with a policy of favouring export led growth driven by pegging its currency against the dollar.  While fiddling at the margins of policy and sometimes making statements to the effect that it uses a basket, a dollar peg has been the policy and it has been successful.  This seems likely to change.

Beyond the political rumblings, which seem more likely to cause China to dig in its heels, it seems like finally the US consumer is unwilling to play the role China desires.  This is indicated by the slowing trend of retail sales as pointed out by Tim Duy.  An updated chart is below, and by my math the trend since July 09 is still running at 0.31% and still below the 0.37% trend Tim calculated from January 03 to November 07.


(Note the y-axis does not begin at 0 to better illustrate the change in trend)

In the past consumption growth would resume with falling interest rates leading to increased borrowing.  This path is now less effective as both consumers and banks look to rebuild balance sheets.  This is shown by increased personal savings rates and balance sheet rebuilding by financials here.

Most recently China has stated plans to review its currency policy after Q3 and at that point in time it seems likely that a gradual appreciation against the dollar will be allowed.