China May Let Yuan Appreciate Against USD: "It’s Started!"
Man what good is YouTube? I had the perfect link for this story–when the French authorities release the elevator in the Eiffel Tower (with Lois underneath it) accidentally activating the countdown on the nuclear bomb inside. I can’t believe all the irrelevant garbage that was coming up on my searches instead of that gem from cinematic history.
Anyway here’s the news:
China sent its clearest signal yet that it was ready to allow yuan appreciation after an 18-month hiatus, saying on Wednesday it would consider major currencies, not just the dollar, in guiding the exchange rate.
In its third-quarter monetary policy report, the People’s Bank of China departed from well-worn language on keeping the yuan “basically stable at a reasonable and balanced level.” It hinted instead at a shift from an effective dollar peg that has been in place since the middle of last year.
“Following the principles of initiative, controllability and gradualism, with reference to international capital flows and changes in major currencies, we will improve the yuan exchange-rate formation mechanism,” the central bank said in a 46-page monetary policy report.
The comments, published just days before a visit to Shanghai and Beijing by U.S. President Barack Obama, set out the possibility of a return to exchange rate appreciation that began with a landmark July 2005 revaluation.
The yuan strengthened by nearly 20 percent against the dollar until concern over the impact of the global financial crisis prompted Beijing to hit the brakes in the middle of last year to protect exporters.
The yuan has been stuck at around 6.83 per dollar ever since, drawing increasing ire from other countries, especially as it has followed the dollar downwards against other currencies.
The dollar has dropped 13 percent against a basket of major currencies including the yen and euro since mid-February.
I am not making an official prediction–I haven’t spent enough time studying China specifically–but this could spell trouble if you believe in Austrian business cycle theory. China’s monetary aggregates have been growing like gangbusters lately, which they had “no choice” to do since the dollar was falling against other currencies and China had a peg to the dollar.
So if I’m reading the situation correctly, China pumped in a bunch of new money and now may be idling the spigot. Fortunately there is a lot of trade liberalization and other pro-market reforms occurring in Asia generally (I co-authored a research paper for an investment firm on this recently), so that should absorb some of the slack.
Like I said, I’m not making an official prediction, but it wouldn’t surprise me if there is a major “correction” in China within a year. If I were in stocks, I would still much rather be in Asia than the West.
