One of the trades that looked like a no-brainer was betting on continued appreciation of the Chinese renminbi. In fact, so strong was the confidence in this outlook that China suffered from large-scale hot currency inflows (as recounted ably by Brad Setser) despite the official obstacles.
A top investment bank in China is now forecasting a small fall in the renminbi next year. Not only is that bad for US exports, bad for global rebalancing (a higher renminbi would do wonders to slow China’s destabilizing growth in foreign exchange reserves), but an exit of the hot money certain of either a revaluation upward or continued appreciation could have nasty knock-on effects for China.
The theory is that China will now try to keep the renminbi weak to preserve its exports. So far this is a lone forecast, but if it were to pan out, it would not be a good development. While not obvious, it would amount to a defacto race to the bottom in currencies.
From ChinaStakes (hat tip reader Michael):
China International Capital Corporation (CICC), a leading investment bank in China, expects RMB to fall against the USD by 2% next year.
Since the 2005 RMB exchange rate reform, or the even the beginning of RMB appreciation expectations in 2003, thoughts about any depreciation of RMB have never appeared in investment bank reports. But yesterday CICC Chief Economist Ha Jiming expressed just such expectation for the first time in a CICC report. “The RMB exchange rate against USD depends on the USD trend. Next year RMB may be 2% down against the USD.”
Recently, although many international investment banks have expressed pessimistic prediction on the Chinese economy, none has expected the RMB to depreciate.
Expectation for China’s GDP growth in 2009 has dropped to 8.7%, 8%, and 9% by Goldman Sachs, UBS, and Barclays, respectively, in reports issued early in October. Goldman Sachs also predicted China’s financial deficit in 2009 to be 2%, and Barclays 1.5%. But even with such pessimistic economic predictions, they still maintained their expectation for RMB appreciation. Goldman Sachs predicted RMB appreciation in 2009 to be 3%, while UBS expected the RMB/USD rate to rise by nearly 3% to 6.3. Barclays predicted “RMB appreciation will slow down”.
According to the report issued in August by Wang Qing, Greater China Chief Economist for Morgan Stanley, at the end of 2009 the RMB/USD rate will rise to 6.3, meaning RMB will appreciate by 7.7% in less than 14 months. Wang Qing also said there was no market condition for RMB depreciation, and believes RMB can hardly depreciate continuously.
But strong depreciation expectation for RMB occurred in the non-deliverable forward (NDF) market since China’s central bank announced an interest rate cut in September. In late September RMB’s five-year NDF approached 7.0, while one-year and two-year RMB NDF both fell to less than 7.0 in October. Depreciation expectation is strengthening.
Ha Jiming says that with the global financial crisis, the Chinese economy is declining, and more obvious decline will appear in exports next year. Since the decrease of export orders has lagged behind the economic decline, it seems exports are now dropping drastically, but this may accelerate next year. Besides, hot money inflows won’t be so active in future as they have been, and overseas companies will withdraw funds and profits from China due to the global credit crunch. With these factors, RMB will depreciate against the USD.
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The renminbi’s movements notwithstanding, the story of the year in China is the impending legal authoriization of sale or long term lease of small peasant land allotments (technically not land titles but long term leases, the duration of which may raised to as much as 90 years also). Nothing would free up more domestic capital movement. This would also accelerate migration from the countryside into cities as those with unsustainably small holdings lease them and then move to the city with the small cash flow as starter capital. Those advocating Chinese domestic stimulus: This is The Big One, when and as it happens.
The knock-on effects on the renminbi are hard to estimate. The big gainers from land use acquisition would clearly be incipient agribusiness concerns, which would draw in a good deal of domestic capital sitting in banks lacking outlets. They are not as likely to a target of hot money inflows, but the increased domestic food commodity outputs would also buffer China from supply constraint price swings to a degree. Small capitalists coming to the cities are not likely to have the education or connections to push manufacturing in a big way, but a nugget of cash means that they may be less dependent upon construction related labor. Most likely, they will boost the service economy, pushing ‘up’ and servicing a nascent lower middle class. The overall results would, hypothetically, insulate China from hot money flows, and begin to rebalance manufacturing from massively for export to a better configuration of for domestic and for export production.
In the mid term if that all proceeds, the likelihood is a firmer floor under the yuan, and perhaps a greater willingness to let the renminbi appreciate somewhat as a way of winnowing inefficient export concerns out of the capital pool and building better relations abroad. Hard to say. With a global recession in its first phase, China needs to buffer its economy with stronger domestic investment, though, and this is the way. The arguments against letting the renminbi rise have been leveraged upon concerns that China’s domestic economy is ‘too fragile’ and that rural-urban wage disparities are dangerously accentuated by hot money flows speculating on currency appreciation and looking for a quick export funded profit. These have been, in fact, real concerns, not just realpolitikal talking points. So if we want the renminbi to rise for global reasons, and realistically the rest of the world does want this, we might best cheer on continued land reform. As China gets its house in order, it will be a better neighbor, at least where macroeconomics are concerned.
Now, if the US would just do something about _our own_ macroeconomic, consumption profligate, wealth concentrative, dys-service jiggered maldesign, we might have the standing to criticize those on the other side of the sunrise. We are playing catch-up—or rather will begin to play catch-up when we get someone to carry the friggin’ ball on this one. Hank, Dickie, and Dufus are doing their best to take the ball and go home; losers.
Yves,
I want to start off by saying I’ve been a loyal reader of the blog throughout the recent crisis, and appreciate your insights. You’re 100x times better at this than I, or anyone else I know, could be. But I have to say, the tone/content of some of the reports are starting to strike me as overly hysterical. The RMB issue is another example of this recent more extremist tone.
China held the RMB peg during the ’97 Asian crisis (while also supporting Hong Kong), despite all expectations otherwise as the rest of Asia “raced to the bottom”… depreciating their currency at unbelievable rates.
It’s not clear to me that the crisis today, for the Asian countries at least, is substantially more serious than what we saw in ’97. The idea that China would engage in a currency race to the bottom to cheapen exports by a few percentage points is simply not viable. I also doubt it’ll so severely affect American (or world) exports; the RMB only started appreciating versus the dollar 2-3 years ago.
I agree with the above, re: the significance of new domestic policies in China, vis-a-vis land-holding policies. Note that numerous Chinese city governments are rolling out real estate support packages, something that hasn’t been mentioned in most media as far as I can tell.
As manager of the Renminbi Bond Fund we spend a lot of time analysing the RMB exchange rate. The Renminbi is tightly managed against a basket of currencies and according to our calculations the EURO and Yen are the largest non-US dollar components, accounting for around 20% of the basket. Currently the PBoC is allowing the exchange rate to appreciate against this basket at around 7% per annum. Unless the trend changes it would require a substantial fall (in the order of 35%) in the Yen and EURO against the US dollar for the Renminbi to fall against the US dollar over the course of a year.
Inferring too much from NDF prices is probably a mistake as this is driven by supply and demand and not just by expectations. At present many investors (primarily hedge funds) are being forced to close long positions which gives the impression that the market expects the RMB to depreciate. However were you to follow the daily fixing rates instead you would draw a different conclusion.
CCT,
With all due respect, this situation now bears no comparison to 1997. The Asian economies in those days were FX reserve poor, and very dependent on hot money inflows. China now has the largest annual growth in FX reserves by far and is the biggest actor in the global imbalances story, which is a crucial element of the massive debt growth in the US and other advanced economies. You can argue whether the chicken came first, or the egg, but we could not have gotten in the mess we are in to anywhere near this degree had China not been maintaining a dollar peg as part of a mercantilist trade policy (which we were happy to accommodate, since cheap goods and cheap debt covered up for stagnant worker wages).
Every respectable economist agrees China needs to let the renminbi appreciate further to unwind global imbalances (this needs to be done in concert with other actions, but the renminbi appreciation is essential). China needs to move away from export dependence and develop more domestic consumption.
The policy has been for continued renminbi appreciation, and many expected a 5-10% one time revaluation (although the consensus is that a far larger revaluation would be necessary to bring the currency into alignment).
More recently, Nouriel Roubini has argued that it it now too late for revaluation, that China would instead opt for a continued rise, and let inflation do the rest (increases in domestic price levels will also reduce the competitiveness of goods, albeit slower and more unevenly than a revaluation).
Thus, the renminbi has looked like a one-way trade and had led to simply massive FX inflows in the first half of the year. Brad Setser and Michael Pettis, who are not prone to alarm, has been absolutely gob-smacked by the amount of money flowing into China in the first half of the year and both saw it as a very troubling development.
Now admittedly, the CIC forecast is one opinion, but it is far from implausible that China would stop letting the RMB appreciate to try to defend exports. But this would be a seemingly rational action that would be damaging externally, and possibly even internally.
In deflation as the UK and later the US showed in the Depression, and Sweden showed in its early 1990s banking crisis, devaluing the currency by a very large amount is part of the reflation program. Thus for China to stand in the way, merely by maintaining a harder peg and reversing its policy of letting the RMB appreciate, is tantamount to a race to the bottom.
And lest you think this alarmist, several professional investors have written me, each concerned about the US letting other currencies rise against the dollar, when we are the epicenter of the deflationary crisis and should be taking measures to drive the dollar lower, fast. Having the reserve currency gives us unusual luxury to do that. They too see a race to the bottom as inevitable, given how many countries are involved in the debt crisis and the need for them to set their currency values lower.
We quoted Michael Pettis’ Financial Times comment “Hot money poses risk to China’s stability” in July:
During the first halves of 2005 and 2006, the trade surplus, FDI and estimated interest on China’s reserves accounted for 80-90 per cent of the country’s reserve accumulation. In the first half of 2007, these components accounted for about 70 per cent. This year, however, their share has declined dramatically to 39 per cent from January to May…Because there are likely to be speculative inflows buried in the trade and FDI accounts, their true share is probably even lower.
So what is powering China’s accelerating reserve accumulation? Probably hot money. As it becomes increasingly clear that China must revalue its currency sharply or else face surging inflation and the threat of financial instability, more and more investors, business people and ordinary households are bringing money into China to take advantage of profits associated with the expected appreciation…
Consequently a flood of speculative money, amounting possibly to tens of billions of dollars every month, is pouring into China… The fact that in recent months the authorities have taken increasingly desperate measures to staunch the inflows confirms this interpretation of soaring hot money proxies.
If hot money is indeed increasing as quickly as the various proxies suggest, it indicates that not only is Chinese reserve accumulation going through a large quantitative change as it doubles yet again, it is going through an even more important qualitative change.
Hot money is notoriously unstable and even more notoriously procyclical..when conditions change and the economy begins to slow or the country face financial risks, hot money is likely to flee the country, exacerbating the very conditions it is fleeing.
The Asian financial crisis steeled Chinese policymakers to create safeguards against capital flight, and China’s massive reserves and capital controls are likely to prevent a rapid speculative assault on the renminbi. However, just because China may be less vulnerable to an external financing crisis does not mean that authorities are out of the woods… Under these conditions, the risks to the domestic banking system, rather than the currency, are likely to be more significant.
Also see this earlier post, “Scary Bad Increase in Chinese Foreign Currency Reserves” which again cites Pettis and starts:
In general, I’m not terribly fond of imprecise and emotion-laden terms such as “scary bad”. However, in this case, the more accurate description might be “mind-numbingly awful, pointing to increased financial instability.”
Whoops, I wrote one bit backwards above. The US is obviously letting the dollar appreciate.
They are just getting a leg up.
With all the dollars that will soon be flooding the globe, we’ll be lucky if that’s all China does.
So,
It is clear that the Dollar is no longer the reserve currency.
China, holding many dollars, knows that they are essentially worthless.
China, knows that it is the reserve manufacturer.
The USA and the entire Anglo-Saxon world know that the only thing they produce is printed money.
Oops,
Huston we may have a problem
I don’t see the renminbi depreciating. It’s taking a staggering investment by the Chinese central bank just to keep it from soaring – hundreds of billions in renminbi sale/dollar purchases per year. I think China is about to have a lot less dough to throw around and that means appreciation for the renminbi, not depreciation.
Further adding to the notion RE: Hot Money Poses Risk to China’s stability…
China’s Hot Capital Inflows Reversing: Whither the Economy?
“Many have thought that the global financial crisis might drive international capital into China for refuge, but in fact this is untenable. Due to losses in developed markets, companies urgently need to convert their Chinese investments into cash. That is why strategic investors of Chinese state-owned banks such as Royal Bank of Scotland and Bank of America have begun to sell their shares. Also, the prospects of the Chinese economy are not so optimistic as has been expected. Many leading indicators such as stock market figures, purchasing manager index (PMI), power generation, and steel production, are repeatedly indicating economic slowing. Investment bank analysts predict China’s economic growth in 2009 will drop to under 8%, which the government is going to find painful. And since China has begun to cut interest rates, both the RMB interest rate and exchange rate are no longer so attractive to outside capital. Recently, in fact, currencies in emerging markets such as Brazil, India, Russia, Malaysia, Singapore, Taiwan, Thailand, and Korea have all seen depreciation. Overseas funds will find no reason to stay in China.”
The impending lease arrangements for land are not radical in the least; it merely makes de jure practices that have been de facto in certain areas, if not most of the countryside, for many years now.
In a previous career I worked in China; I was there from 2001-2006. Most of the time was spent in Harbin and Shanghai setting up franchise operations for the regions. I married a woman from the west of Zhejiang, and spent approximately 30 days in the village several miles west of Tai Hu.
My father-in-law has rented land in the area from both the state as well as from other villagers for many years. The contracts have run as short as a season (typical for crop land) to 3 years (for rights to river/lake use for aquaculture) to 30 years (land holdings to build homes). Speaking with others in the area I learned that this was common practice in Western Zhejiang. While I have no concrete proof, I doubt this practice is unique or special to the country.
It would probably not accelerate movement to the city as renting of one’s land holding, legal or otherwise, has been a common practice for many years. However, the ability to rent an individuals plot for long term may allow for the potential of a modern day enclosure movement as small plots (about 1/6 th an acre personal holdings) are rented long term (30 years or so) to local land barons…
Peterpaul
While the depreciation of dollar produces a loss in China’s foreign currency reserve, doesn’t it at the same time increase the overall financial power of China? China’s annual GDP is nominally at 3.4 trillion US$, as compared to 2 trillion US$ in reserve.
If I were the Chinese, I’d spend the money in buying up assets in the resource rich emergent economies, now that they have fallen so much. US is printing money like crazy, and is likely to print more to stimulate the economy. This crisis provides Chinese a good opportunity to move away from dollar assets.
Yves,
I’d like to raise 3 points.
Firstly, not being an expert in the Chinese financial world, I’m wondering how close to the government CICC is. Chinese officials have been desperate to try to tamp down expectations of RMB appreciation for at least the past year, if not longer, in order to curb hot money inflows. It wouldn’t be out of the realm of possibility for the officials to lean on friendly firms to start putting out reports that bolster the government’s objectives. I don’t mean to impugn CICC’s independence without evidence, so I’m curious if others have info about just how independent CICC’s report really is.
Secondly, I’m curious as to exactly how China would engineer a depreciation. As others have noted, China has tried mightily to limit appreciation, at enormous costs to its own economy including inflation and asset/investment bubbles. While the unwinding of speculative investment vehicles such as hedge funds in the ongoing credit crunch may ease hot money inflows, that is only a part of China’s currency surplus, which is fundamentally built on its imbalanced trade flows.
To expect China to reverse its currency flow in order to depreciate its currency when in the past few years China has barely been able to limit appreciation to its stated goal of 7%/yr would call for a radical retooling of its economy and/or massive intervention above and beyond its current injurious practices. I don’t see either occurring within such a short time span as predicted by CICC’s report.
Thirdly, while imploding hedge funds may currently be leading to a flight of money out of China, don’t be surprised if all of a sudden, people see RMB appreciation as the next “sure thing”. The commodity bubble has been pricked, and the Treasury bubble is likely close to its peak. Who’s to say a RMB bubble won’t be next…?
I think China’s actions will be more inward focused going forward. They can, should, and will
– enact rural land reform, at least a restoration of pre-1989
– not tie level of healthcare to urban/rural residency
– introduce a national pension program
The last one would have many effects. It could be a branch of the government, or through mutual fund companies (see Mirae‘s success in South Korea with high penalties on withdrawals under 180 days) It would reduce people using the stock exchange as a combination of bank account and gambling venue.
It would boost domestic consumption. It would be reassuring to the enormous elderly population, and ease concerns in general about inflation which has caused many of the protests in recent years.
The Chinese are big fans of their own history, and the party leaders are very aware of all the governments toppled by internal unrest with inflation being the top reason for overthrow. While none of the inward looking suggestions I put forth deal with inflation, they do reduce the cost of living which is after all what matters
One other point to the points above is that there are probably big losses in SAFE’s USD investment portfolio which have not been disclosed and will need to be faced up to. I have heard estimates of 400 bn.
This is logical as there are still vast amounts of subprime losses (based on the IMF figures) which remain unaccounted for.
I suspect that when this get out (and it will probably be leaked rather than an official announcement which will make it worse) some of that hot money may disappear anyway.
Yves,
thanks for this very insightful information. However, I would like to know if you still hold the view that the greenback is going to depreciate long-term and that the treasury bubble is still very much an issue.
Lune, EvilHenryPaulson,
To Lune’s points (which largely addresses EHP’s issues):
First, if China wanted to lower expectations for RMB appreciation to punish or discourage speculators, one would think they’d be talking it up, or having favored sources talk it up in the Chinese press, later to be denied in official circles. For instance, academics known to consult to the government are perfect for plausible deniability (and they, rather than research reports, have in the past been the preferred outlet for trial balloons and early signals). The fact that CICC’s’ call is so isolated isn’t consistent with a strategy to change views.
Second, since the dollar is momentarily rising and imports from China are falling (haven’t checked, but assume the trade deficit with China is contracting), that means a lower level of intervention is needed to achieve the desired outcome.
And specifically regarding hedge funds, it is not easy to buy RMB. The fact of sustained trade surpluses means there is not a lot of currency floating around outside the country (you need sustained deficits to do that). And China has fairly tight controls over its banks and currency exchange. If you read the link I provided above, and other stuff from Pettis and Setser, a lot of the hot money flows were classified as FDI and in other categories because that was how they could get the money in.
Third, you are looking as if the choice is “more inflation versus less inflation” when the officialdom is going to frame it as a choice between two evils: more inflation or more unemployment. We tend to regard as more unemployment as a choice to be avoided until inflation becomes completely intolerable. I see no reason why the Chinese would view their choices any differently, particularly since unemployment tends to hit certain regions and sectors harder, and concentrated groups of unhappy people has greater potential for explosive outcomes that spreading the pain broadly, which inflation would tend to do.
And there is a faction in the government which is keen to halt RMB appreciation, and its influence is growing. From a September post:
The Bank of China buys lots of dollar investments to keep the yuan from rising. However, as we all know, the yuan has been permitted to appreciate somewhat. Note that this means the value of those holdings in local terms has fallen.
However, the central bank has still had to keep buying dollars to keep the yuan from rising rapidly. It is running out of capacity and has to go to the Finance Ministry for a handout.
This is the bizarre bit. The Finance Ministry is mad that the central bank lost money on its dollar investments and wants no more yuan appreciation. This of course commits it to even greater dollar purchases, which guarantees that its eventually currency losses will be all the greater.
And these quote came from a New York Times article cited in the post:
The central bank has been the main advocate within China for a stronger yuan. But it now finds itself increasingly beholden to the finance ministry, which has tended to oppose a stronger yuan. As the yuan slips in value, China’s exports gain an edge over the goods of other countries.
The two bureaucracies have been ferocious rivals….
Victor Shih, a specialist in Chinese central banking at Northwestern University, said that when he visited the People’s Bank of China for a series of meetings this summer, he was surprised by how many officials resented the institution’s losses.
He said the officials blamed the United States and believed the controversial assertions set forth in the book “Currency War,” a Chinese best seller published a year ago. The book suggests that the United States deliberately lured China into buying its securities knowing that they would later plunge in value.
There is more in the article, but you get the drift. The Chinese get upset now if they take losses on their dollar holdings, which is inevitable if they let the RMB rise.
An article today in a NY Times blog on land leasing in China. Supports the idea that it is not new, but contends (admittedly from one extended anecdote, and a claim that the story is far from isolated) that the process is rife with corruption:
http://economix.blogs.nytimes.com/2008/10/16/corruption-in-chinas-countryside/
So peterpaul, agreed that de jure there has been active leasing of land plots for twenty years. In that respect, the transition is not ‘radical.’ The legal standing of these has been, to put it mildly, vague. Furthermore, it has been my impression that such leasing has, in fact, _not_ been spread around to the country as a whole but concentrated in a few test areas where the government could snuff it out quickly if it so chose, specifically in the east, such as in Zhejiang and Anhui. (I would be interested to hear hard evidence to the contrary if it is available.) It is my impression also that lease-bundling has been encouraged in some urban locations to facilitate development.
The real point of impending reforms is to give solid legal standing to sub-leasing ones own lease rights for the long-term. This may have two effects. One the sub-leasor gets a modest but steady cash flow to finance something else they want to do with their life and time which is not tied to the location in which their family was born. They may or may not migrate, but those who do will come moderately better financed rather than incipient shantytown dwellers, something of signicant importance. The other, and really more important issue, is that sub-leasees have the incentive to actively invest and develop the landholding since they have longer term time frames and solid rights to what they create. Now in much of the country, local officials can stick in their oar and palm at any time, at least for a shakedown to look the other way but even worse to try to snatch away developed plots for themselves or their cronies. _Clear title_ is essential for investment. Your father-in-law sounds like an enterprising sort who knows well the ‘lay of the land’ in his district, and has nothing to fear from the local powers that be. That is not the case in many other places. Outright sale of lease rights would be far more radical, with larger systemic effects, not all of them necessarily desirable. I would be more surprised to see this in the near future, but who knows?
On the land-reform issue, I think many have missed the truly critical “innovation” in the upcoming set of reforms. Ever since the Communist Revolution in 1949, rural land has (by law) owned “collectively”. Even though farmers work individual plots of farmland (as well as living in their own homes), they legally don’t own that land.
There has certainly been a variety of commercial activity (including leases and sales) of this land over the last 20 years, but all of this has been “collective”. The anecdotes from the gentleman in Zhejiang above fits in that category. The NY Times blog that Yves links reflects the downside of such an approach, in which local government officials have often become filthy rich by monetizing the “collective” assets of villagers. The new reforms will give land back to individuals.
The only concrete initial policies I’m hearing about refers only to non-agricultural land (ie: residential lots in the countryside). Your average Joe Wang will now be able to “lease” (essentially sell) their ancestral home to real estate development companies, and will then be expected to use that money to move to a small township… doing their part to contribute to the on-going urbanization of China.
Yves,
Appreciate your detailed comments. I’m still of the opinion that of all the possible crisis focal points out there, China’s currency is a non-story. Setser has a blog entry a few days ago, pointing out that China’s reserves continued to grow through Q3, and shows no sign of reversing.
I believe Chinese policy makers remember well the visible hand of speculative hot money from ’97, and this led to numerous obstacles blocking excessive inflows of hot money over the last 4 years. They couldn’t stop them, of course, but they certainly slowed them down. I simply don’t think there’s enough hot money in the Chinese economy to do real damage and force the government’s hands.
CCT said ; I’m still of the opinion that of all the possible crisis focal points out there, China’s currency is a non-story.
I completely agree with this, and a quick look at a chart will show hardly any movement in the exchnage rate compared to current account deficit countries such as Aussie dollar, New Zealand dollar and Turkish Lira (now that really is a bubble in the process of bursting!). Equally though US Treasuries are also not a bubble. Bubble conditions occur when investors hold large long positions. However most investors are short US Treasuries. Take a look at PIMCOs Total return bond fund – not a single US Treasury. Look at failed trades in US repos which are currently running at 4.5 TRILLION. Thats becuase the banks are net short of US Treasuries. Thats a big mistake in my opinion. If you look at Fed custody holdings central banks have been selling US agency paper recently and buying large amounts of US Treasuries. I cant prove that the Chinese are doing the same but it would seem odd for them to be unhappy with losses whilst at the same time stepping up purchases of Fannie and Freddie paper.
CCT, 3:10 AM, it blows me away that you dismiss information because it does not fit your world view. Pettis is on the ground in China. Setser makes exhaustive study of international currency flows. The guy the New York Times interviewed who talked about how unhappy the mid-level Chinese officials are meets with the PBoC regularly. But no, you sitting here with no direct contact with China know better. Amazing.
And the AUD and NZ plunging isn’t a tragedy. They don’t have a lot of dollar denominated debt. Australia had the best growth rate of all advanced economies in the early 2000s and their currency was between 50 and 60 to the greenback.
Now holding the RMB peg right now is a minority scenario. But look at how international trade is plummeting. China is export dependent. You simply cannot rule out the scenario that China will backpeddle on letting the RMB rise to keep more exporters from going bankrupt (and there were a very large number of bankruptcies in certain provinces in the month BEFORE the Olympics). And if they do keep a hard peg to the dollar, that kills US exports which was our best hope of pulling ourself out of a slump.
Your dismissal reminds me a lot of the speeches Timothy Geithner used to give about how wonderful our modern financial system was at distributing risk, how in this best of all possible worlds, really we were all a lot safer. But even in those rosier days, he’d acknowledge if we did have a systemic crisis, it could be much worse than if we lacked all this fancy new risk transfer technology.
He at least considered multiple scenarios. You two have simply dismissed ones you consider low odds. We’ve seen repeatedly that supposed ten sigma events seem to show up once a decade. And this even based on press reports has considerably higher than a ten sigma probability.
And 3:10, we are in a massive Treasury bubble. There is huge demand for dollars to unwind trades, and that is being shifted into Treasuries via all these fancy new facilities here and abroad and dollar swaps. Just like the commodities bubble went far enough long enough to turn lots of people into converts, so too will this bubble. They always go farther and last longer than anyone forecasts, but this too will reverse quickly when it finally blows. There is too much inflation in the offing once the CBs finally get money market and credit mechanisms working. How long that takes is anyone’s guess, but as with past bubbles, the reversal will be sharp.
Nothing is impossible, but it is just not very likely. I am happy to stick to my view that AUD, NZD, TRY are more likely to go down a lot that the RMB which will gain from here against US dollar. Current levels are 0.6757, 0.6090, 1.5264 and 6.8245.
Just for good measure, 10 year Treasuries are at 3.91 and US inflation is 4.9%. Both will fall from here.
Wonderful post and the comments and discussion were most elucidating. I agree that the Chinese will keep their currency low come hell or high water. We have our irrational beliefs (the completely rational economic agent) and the Chinese have their merchantilist beliefs – with human belief systems, no amount of data can refute them.
From the first half of this year it was clear that the Chinese authorities struggled to keep their currency from rising. For this to continue to be true the Chinese economy needs to continue growing. Long term the authorities will spur internal demand, but I think this is unlikely to make a significant impact over the next 12 months. I strongly suspect that demand from western developed economies is dropping and this is unlikely to be sensitive to small price changes (its credit availability not price) . Funding for development from outside china looks to be being withdrawn as the risks of over capacity of factories and the risks of being export driven make investment highly risky. This reduces demand internally for building and will most likely require government to spend some of those reserves that china has to keep things going.
The big news for me this week was that India one of china’s biggest customers has been having problems with mutual funds being withdraw. Inter bank lending rates in India having at one point reached 23 percent according to live mint web site and the credit markets are frozen much as they have been in western economies. Relaxation in some trading rules (Shorting shares, trading in derivatives) point to the Chinese economy struggling more than would appear on the surface at the moment. I would not be surprised if the government has to stamp forcibly on political unrest as a result and its for this reason I suspect the renminbi will experience a short term fall and may be forced to sell dollars to limit its fall.
Lack of information about what is going in china mean almost any action with respect to the renminbi is possible.
What can’t go on will stop. And that applies to the Chinese Wirtschaftswunder (economic miracle) as well. What’s more, what better time than now?
We don’t seem to understand these things very well, we don’t even seem to have gotten the last time round sorted out. I’ve begun reading Kindleberger’s “Great Depression” (I know, there may be other books that are better, but I have to start somewhere), and he makes a lot out of falling commodity prices and global imbalances involving US foreign lending as the setting for what happened at the end of the 1920s.
Isn’t it odd that we have had the same in the past years – falling (commoditised) consumer article prices and global imbalances involving chinese (also japanese etc) lending?
It was the USA as source of the falling prices and global lending that got clobbered last time. Could it be that this time it will be China that will get well and truly clobbered?
Anonymous said…
I am happy to stick to my view that AUD, NZD, TRY are more likely to go down a lot that the RMB which will gain from here against US dollar.
Good call on the Turkish Lira. Got any more tips? Renminbi does seem solid in this environment.