Has anyone thought it likely that China may revalue the yuan upwards? I’ve been thinking along those lines, and I’m wondering what ideas others may have on how to play this. Are there ETFs that hold yuan?
dude they are paying so much for oil that they have a trade deficit. if anything they will continue to devalue the CNY as they have done for the past 10 years.
At some point China will revalue the Yuan upwards. They are currently on a path of gradual band-increasing (IIRC, increments of about 5% per year, which would reach a reasonable level in about 5 years, assuming the USD stays relatively constant, which of course is hardly certain). My take on CNY liberalization is that the Chinese will do it, but only when the benefits for them are pretty clear, which means that they have some kind of foreign policy objective where they get something in exchange for revaluation, or perhaps commodity prices go up so much that they decide that a revaluation will allow them to acquire more, and that the hit to their USD reserves will be worth the benefit of access to more resources. If there is a middle class revolt, allowing the CNY to strengthen is a way to let the middle classes buy more stuff for themselves. It is unlikely to do much for a peasant revolt, although the additional purchasing power might help industry employ more by lowering the cost of foreign inputs, but this would only work for things that are consumed domestically.
starbuk - wouldn’t they pay less for oil if they revalued upwards? bchad - What do you mean by band increasing? I think the two big issues are: - Inflation, they’ve seen what happens in the middle east when people can’t afford food and they’ll be acutely aware of social unrest. Perhaps by not tying it to the USD, inflation will be checked. - What’s going to be the reserve currency in the future? I’m thinking that as China grows, they’ll be less likely to accept the USD as the global medium of exchange and will seek to play a greater role in that area and I think there is a chance that we will move to a basket of currencies rather than the USD alone. If that were to take place, I think China would want to float the yuan. However, as Bchad said, the hit to the reserves would be a big issue in that scenario, unless of course they hold that cash in real assets instead…
China is making efforts to make their currency more available as a world reserve. There was an article on that in the WSJ earlier this week (or maybe late last week). They’ve opened swap lines with Brazil’s central bank, which effectively allows Brazil and China to keep each others’ currencies on reserve. A big issue with CNY as a reserve currency is that it’s an authoritarian government in a country with a history of xenophobia, and if there is unrest, one big card that they can play is “we screw the foreigners to protect you, so keep your mouths shut.” With the USD, clearly there is a move to find other reservable assets, and I think this is one of the main reasons that gold is on a tear. But the USD just has an amazing advantage in terms of market depth. No other country comes close in terms of the availability of reservable currency. They did indicate that they are trying to move to SDRs (special drawing rights) at the IMF, but I really don’t think that there is enough depth there to do anything more than a symbolic move. If China is able to find an alternative to USD, I think they would be very comfortable letting the Yuan float. I think the big thing holding them back is the risk on their present reserves. Indeed, China and the US are kind of screwed together. They really need to disengage from each other a little bit, but the short term costs of doing that will be very large.
"was an article on that in the WSJ earlier this week (or maybe late last week). " Link please, I missed that.
Here’s someone’s PDF of what I remembered: http://www.vis-am.ch/uploads/allegati/Files/China%20speeds%20Yuan%20push.pdf (April 20th, 2011) Some other things that came up in the search: http://online.wsj.com/article/BT-CO-20110426-719214.html?mod=WSJ_latestheadlines http://online.wsj.com/article/BT-CO-20110427-724686.html http://online.wsj.com/article/BT-CO-20110427-724686.html
PTJ has been a big promoter for Yuan appreciation as a better alternative to QE10000 in order to decrease unemployment and spur the economy - and even goes so far as to say it’s a root cause of the situation we find ourselves in today. I’d tend to agree with him (really going out on a limb there huh, ha), though he seems to be more vocal on his view as time progresses and less pragmatic about it - meaning at first he offered it as a view and provided ways to implement that view on markets, though lately seems to be more strongly opinionated on the view and less interested in market implementations. Not sure if that means much of anything though, after all, we haven’t even seen the guy’s birth certificate!
The Yuan will undoubtably head upwards. It is most certainly undervalued at the moment, read an estimate of about roughly 20% undervalued versus the dollor, couple this with inflation pressures, the Chinese governemnt is smart enough to know that tackling inflation with interest rates will have a knock-on effect on its housing market and the affordability of housing for its poorer residents, which still make up a vast amount of the population, so instead of tackling inflation with interest rates why not use the more politically smart move and just gradualy appreciate the yuan instead, unless they beleive the housing market itself is at risk of overheating, in that case interest rates may be a better move, which of course they already have done. Also they are under tremendous pressure worldwide to value the currency upwards and help reduce ‘global imbalances’ and not just from the US. As for the Yuan being a reserve currency, maybe in the very very very longterm, but the fact remains that the Chinese goverment is no-where near a fair and democratic political system, and I think it will be a long time before developed nations realy have the confidence never mind the ability to use the Yuan as a reserve. Also lets not forget the other ‘boomer’ Singapore which has a currency that is considered even more undervalued.
If you look at the 4-5% premium of CNH over CNY, the market clearly baked in an upward revaluation of the Yuan in the foreseeable future. A revaluation will help China in the way that it will slow the hot money inflow into China and contain the inflation. What China is doing now is to print more Yuan to obsorb all those foreign hot money, which drives up inflation, property price, etc. Like the US, China will only do something like that when it’s in its best interest, that’s its economy and labor market is less export dependent than it’s currently is. A bigger question for the US is whether an yuan appreciation benefit (or hurt) US more. Opposite to many politicians’ claim, a stronger yuan may not bring jobs back home for two main reasons. 1) US manufacturers will go to other lower cost countries. No brainer. 2) more importantly, US company invest and hire in their target markets, which is increasingly China/Asia/Bric, etc. A stronger or weaker yuan won’t change that fact. Furthermore, given so much stuff are made in China now, a stronger yuan will “import” more inflation into the US, on top of the killer gas price already. The have-nots will get hurt more by these than the haves, obviously. So in a way, the US politicians hurt the group they want to protect by way of unintended consequences. That said, the bottom line is a stronger yuan is good for China in the long run. Yuan as a reserve currency? Not in any of posters’ life time.
Lets not forget that if Chinese interest rates go up, then the US government debt burden will also go up as a result, because who holds a sh*tload of Chinese governemnt debt…
pedpenny Wrote: ------------------------------------------------------- > Lets not forget that if Chinese interest rates go > up, then the US government debt burden will also > go up as a result, because who holds a sh*tload of > Chinese governemnt debt… uh???
^^Yes I know!!! That was pretty stupid, ah well, must remember to not make comments when im half asleep Could be worse, I could be arguing if Obama was from Kenya or not
I meant strengthen the CNY so that oil is cheaper. it is hard to predict anything else beyond that. rising interest rates have been happening and will probably continue to do so for a few years until inflation cools.
This is disappointing. I was hoping for a 20+% upward revaluation so I could make a huge return. I guess I’m not George Soros. Anyways, it could have other macroeconomic affects, like perhaps increasing US exports to China (Nike etc.), or US manufacturers shifting to suppliers from Vietnam or other nations…
If you want a 20+% return, buy the US dollar and sell the Canadian dollar. I don’t think the current exchange rate is sustainable long-term. When commodities will take a pause or retrace, the canadian dollar will follow.
Where do you get 20% off of that? You just think it is going to go back to the historical average? Even though the US had a financial crisis and the Canucks didn’t? All that debt being put onto the public balance sheet and there is no long term consequence to the exchange rate? The trade may make a profit, but I don’t see how you get 20%+ out of it without massive leverage (and accompanying risk).
bchadwick Wrote: ------------------------------------------------------- > Where do you get 20% off of that? You just think > it is going to go back to the historical average? > Even though the US had a financial crisis and the > Canucks didn’t? All that debt being put onto the > public balance sheet and there is no long term > consequence to the exchange rate? > > The trade may make a profit, but I don’t see how > you get 20%+ out of it without massive leverage > (and accompanying risk). It doesn’t have to go no where near the historical average to get at least a 15% return. Many economists find 0.90 USD per 1 CAD (which is still well above the historical average) to be a “sustainable” rate. Canada is an exporting country and the high value of the dollar has been a major concern for the Bank of Canada (it has mentioned it at every meeting). Even during the current election campaign (vote is on Monday) we are hearing several politicians voice their concern about the strong dollar. Of course they can’t really do anything to stop market forces…but there is political pressure on the Bank of Canada to not raise rates (not only to keep the currency from continuing to rise but mainly to keep mortgage rates low). Yes, the central bank is independent but they don’t live in a bubble. The NDP (left wing party) is expected to form the opposition in Parliement on Monday, and there have been rumors that if they formed the government (unlikely) they will meddle in the affairs of the central bank to keep rates low. Although their leader has backtracked on the issue, there will still be pressure among the base of the party for him to interfere. http://www.cbc.ca/m/touch/news/story/2011/04/29/cv-electionl-layton-rates.html We are currently at 1.06 USD per 1 CAD and wouldn’t be surprised if it reaches 1.10 USD per 1 CAD by the end of the year. But as soon as “extended period” is removed from the Fed’s statement and the surge in commodities start slowing as a result, I wouldn’t be surprised to see a correction (15 - 20%). Canada has its issues too: financially and especially politically. On the financial front, deficits expected to last for another 4 years at least, the lack of diversification of its economy (heavy reliance on commodities, which is cyclical) and heavy household debt which is worrisome to the Governor of the Bank of Canada: http://www.bloomberg.com/news/2010-12-14/canadians-with-more-debt-than-u-s-spark-policy-makers-warning.html Not to mention productivity levels that are severely lagging the United States’. Politically, Canada has elected 3 minority governments in a row. The election result on Monday is expected to be another minority government. That’s 4 elections in 7 years. And who knows how long the new minority government will last. With politicians constantly campaigning, tough decisions are not being made. It’s a standstill in Parliement on many important issues, including the budget. So although the US has its problems, it’s not that rosy up north.