Friday, November 13, 2009

Possible Chinese re-valuation: Why now?

Ahead of Obama’s visit to China, the markets have been abuzz with a statement from the People's Bank of China that it will consider “changes in international capital flows and the trends of major currencies”. This is a departure from the broken record mantra of keeping its currency “basically stable at a reasonable and balanced level”. These statements have created speculation that China is ready to either revalue the RMB upwards or allow it to float.

Analysts have said for years that China will start to move when it is ready. So why now?

I can think of several reasons that, put together, might have prompted this change in attitude, as evidenced by several headlines that have crossed my desk:
  • China is preparing the ground for the RMB as a regional currency, which lowers the demand for the US Dollar as a medium of exchange for world trade (hat tip Ron Liebis). There is the news that HSBC is facilitating trade using the RMB as a medium of exchange.

  • China wants to continue to inflate, at least in the short term. When you read through the rhetoric, China is to continue its loose monetary policy despite its high growth. Isn’t loose monetary policy under these conditions inflationary and would tend to devalue your own currency?

  • Chinese culture is big on "face". Making this statement ahead of Obama's visit gives the president "face" and shows for US consumption that he is making progress with the Chinese on the currency issue. They are more or less ready to move in any case so making these statements now cost them nothing.

What is not a reason? Tim Geithner’s statement that “I believe deeply that it’s very important to the United States, to the economic health of the United States, that we maintain a strong dollar.”

Watch the wheels within the wheels of Chinese policy.

3 comments:

Andy Dong said...

China may consider to revalue RMB to some extent like what they did in 2005-2007.

Floating of currency is too much of a change for China and will not happen this soon. I am not sure if it will happen over the next 10 years.

Floating of RMB will have massive implication not just for the chinese economy but more importantly for the global economy.

martin said...

I wondered if you've seen this report on the Chinese economy:

http://www.pivotcapital.com/reports/Chinas_Investment_Boom_the_Great_Leap_into_the_Unknown.pdf

Mike said...

I think we are right near a multi-year top in many stock markets around the world in part because of all of the misstepts by governments to try to manipulate the business cycle and disrupt the free market. But fortunately there are still some individual names I like going forward cuz of what the govt is doing to try to help the economy. One of which is Golden Star Resources, ticker GSS, a junior gold mining company which reported earnings recently and whose stock has done really well this year. Here is a discussion on their earnings and some thoughts on Golden Star Resources . I wouldn't necessarily step in and buy the stock today, but I would definitely would on a 5-10% pullback. I believe that the macroeconomic situation is going to remain extremely positive for gold over the next several years because of the deflationary threats of the credit crisis and the inflationary policies of the Federal Reserve in trying to combat these issues.