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The Chinese Yuan is Begging for a Home Run
Any doubts that China’s Yuan is a huge screaming buy should have been dispelled last week when news came out that it had displaced Germany as the world’s largest exporter.
The Middle Kingdom shipped $1.2 trillion in goods in 2009, compared to only $1.1 trillion for Deutschland. The US has not held the top spot since 2003. China’s surging exports of electrical machinery, power generation equipment, clothes, and steel were a major contributor. German exports were mired down by lackluster economic recovery in the EC, which has also been a major factor behind the weak euro. Sales of luxury Mercedes and BMW cars, machinery, and chemicals have plummeted.
Two back to back interest rate rises for the Yuan, and a snugging of bank reserve requirements to 16% by the People’s Bank of China, have stiffened the backbone of the Middle Kingdom’s currency even further. That is the price of allowing the Federal Reserve to set China’s monetary policy via a fixed Yuan exchange rate. Is it possible that Obama’s stimulus program is reviving China’s economy more than our own?
The last really big currency realignment was a series of devaluations that took the Yuan down from a high of 1.50 to the dollar in 1980. By the mid nineties it had depreciated by 84%. The goal was to make exports more competitive. The Chinese succeeded beyond their wildest dreams.
There is absolutely no way that the fixed rate regime can continue. There are only two possible outcomes. An artificially low Yuan has to eventually cause the country’s inflation rate to explode. Or a global economic recovery causes Chinese exports to balloon to politically intolerable levels. Either case forces a revaluation.
Of course timing is everything. It’s tough to know how many sticks it takes to break a camel’s back. Talk to senior officials at the People’s Bank of China, and they’ll tell you they still need a weak currency to develop their impoverished economy. Per capita income is still at only $5,000, a tenth of that of the US. But that is up a lot from a mere $100 in 1978.
Talk to senior US Treasury officials, and they’ll tell you they are amazed that the Chinese peg has lasted this long. How many exports will it take to break it? $1.5 trillion, $2 trillion, $2.5 trillion? It’s anyone’s guess.
One thing is certain. A free floating Yuan would be at least 50% higher than it is today, and possibly 100%. In fact, the desire to prevent foreign hedge funds from making a killing in the market is a not a small element in Beijing’s thinking.
The Chinese Central bank governor, Zhou Xiaochuan, says he won’t entertain a revaluation for the foreseeable future. The Americans say they need it tomorrow. To me that means about six months. Buy the Yuan ETF, the (CYB). Just think of it as an ETF with an attached lottery ticket. If the Chinese continue to stonewall, you will get the token 2.2% annual revaluation the swaps have been discounting. Since the chance of the Chinese devaluing is nil, that beats the hell out of the zero interest rates you now get with T-bills.
If they cave, then you could be in for a home run.
For more iconoclastic and out of consensus analysis, you can always visit me at www.madhedgefundtrader.com , where the conventional wisdom is mercilessly flailed and tortured daily, or listen to me on Hedge Fund Radio at http://www.madhedgefundtrader.biz/ .
China is surrounded by competitors and potential adversaries, especially Russia and India and can be cutoff by the US Navy. They have little in the way of internal consumption for the size of production . They export or die - 1.5 men for every women makes idleness a real problem. They are more likely to devalue if the $US continues to rise or defacto they could start selling to drive to drive $US down and maintain their peg. China is more like the old Soviet Union than the new world superpower. A trade war with the west means losses of Chinese jobs faster than losses of US jobs...and that is a prescription for turmoil. If it looks like it is going to happen the Chinese will manufacture and incident to try to rally the populations against the foreigners - they in effect are still a paper tiger.
Stop thinking of China as a rationally driven economy. It is a government trying to maintain control over a teeming population that has 1.5 men for each woman. It is surrounded by competitors and has potentially hostile borders with Russia and India and hemmed in by the US Navy that cut its lines of transportation and communication. China's economy cannot survive for long without exports to the West and especially the US. They need to export, a devaluation is more likely if the $US continues to rise.
you believe this shit? i don't believe this shit.....
Maybe Zero Hedge should start screening these comments.
I have some questions on the comment above:
1) If the swaps are implying a -2.2% annual yield, the why has the CYB ETF been unchanged for six months. Is the management of this ETF able to manufacture their own money and give it to the investors?
2) If you can earn a 2.5% yield in a domestic yuan bank account, but the swaps are implying a negative 2.2% return, then who gets to keep this 4.8% difference? the Chinese government?
I'm waiting
Targetdemo on Feb 15, 12:53 PM said: from clusterstock comment?
Someone needs to screen this stuff before posting... The trade implementation in the last paragraph:
"If the Chinese continue to stonewall, you will get the token 2.2% annual revaluation the swaps have been discounting. Since the chance of the Chinese devaluing is nil, that beats the hell out of the zero interest rates you now get with T-bills."
States the 2.2% revaluation backwards. If you own the ETF you PAY the 2.2% that is built into the currency swaps. The market is already discounting a chance of revaluation, so CNY in the forward market is more expensive than in the spot market. Do you really think you are going to get paid 2.2% to be long CNY at the current spot rate? So, going long the ETF means that you are willing to pay 2.2% away in the hopes that the revaluation is soon enough / large enough to offset that. I don't have any particular opinion on that, but it is a very different trade than the post is attempting to suggest.
As Ed Norton used to say (back in the 50's on the Honeymooners), "If it floats, sink it."
What would be their incentive to float the yuan? It would automatically increase the price of their exports and reduce some of the advantages they have. I think they would have to have some catastrophe before that would happen. What leverage does the world have that could force them, we are reliant on their low cost exports to entice the consumer.
does (CYB) mean "cover your butt", or ? ... :^)
tnx for the read.
As free Americans --- let us embrace the Chinese Yuan
Make it our currency ----- by popular choice -- free to choose and all of that
Forget about the Fed, GS, JPM, the Central Banks of Europe-Jekyll Island, Let them have their own currency -- lets us leave them. Let us make the Yuan a dual currency by popular choice
Then our govenment will not be able to inflate the Yuan with pork barrell, free health care, unlimited pensions, bloated government employment, and other programs.
We can still pay taxes in $$$ but save & exchange goods and buy gold in Yuan
The dollar is pegged to the Yuan, as well as the Yuan being pegged to the dollar, ergo, China determines American trade policy, not the United States.
This means the U.S. government is impotent. China tells Obama- don't tell us what to do with our currency we might loose "face". What China needs is a slap in the face !!
How about giving China a kick in the head. Would that be loosing face.
It's American jobs that this country is loosing, and not Chinese "face" being lost.
For me personally, I would feel better knowing all our politicians are on the take, as opposed to being outright stupid.
At least, if they are on the take, America has a chance of buying political influence.
>For me personally, I would feel better knowing all our politicians are on the take, as opposed to being outright stupid.
Why?
If they are just stupid, there is a chance that they will be replaced with the less stupid.
If they are on the take, and you can't afford to buy them, your situation will never improve.
China doesn't need a kick in the head from the US. It is the US that has been kicked in the head by Wall St. So long as people fail to understand the source of the problem, there is not much chance of fixing it.
It is quite sad when an exceedingly simplistic blame the foreigner approach is suggested. Wasn't it blame the bored Saudi youths on 9/11 that led to American people being dragged into two wars? For crying out loud, it would seem that American geography skills are so bad that we even started those wars in the wrong countries.
Hmmm. I do find it sad that, despite the attempt at grasping geopolitical economics...
One does not know the difference between 'losing' and 'loosing'.
Christ we apparently do need those manufacturing jobs back as 'we' can't even look beyond our spellcheck.
Sad.
I dont believe it. the chinese are on the verge of an economic collapse from over investment in real estate and excessive purchases of commodities they no longer need. other analysts are predicting a chance of Yuan collapse. Maybe this is just a case of Goldman suckering the masses into positions to provide the funds for them to take when the Yuan collapses. Otherwise, why would they tell the world the Yuan is going to go up if they really believed it themselves?
Why does everybody keep expecting China to collapse?
From a mercantilist perspective, they are doing great.
Yes, China has spent a bunch of money on empty buildings.
Have you noticed that the US has spent a bunch of money blowing up other countries?
Until the US stops being run for the benefit of the vampire squid and its ilk, the situation in the US will not improve.
A skeptical person might wonder if all this pointing at problems in Greece, China and elsewhere is to distract Americans from the problems right here at home.
Imagine that China stops selling anything to America. China can keep all those unemployed factory workers busy by having them make things for one another. So long as China merely converts its sales to the US into USD treasuries, the two options are identical.
Imagine that China stops buying USD treasuries. The consequences to America are devasting. (Perhaps China already has done that and Treserve is merely pretending to buy what it is pretending to sell.)
So China is a centrally-planned economy that has some massive inefficiencies What the heck does everybody think the US is if not centrally-planned? Treserve is making the capital allocation decisions. Treserve has ended free markets.
The difference between the US and China is that the US needs China and China does not need the US.
In order to become a functioning economy (never mind a republic), Goldman Sachs et al must be disbanded.
Goldman. Sucker. Ha ha.
the real-estate excess is probably not-so-good, but the commodity surplus... what would you rather have sitting around, USD or copper? i'd go with copper if i had a billion or so people to make wire and electrify the country/third-world.
while i still see deflationary pressures on the world market, i see the commodities they've bought into as a hedge more than a liability. as the world fiat currencies inflate in unison, real stuff will at least hold its own.
Look at money aggregates. Where exactly do you see world fiat currencies inflating in unison? China is a big condom blown with farts. When it pops you'd better stay away.
What is a good ETF for German corperations?
Seems like it should but it hasn't happend yet. When? We don't know.
Good read:
http://www.marketwatch.com/story/time-for-fed-to-....
it's cetin...
don't click.