I thought I was a lone wolf on the RMB. It seems that almost everyone else is all lathered up on the RMB. Certainly hot money has been pouring into China for some time in anticipation of making a quick killing. I still maintain that China will not and more importantly SHOULD not float the RMB anytime soon. If they did float right now, my belief is that the RMB would SINK vs. the US$ perhaps after an initial pop.
Finally I see some support from a well respected economist, Andy Xie at Morgan Stanley.
Andy writes :
I see a very low probability that the Chinese renminbi (Rmb) will revalue soon. China faces major economic uncertainties at home. Its overheated property sector is experiencing uncertain times. A revaluation may cause hot money to leave and, hence, the property market to collapse. On the other hand, elevated expectations of imminent Rmb appreciation could prevent panic selling and help stabilize the property market. The expectation – not the reality – of imminent Rmb revaluation is in China’s interest at present.
Foreign pressure is unlikely to be sufficient to force China to take an action not in its interest. The global economic cycle could well turn down next year. China’s trade performance would also deteriorate with it, and the pressure on China to revalue would evaporate. I believe it is in China’s interest to stall on the currency issue.
There are two necessary conditions for China’s exchange rate regime to change. First, China’s state banks should be listed. Listing the banking sector would lead to a good assessment of the bad asset problem in China. If the magnitude of the problem is bigger than expected, China may have to delay its currency reform.
Second, any currency reform by China should be acceptable by the US. Were the US to disapprove of China’s actions, it would continue to put pressure on China – and because China would have already changed, the market would likely give the US pressure more credibility and speculate in the Chinese currency even more.
China has had the peg for ten years. It is groundless to criticize China for currency manipulation. Such an accusation would not stand up at the WTO. However, if China moves away from the peg, any increase in foreign exchange reserves could be interpreted as currency manipulation. This would be a very negative scenario for China.
The political will in Washington seems likely to be for a big appreciation by China, regardless of its language. If China makes a small move, it will only whet Washington’s appetite and invite more demands, in my view. This is why I believe that, if China plans to make a small move, it will need to reach an agreement with Washington that this is acceptable and that there will be no more demands for five years.
In Would Floating the Renminbi Solve Anything? we discussed why it would not help the US one bit. Andy Xie contributes ideas as to why it is not in China’s best interest either. As for losses on the US$ and reserves that everyone else is bitching about…. The US$ has essentially gone nowhere (in fact I think it is up), ever since Newsweek’s Incredible Shrinking dollar cover hit the stands.
I do think there is probably another leg down in the US$ but the time to be super bearish on the dollar was two years ago not today. Look at the problems in the UK, the housing bubble bursting in Australia and Japan back in recession and then look at the huge problems in the banking sector in China and tell me the demise of the dollar is just starting. I do not buy it. Every fiat currency has problems and eventually gold is likely to outperform them all.
Here are my reasons why China should not float the RMB
1) The Chinese central bank does not want to trigger a currency crisis by floating the RMB too soon.
2) There is too much “hot money” flowing into China in hopes of making a quick killing on a currency repeg or float.
3) China thinks in terms of years or decades on policy changes. What happens over the course of the next 6 months is not relevant.
4) Chinese banks might not be in a position to take the stress of floating the RMB at this time, even if other factors were conducive.
6) Fundamentals such as slowing worldwide growth do not favor floating the RMB right now
7) The Asian principle of “face saving” suggests that China can not be forced into premature action and that “Snowtalk’ is counterproductive.
8) The peg has served China well. China did not blow up in the last Asian currency crisis because of that peg. The peg has provided stability and that stability is still useful.
9) The US has bigger problems that need addressing first.
10) Paper losses on paper currencies look far bigger on paper than they actually are in the grand scheme of things that central bankers consider.
On the other hand you may wish to consider Stephen Roach’s article insisting that China Needs a New Anchor. My reply to Roach would be “Yes, but not now”. There is just too much hot money, too many issues with a global slowdown (that almost everyone is in denial over), and too many bad loan problems with Chinese banks.
Anyone else in the boat with Andy Xie besides myself or are we the two lone wolves?
Mike Shedlock / Mish/