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Week In Review


In December, China’s foreign exchange reserves declined to $3.010 trillion, the lowest level in over 5 years. December also saw a continued decline in China’s balance of trade. These developments occurred as China continues to tighten restrictions on capital outflows, including restrictions on overseas assets that can be bought with individuals’ quotas of offshore yuan.

Our Take

China saw massive overinvestment in uneconomic capacity following the financial crisis. An increase in the cost of capital in yuan will make it more difficult for the Chinese government to manage the necessary adjustment from this overinvestment. The decline in forex reserves stems from PBOC selling in order to maintain the value of the yuan. The restrictions on capital outflows are part of the effort to hold down the cost of capital in China. As China’s forex reserves dwindle, the PBOC and Chinese government will find it difficult to maintain the value of the currency and to avoid an increase in the cost of capital, and this could force a more sudden adjustment from China’s recent overinvestment.

Retail Sales

Retail sales rose 0.6% in December, just shy of the predicted 0.7% increase. Excluding automobile and gasoline, sales were flat. Year-over-year, retail sales increased 4.1%.

Our Take

Increases in gas prices and higher car sales drove retail sales in December. Core retail sales were weak, pointing to an economy that continues to progress in fits and starts.


Chicago Mayor Rahm Emanuel asked Moody’s Investors Service to withdraw its rating on Chicago debt. Moody’s currently rates Chicago Ba1 with a negative outlook, which is non-investment grade, or junk. Emanuel claimed that the ratings agency does not “accurately reflect the city’s credit.” Emanuel’s comments come before a $1.2 billion bond sale scheduled for next week. In comparison, S&P has assigned a BBB+ rating, while Fitch rates Chicago BBB-. Moody’s did not comment on Emanuel’s statement.

Our Take

Emanuel’s comments to Moody’s this week in advance of a scheduled bond sale may be in an attempt to decrease the city’s borrowing costs by removing the agency’s rating. Instead of blaming the ratings agency for the city’s troubles, Emanuel and Chicago lawmakers should focus on improving the city’s fiscal health and pension reform, which is what Moody’s indicated are factors that could lead to a future upgrade.