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China’s bubble pricking experiment, part 2
More update after my previous post on China’s curbing on real estate bubble:
Market impact of rising Yuan
WSJ had a very nice analysis on the potential impact of a rising Yuan. Nobody will know how much the appreciation will be, 3%, 5%, or 10%? Will it be gradual or one-step revaluation?
But rising Yuan will make imports into China cheaper, increasing domestic demand for imported goods, especially energy and commodities. Also, an appreciation of Yuan means relative devaluation of the US dollar, which is also good for commodity prices – there is a very strong correlation between falling dollar and commodity price, including gold.
Another impact could be negative on US treasuries. According to the analysis, “Ripples from the currency markets could spread to U.S. Treasurys, as Chinese and other Asian governments, with fewer dollars on their hands, buy fewer U.S. Treasurys. Worries of reduced demand from China could result in a short-term selloff, …In 2005, 10-year Treasury yields jumped from 4.17% to 4.41% in the 14 days after the July revaluation. And from August through December of that year, China’s net purchases of Treasurys slowed to a monthly average of $2.7 billion, from $10.5 billion in the previous seven months, according to Treasury Department data.”
On the timing of the revaluation, the Journal points out that Chinese policy makers will avoid appreciation close to US’ mid-term election, in order not to leave impression that they bow to the US pressure. So a reasonable estimate is China will probably re-valuate between May and September — my own guess.
When China allowed the yuan to rise in 2005, it startled investors and sent waves through the financial markets. This time around a revaluation is widely expected. So will a higher yuan turn out to be a big yawn?
![[ABREAST]](https://sg.wsj.net/public/resources/images/MI-BC764_ABREAS_NS_20100418175625.gif)
Not necessarily. Based on the experience of 2005, a rising yuan could boost other Asian currencies, lift commodity prices and hurt U.S. Treasurys. Domestic-focused Chinese stocks are also likely to rise. With China being an even bigger economic force throughout the global economy, sucking up commodities and dominating exports, the market effects could be bigger this time around. While some market moves have begun in anticipation of a policy change—oil prices are up and Asian currencies are rising—some analysts believe the market may be underestimating the size of any revaluation, leaving open the chance of a bigger-than-expected reaction when a change comes.
The currency markets have for months expected the Chinese currency to rise a bit more than 3% this year. That would take the dollar down to roughly 6.60 yuan from 6.80 yuan, where it has been pegged since 2008. At that time the financial crisis prompted China to put a halt to the gradual, 21% appreciation allowed since July 2005. But analysts at Morgan Stanley believe China could drive the yuan up 4% to 5% in several steps in 2010, and take the yuan to 6.17 by the end of 2011. Barclays Capital analysts also expect a gradual 5% increase this year. So far, the markets are betting on China making a gradual and modest move. … full text here.
China lens on America
It’s been a while to have Tom Ashbrook’ On Point on this blog.
This Hour, On Point: how the U.S. looks from rising China.
Tom Ashbrook with guests:
Peter Hessler, staff writer for The New Yorker. His latest book is “Country Driving: A Journey Through China from Farm to Factory.” Listen back to the On Point show about it. His new article for The New Yorker, about returning to the U.S. after years of living in China, is called “Go West: Scenes from An American Homecoming.”
Jia Cheng, a 28-year-old graduate student at Harvard Business School. She has moved back and forth between the two cultures as a businesswoman working for both McKinsey & Co. and Goldman Sachs. She grew up in Shanghai and graduated from Fudan University.
China’s bubble pricking experiment
The latest news came in from China:
In my view, China stands at the forefront of the policy experiment of pricking asset-bubbles. Many economists and central bankers hold the view that bubble is impossible to detect; instead, policy makers should focus on minimizing the damage in the aftermath of bubble bursting. Former Fed Chairman, Alan Greenspan, is one of them.
The recent financial crisis taught us an important lesson, i.e., central bankers should take a pro-active role in containing the bubble – the damage left by bubble bursting is just too great to ignore, especially to the employment.
China’s case is especially interesting – unlike Western central bankers, so far Chinese policy makers have largely relied on administrative measures, instead of the traditional policy instruments, like interest rates.
I would think the new regulation on down-payment would be quite effective. However, it’s an open question how strictly Chinese policy makers would want to implement such policy; and how long and how far the policy makers would allow the price to fall, without worrying about the stability of the system – yes, I am talking about the stability of political system.
If speculators know the government isn’t going to allow the price to fall (or fall too much), then this will eventually create a Moral Hazard problem – Next round, when new policy measures come about, real estate developers and speculators just hold up, accumulating housing inventories, anticipating the policy will soon reverse. This will essentially render polices ineffective.
So all in all, we may never really get rid of bubble – as long as there is human greed and fear, and no matter which system you are living in – unregulated or heavily regulated.
Expectation of currency appreciation drives up China’s Hot Money
China’s foreign exchange reserves rose substantially despite its trade deficits. Imagine how many people or investors are moving their money into China to bet on an incoming (and continuous) Yuan appreciation.
This is part of reason that caused Japan’s real estate bubble.
Now comes currency diplomacy
Tim Geithner postponed labelling China as currency manipulator, and he goes to China for back-door negotiations. It’s likely the appreciation will come not long after the visit.
The ‘blame China’ game
Interview of Stephen Roach on ‘don’t blame China for US problems’, and prospect on China’s currency reform.