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Goldman on the Yuan - What Do They Know?
In my yearend projections for 2010 I said (among other things) the following:
-China will surprise us all and revalue the Yuan by 10%. The currency will still be undervalued.
On Monday morning Bloomberg has a story out quoting Goldman’s Chief European Economist as saying:
Feb. 15 (Bloomberg) -- Goldman Sachs Group Inc. Chief Economist
Jim O’Neilll said China may be poised to let its currency strengthen as
much as 5 percent to slow the world’s fastest growing major economy.
I doubt that Mr. O’Neill is making a guess here. I think he may have some real insight on this. When he says this, I listen:
“I have a strong opinion that they’re close to moving the exchange rate,”
Say this story is true and in the not too distant future China will
adjust its currency against the dollar by a reasonably significant
amount. Assume that they move by 5%. What might this mean in the scheme
of things? What are the market implications, if any? Just some thoughts.
-If China does do something significant, it is another sign that should
not be avoided. Something is up with China. They are changing
direction. A currency move this week followed by the monetary moves
last week is a clear indication that things have heated up, and they
don’t like it. The two steps (assumes currency reval.) would prove that
Chanos etal. were right all along. There is a bubble.
-If you were China Inc. and you owned the IOU’s behind a monster amount
of empty buildings (and cities) the last thing you would do is to
strengthen your currency and tighten monetary policy. But if the
arguments in favor of reversing stimulus outweigh the consequences of
extending fast money policies then it is not hard to predict that those
empty buildings will remain so for a while to come. There would appear
to be some urgency to the Chinese steps, should they occur.
-Should this happen it would come at a very inconvenient time. China’s
currency is tied to the dollar. The dollar his risen against the Euro
by 10% in the last two months. Therefore China’s currency has risen by
the same amount against the Euro Zone. That is a big market for China’s
exports. If they revalue against the dollar by 5% and the dollar stays
where it is they will have taken a 15% hit on the terms of trade in
just 60 days. If I were China I would be putting out the story, “Our currency is up 10% versus half the world. Stop yapping at us to make it higher still”. So that makes the timing of this (should GS be correct) very suspicious in my mind.
-All else being equal I would rate this a win-win for the Euro Zone and
Brazil (again), a win-lose for the USA and a lose-lose for China. For
the US it might be of some benefit to the big exporters, but I doubt
it. Any improvement on pricing will be offset by a reduction in demand.
For all of those Wal-Mart and Home Depot shoppers beware. Prices are
going up.
The market outlook on this is murky for me. There are some checks and
balances to this that could in theory bring some stability. Everyone
has been leaning on the Chinese to hike their currency. So if they were
to do it the spin would be, “Hey! Here’s some Good News!” I don’t see it that way.
-Last week the market tanked on the news that China was moving on
reserves. This is no different. So if it was bad last week. It will be
bad this week too.
-Should this happen it raises a big question about the HK dollar.
Logically that would have to be re-pegged as well. Should that not take
place I would expect a mega move into the HK$. I can’t imagine that the
Central Bank will accommodate that.
The money flow to Hong Kong has been big and steady for some time. The
reserves were $206B as of 12/31/2009. Should there be an adjustment in
the HK$ rate there would be some very big overnight profits. At some
point thereafter the reserve flow would reverse to more normal levels.
Say 50% or $100b. That just means there is one less buyer of US
Treasury bills at the next auction. Most of the hot money that went to
HK was borrowed, so when the short-term flows are reversed the margin
debt is paid down. There is no new or alternate buyer of those Tbills.
-China was supposed be a global engine for growth. Whatever your
expectations were on that score a week ago you must revise them down
today. A year ago there was all the talk of green shoots. There were
many of them. China tightening its belt at this time and at this pace
is a brown patch. In Europe there are dead tumbleweeds blowing around.
These things do not make for an improving growth story.
-Using the wisdom of purchasing power parity an argument could be made
that the Euro would be a tad undervalued should the Chinese move. I
don’t see that happening either. Much to the chagrin of the Chinese the
dollar could go right on rising. To hell with purchasing power parity.
-If you read the Chinese steps as deflationary, it has to be bearish
for the commodities. They have all been backing up. This could cause
that to continue.
-Gold could be interesting. Say the thoughts on the dollar were right
and we move toward 1.30. Say the commodity markets followed that lead.
That would imply that gold should move lower in sympathy. I would watch
that one. These things that may be coming are on the side of the shelf
that is marked: DESTABILIZING. I am not sure if this will come into the
gold equation at this time. It will soon enough.
-In this environment the TLT is not the place to be. Not yet.
-On paper this could mean that China has less exports and more imports.
Should that be the case their reserves will stop growing. Who is it
that is going to be buying all of the paper that is being created by
all of the debtors in 2010? At the moment I am having trouble of
thinking of any ‘size’ buyers. Possibly Ben B will have to add some
more demand to meet the supply. That would be very big tumbleweed.
The GS report got me to write these thoughts. This all just blue-sky thinking. Probably nothing will come of it. I hope not.
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and a few snobs
I disagree. This article is speculating on something that could happen in the near future. It's hard to say what the effect would be but I wouldn't call a lack of speculation a sign of a lack of sophistication.
This is not a new story, this is something that has been discussed for some time.
good for TBT, TBF.
Bad for UST, MBS.
Thanks for the head's up.....
Good to see the various thoughts. Thanks!
I believe China is first and foremost wedded
to Mercantilism and the Mercantilist cannot
do anything that imperils their market share.
How can they let the yuan appreciate?
On the other hand if there is an internal
revolution in Chinese thinking such that
they are ready to abandon Mercantilism
for "something else" then this is a much
more interesting and fundamental change.
The "something else" may be a swing back toward the Chi.Com.ism some Chinese see as their rightful destiny. Remember Korea? There are most definitely Rahm.bo types in the Chinese.gov who subscribe to the, "Never waste a good crisis," school of thought.
Honestly, does anyone expect that China will ever have a better opportunity than now to take what they want by force?
1) Strong balance sheet (war is expensive).
2) Surplus of young single males.
3) The greatest war-machine-manufacturing capability ever to exist on the planet (Got steel and forges bitches?)
4) A Nobel Peace Prize winner in the White House
5) Most of number 4 above's warriors sitting in a cold and open land-locked desert right nextdoor to China looking for one rich Arab al-Jazeera video star, not expecting or prepared for 100's of 1,000's of number 2+3 above to come walking across the street.
Just sayin'
> 2) Surplus of young single males.
This is an agrument for war.
However, perhaps you can list wars and invasions started by the Chinese in the last few centuries. Yes, Tibet. And what else?
I don't think the Chinese leadership is stupid enough to get involved in starting wars. As America is starting to understand, wars are extremely destructive.
Surely much of the world understands that Afghanistan and Iraq are being used to bleed America.
As America is starting to understand, wars are extremely destructive.
Huh What ?
The greatest percentage of Americans know wars are expensive. But... Chief Soap Salesman-Dubya did not. After all when ya got ta take yer shoes and socks off to start countin them big numbers... and a one and a two, aw geez this is hard work Ma....
I wrote "destructive" not "expensive".
For most of the baby bush era, most Americans didn't really see war as all that destructive or expensive. bush wouldn't have been re-elected in '04 if they had.
With no draft, war was for those without any other economic options or with a very misguided sense of patriotism (haliburton and exxon are not liberty or defense of country).
Not gonna happen. China is obsessed with building walls to keep foreigners out. I see no evidence that they want to be an expansionist power. In fact they seem quite happy to live under the auspices of the PAX Americana. That leaves the increasingly restless Chinese people as the only thing the leadership must worry about.
"That leaves the increasingly restless Chinese people as the only thing the leadership must worry about".
Most of the people in China live in poverty, the stimulus induced growth benefits just a small percentage of the population. Food prices are higher as a result of the growth in money supply, the hungry masses are getting the wrong end of the stick. China's customers are cutting back on spending, the chinese people won't pick up the slack.
One of these days China will be in recession, when they attach the "R" word to the chinese story it might move some markets.
Am confused by your statements. Are you suggesting war between nuclear states which is not an option that we humans can afford. The only wars that can take place are like the US on Iraq and Afghanistan (the Great Game).
Do the Chinese know that? You may want to send them a rule book.
Disclosure: Long Sino Pb miners.
I concede that all countries appear to be ruled by dunces. But, even they would know to avoid some confrontations.
Else, we are truly screwed!
I think the Chinese pegged their currency to ensure that the US does not exclusively enjoy the benefits of reserve currency status -- they want to equalize the playing field by ensuring that the US also feels some pain by way of constant trade deficits resulting in job losses. The only way the Chinese can rationalize the US reserve currency based trading system is if they can ensure massive job creation by purchasing commodities/raw materials from commodity rich countries and processing and exporting the finished goods to the US.
Against the US, one cannot call their approach Mercantilist but their approach against the rest of the world may be termed Mercantilist...
Much news has been made about China's empty cities and excessive real estate development (what else do you expect from a centrally planned economy--Bernanke couldn't do better).
However, China's recent infrastructure investments, especially dams and high speed rail, might be seen as 2010 version of FDR (Hoover dam, etc) and the interstate highway system in the US. Both of these investments were beneficial to the US.
China might be taking steps to grow a middle class. From China's perspective this is a far better choice than being the sweatshop for the US and Europe.
As the US economic crisis is destined to grow worse, it only makes sense for China to separate its currency from the USD. China has been doing this for sometime, with earlier steps including setting up swap arrangements with Brazil and other countries.
If you were to ask the American people, should we rebuild our infrastructure or ensure the welfare of the predatory banking class that brought us our current predicament, what do you think the answer would be?
Here's a suggestion. Stop thinking about the Chinese as the newest version of Americans. Ask yourself what other models the Chinese might adopt. As an extreme, ask yourself what would happen in the Chinese decided to behave like the Swiss?
While on that idea, ask yourself how much better the world would be if the US government would start behaving like the Swiss government.
I'd like to see that. George Washington thought we should be like the Swiss. How dumb do you have to be not to want to be like the Swiss?