Tuesday May 10, 2005 - 10:57:48 GMT
Share This Story
Black Swan Capital - www.blackswantrading.com
More to "revaluation" than meets the eye
“I interpret financial markets as a historical process. I believe my interpretation also has some relevance to history at large—by which I mean not only the history of the human race, but all forms of human interaction. People act on the basis of imperfect understanding and their interaction with each other is reflexive.”
George Soros, The Crisis of Global Capitalism
You have to wonder what the politicos are thinking. Let’s say you own a cabinet making shop. You pay your workers $0.40 per hour to build cabinets. I own a competing shop down the block, and I pay my workers $6.00 per hour to do the same job. But the local politician says that it’s unfair competition for you to pay your workers just $0.40 per hour. So, he says in order to make it fair, you should raise your workers salaries by at least 40%. So, you relent and pay them $0.56 per hour. Now, the local politician feels good and can tell his constituents he just leveled the playing field—no more unfair competition on his watch. Does this sound familiar?
How on earth is a Chinese revaluation of 20% or even 40% [and it’s highly unlikely we see a revaluation of that magnitude, if we see one at all] going to level the playing field in terms of trade? I am no economist, but on the outside looking in, those numbers just don’t add up to much. Yet the politicos would have us believe it to be so.
But what is interesting is that a revaluation of that size could change the terms of trade for China vis-à-vis its other slave labor nation competitors.
This is from a piece by Stephen Jen, at Morgan Stanley:
“I believe the RMB is modestly under-valued both in index terms and against the USD. Moreover, the popular guesstimates in the 40% range are too high. I also doubt revaluation will contribute to normalisation of global imbalances. Global imbalances reflect disparate savings-investment (S-I) imbalances in the world, and the process of globalisation, not exchange rates. Previously, I have stressed the low price elasticities of trade demand for the US, and the price substitutability of goods produced in China and other emerging economies. If an RMB revaluation shifts production from China to other not-so-low-cost emerging markets, the US C/A deficit could deteriorate further!” [My emphasis]
Can you just imagine it! The law of unintended consequences kicking into play when politicians rear up on their hind legs to solve a problem!
Mr. Jen doesn’t believe China has manipulated its currency for trade gains—he believes the huge foreign exchange reserve balance is because of hot money pouring into China.
And I believe most people would agree that much of the hot money flowing to China is precisely because the people on the other end of the flow believe China’s currency is 20-40% undervalued and they will see a revaluation of that magnitude. But, ask yourself this, what happens if China decides to wait another year or two before revaluing? Or what if it does the deed and it turns out the much awaited revaluation is miniscule relative to expectations? I would imagine that the hot money people would be disappointed.
Mr. Jen cites an IMF study: “They [IMF] found that close to 75% of the change in capital flows came from categories of flows sensitive to market expectations on the future trend of USD/RMB, rather than the underlying fundamentals, i.e., without ‘speculative’ inflows, China’s reserves would have been US$455 billion at end-2004, rather than US$609 billion.” [My emphasis]
That’s $154 billion in hot money flow. If that goes the other way—I would imagine it would have a significant negative impact on a Chinese economy [global growth engine #2 of 2 besides the US] in need of funds to keep the music playing—and it would probably be a little boost for the buck!
So, as we’ve been told before: Be careful what you wish for, it may come true.
Forex Trading News
Daily Forex Market News
Forex news reports can be found on the forex research
headlines page below. Here you will find real-time forex market news reports
provided by respected contributors of currency trading information. Daily forex
market news, weekly forex research and monthly forex news features can be found
Real-time forex market news reports and features providing
other currency trading information can be accessed by clicking on any of the
headlines below. At the top of the forex blog page you will find the latest
forex trading information. Scroll down the page if you are looking for less
recent currency trading information. Scroll to the bottom of fx blog headlines
and click on the link for past reports on forex. Currency world news reports
from previous years can be found on the left sidebar under "FX Archives."