Thursday July 27, 2006 - 11:02:02 GMT
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Black Swan Capital - www.blackswantrading.com
Is it getting close yuan revaluation time?
According to reports, the US Senate now has 67 votes in favor of doing something in the way of whatever it is they do to get China to revalue the yuan. But maybe we are getting close to a move by China anyway. The leadership of China is making noises; they are going to get serious now when it comes to reigning in ‚Äúuncontrolled‚ÄĚ growth and ‚Äúout of control‚ÄĚ liquidity.
‚ÄúChina's growing record trade surpluses and soaring foreign exchange reserves have indicated the currency is undervalued. As foreign exchange reserves have accumulated dramatically, the People's Bank of China ‚Äėsterilized‚Äô the accumulation by selling domestic bills.
‚ÄúBut Societe Generale analyst Glenn Maguire said selling domestic bills can be problematic in emerging economies and illiquid financial markets like the mainland. ‚ÄėIn an economy where financial markets do not `price' risk properly, the transfer of liquidity from the central bank's balance sheet to the private sector's may ultimately be funneled into `bubbles,' funding over-investment in overheated real estate and property sectors for instance,‚Äô he said.
‚Äú‚ÄôChina is clearly seeing a renewed liquidity bubble as a result of such increases in money supply growth and external balance. The yuan should be allowed to act as a pressure valve on that liquidity bubble by a faster pace of appreciation,‚Äô according to Maguire.‚ÄĚ
‚ÄúIts economy is seriously overheated yet the Chinese leadership continues to respond to pressures arising from such unsustainably rapid growth by relying on a highly incremental approach to policy restraint (see my 21 July 2006 dispatch, ‚ÄúChina‚Äôs Control Problem‚ÄĚ). In large part, this is an outgrowth of the limited progress that China has made on the road to reform -- underscored by a highly fragmented banking sector. Chinese monetary policy can hardly be expected to achieve meaningful traction when it is aimed at restricting credit growth in China‚Äôs four largest banks, which collectively contain over 75,000 highly autonomous local branches. Nor should the recent increase in Chinese bank reserve ratios carry much clout, as China‚Äôs banking system has been in a chronic excess reserve position since the late 1990s. And, of course, China‚Äôs ‚Äėquasi currency peg‚Äô severely constrains the autonomy of Chinese monetary policy and fosters a bias toward massive foreign exchange reserve accumulation, whose macro impacts spill over into China‚Äôs domestic liquidity and credit cycles,‚ÄĚ writes Stephen Roach, of Morgan Stanley.
Chinese policymakers may have little control over their runaway economy. And we know control is something near and dear to them. So just maybe there is some fire where for a long time we‚Äôve only seen smoke.
Jack Crooks, Black Swan Capital Black Swan Subscription-based Service
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