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Friday January 28, 2005 - 13:31:41 GMT
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Chinese revaluation - Not!


“All animals are equal but some animals are more equal than others.”

George Orwell, Animal Farm

FX Trading

Another day of drivel from the power elites assembled at Davos who seem to believe it is they who have cornered the high ground of “compassion.”

“One day Solomon decided to humble Benaiah ben Yehoyada, his most trusted minister. He said to him, ‘Benaiah, there is a certain ring that I want you to bring to me. I wish to wear it for Sukkot which gives you six months to find it.’

"’If it exists anywhere on earth, your majesty,’ replied Benaiah, ‘I will find it and bring it to you, but what makes the ring so special?’

“‘It has magic powers,’ answered the king. ‘If a happy man looks at it, he becomes sad, and if a sad man looks at it, he becomes happy.’ Solomon knew that no such ring existed in the world, but he wished to give his minister a little taste of humility.

…“To everyone's surprise, Benaiah held up a small gold ring and declared, ‘Here it is, your majesty!’ As soon as Solomon read the inscription, the smile vanished from his face. The jeweler had written three Hebrew letters on the gold band: _gimel, zayin, yud_, which began the words ‘_Gam zeh ya'avor_’ – ‘This too shall pass.’

“At that moment Solomon realized that all his wisdom and fabulous wealth and tremendous power were but fleeting things, for one day he would be nothing but dust.”


This from the Davos wires yesterday:

DAVOS, Switzerland (Dow Jones)--Now is the time for the People's Bank Of China to revalue the yuan, Yu Yongding, a member of the bank's monetary policy committee said Thursday.

"Now is the time to revalue," Yu told journalists at the World Economic Forum after a dinner discussion on the dollar's weakness. "We need more flexibility. That mean's revaluation."

This from the Chinese today who seem to have bigger fish to fry:

(Bloomberg 27 Jan): The yen extended declines after a People's Bank of China official said remarks yesterday by a central bank adviser to Reuters that it is time to revalue the yuan don't reflect the government's view.

And the bigger fish taking attention of those fun loving party officials from “revaluation” (a friend sent me this excerpt from Stratfor:

“…China is creating a more precarious situation for itself by forestalling action to put the brakes on its economy. Overinvestment has created bubbles throughout the Chinese economy. The longer China waits to slow its economy, the larger these bubbles will become, and the louder the sucking sound will be when they burst.

“The property market offers an ideal illustration of the size of the bubbles in China's economy. Property firm CB Richard Ellis, in a recent survey of prime office real estate throughout world, listed two Shanghai districts and Beijing in the top 50 most expensive areas in the world. The problem for China is not high prices, but occupancy levels in these districts that are as low as 70 percent. With overinvestment in sectors such as steel and cement driven largely by the need to employ migrants moving en masse from rural to urban areas behind this excess capacity, this is a classic bubble scenario.

“If a demand shock should hit the property market, such as one that would be caused by the departure of a multitude of foreign firms, occupancy rates would plunge, and the resulting oversupply and reduced demand would lead to a collapse in prices. The property bubble in China today is similar to that which existed in Japan in the 1980s. When demand collapsed in Japan in the early 1990s, property prices fell through the floor, and the Japanese economy -- and property prices -- have yet to recover. China currently is following in Japan's footsteps, and the sustained deflation that Japan continues to be mired in grows more likely in China with each day that passes without greater economic intervention efforts.”

And what has seemed to go unnoticed this week was this fine piece in the Economist magazine, dated 20 Jan 05, highlighting some excellent analysis by HSBC chief economist, Stephen King:

“In a new paper, ‘To Be a Rock and Not to Roll’, Stephen King, the chief economist of HSBC bank, exposes several myths behind the conventional arguments for a revaluation of the yuan. The first is that China's large and growing trade surplus with America proves that the yuan is undervalued. China's surplus with America is offset by a deficit with other Asian countries (see left-hand chart), from which it imports capital equipment and components. As a result, China's overall trade surplus was a modest $32 billion last year, smaller than in the late 1990s and peanuts compared with America's trade deficit of over $600 billion. Nor does the extraordinarily rapid growth in Chinese exports prove that its currency is too cheap: imports have also been rising rapidly.

“…Much of the increase in reserves reflects inflows of short-term capital, from investors taking advantage of higher interest rates in China or speculating on a revaluation. In the long term, if China scrapped its controls on capital outflows, the yuan might well fall as Chinese households diversified into foreign assets.

“…on a longer view the Chinese currency looks less cheap. Between 1994 and 2001, it gained 30%, dragged up by a rising dollar (see right-hand chart). Those who accuse the Chinese of pursuing a cheap-yuan policy conveniently forget that during the East Asian crisis China let pass the chance to devalue its currency in line with most of its neighbours.”

Drum roll please for my favorite tidbit from Mr. King’s excellent piece:

“Perhaps the biggest myth of all, says Mr King, is that the yuan's value is the only stumbling block to reducing America's current-account deficit. China accounts for less than 10% of America's total trade so a 10% revaluation of the yuan—as much as might be reasonably expected—would reduce the dollar's trade-weighted value by only 1%.”

And there it is again! The newly emerging rationale—a falling dollar is not the cure for the current account deficit.

This idea of course doesn’t sit well with a whole segment of dollar haters ranging from the sycophants’ favorite financial deity, Mr. Warren Buffett, to the Keynesian number crunching crowd at the Institute for International Economics, and to the hard money nuts at the Ludwig von Mises Institute (I admit a fondness for the hard money nuts). But, there it is nonetheless.

Take care. And enjoy the weekend!

Jack Crooks.


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