The Heat Is on the Yuan

05/03/2010 11:39 am EST


Carlton Delfeld

Editor, The La Jolla Letter and Pacific Gains

Carl Delfeld, editor of Around the World with, says pressure on China to revalue its currency is rising both domestically and overseas.

International pressure on China to revalue its currency is growing as leaders from Brazil, India, and Singapore pitched in to help make a strong case for action.

Henrique Meirelles, head of the Brazilian central bank, said a stronger Chinese currency was “absolutely critical for the equilibrium of the world economy.”

“If China revalues [the renminbi], it will have a positive impact on our external sector,” Duvvuri Subbarao, governor of the Reserve Bank of India, said.

And [recently], Lee Hsien Loong, prime minister of Singapore, said: “Now that the crisis is over, it is really in China’s own interests, for its own calculations, to have greater flexibility in its exchange rate, and to avoid a showdown, not just with America, but really with all the rest of its global partners.”

Over the past 12 months, China’s competitors have seen their currencies appreciate. Brazil’s real is up 27%; Russia’s ruble, 14%, and the Bloomberg-JP Morgan Asia Dollar index, which tracks the ten most active emerging Asian currencies, is at a 19-month high.

These countries therefore face a tough export environment and my bet is that they will intervene in markets to stem the rise in their currencies.

One force driving these currencies is a rebound in capital inflows. According to the International Institute of Finance, net private inflows into emerging economies this year could exceed $700 billion, versus $531 billion last year. This is well short of the 2007 record of $1.28 [trillion,] but much higher than anticipated given high uncertainty about the global economy.

“They (China's leadership) are on this treadmill to hell because 50% to 60% of [gross domestic product] is construction,” [said James Chanos in Bloomberg BusinessWeek]. “And if they stop construction, you'll see GDP growth go negative quickly. That's not going to happen because in China, people are rewarded at almost every level of government for making their economic growth numbers. The easiest way to do this: put up another building.

“So, they're really hooked on this sort of heroin of real estate development. The perception seems to be that China will grow out of this situation. But the problem with that argument is the real estate being built is not for the masses. This is not affordable housing for the middle class. This is high-end condos in major urban areas and high-end office buildings.”

Andy Xie, a former Morgan Stanley chief Asian economist, believes that China’s property market is the biggest bubble in the history of finance, and only by raising the interest rate can the bubble be pierced.

Finally, many think China is resisting appreciating its currency because it will hurt exports. Maybe they fear something much worse—the explosion of the bubble as hot money chases currency and property appreciation.

Look at what happened in Japan in the late1980s. The sharp appreciation of the Japanese yen brokered by Treasury Secretary [James] Baker through the 1985 Plaza Accord turned what was, up until then, a modest bubble into a ballooning asset bubble. We know how that ended.

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