Friday, January 29, 2010

Yuan Revaluation Pending

These monetary maneuvers by the Chinese government surely presage a revaluation of the Yuan dollar peg.  It will now obviously benefit China by somewhat cooling things off internally and allowing them more time to place their huge US dollar pool. This should actually happen very quickly.

The Chinese are also diversifying their currency holdings but there is only so much that can be done quickly.  Again the next two years will be used to perfect this new policy.

The USA is still getting its fiscal house in order in a process that if not accelerated by government action, promises to last a decade.

So we can expect a slow delinking of the Yuan into a basket of currencies and a step by step advance in the value of the Yuan for at least ten years.  We may be impatient with them but recall this is about 1.3 billion people transitioning into a middle class consumer society and they are trying to bring the whole country along.  So far they are doing fantastic and have avoided hillside slums that is common most other places.

January 28, 2010

Alan Ruskin, who heads foreign exchange strategy at RBS Securities, notes there is more evidence of a strengthening U.S. dollar than there is to indicating a weakening in the currency. "The dollar's rallied quite sharply. There's a sense that as the U.S. economy is recovering it's hard to conceive of a dollar collapse," he said. 

Ruskin said he sees China's recent moves to scale back bank lending as a sign the country could move toward using exchange policies as another tool to tighten monetary policy and fight inflation.
International pressure for the yuan to rise is growing; there are strong expectations for yuan appreciation. Zhong said expectations for a stronger yuan were one of the factors that could weigh on China's exports in 2010, in addition to uncertainties about global economic recovery and trade disputes.

These semi-official comments from a Chinese Minister could indicate that
China will move earlier than this summer to begin re-appreciating the yuan versus the US dollar. It could also signal an increased likelihood of something in the range of 10% one off appreciation.

WSJ discusses one off appreciation versus gradual

The 23% surge in China's foreign reserves last year to $2.4 trillion is a much clearer signal that its currency is undervalued. 

China rightly worries that a new program of gradual appreciation would only encourage more hot money inflows. 

So the alternative is to do it all in one bang. To be sure, a one-off sharp revaluation would strike a major blow at China's export base and induce a significant slowdown in the economy. But since China's competitors would enjoy an exchange rate windfall, contagion would be limited.

Either way, doing nothing and so indefinitely postponing a more violent, involuntary bursting of the bubble is the worst option.

No comments: