Globally Imbalanced

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Slowly but surely….

Eleven days ago I mentioned the number of increasing signs that a Yuan revaluation was imminent, along with the similarities to the buildup to the initial 2005 reval. The past few days have only stepped up this feeling of inevitability as Tim Geithner following the tactful decision to delay the currency manipulator report with a surprise visit to Beijing.

Accompanied by his trusty sidekick, the aptly named David Dollar, Geithner met with State Council members Wang Qishan and Dai Bingguo at the VIP terminal of the Beijing airport. Both of the Chinese officials are from the State Council and will be leading the upcoming Strategic & Economic Dialogue. It’s important to note that the US officials were given access to State Council members, who are generally above the politics of the PBoC and Commerce Ministry. The PBoC (People’s Bank of China) have appeared much more understanding of the need to revalue, while the Commerce Ministry, under the influence of the domestic export lobby, has been the most vocally resistant. Wang Qishan is one of the four highest ranking assistants to Hu Jintao, indicating that cooperation is coming from the very top on the Yuan issue.

Wang Qishan (center) talking hoops with Obama

I imagine we’ll continue to see this internal Chinese battle play out over the coming days or weeks before any concrete action is taken. Just hours after the meeting with the US Treasury, Yi Xiaozhun, a vice-minister in the Commerce Ministry, claimed, “the crisis is not yet over, and so an increase in the value of the yuan now would hurt China’s economy.”

Again, we’re seeing shades of 2005. There were constant mixed messages coming out of Beijing which led to very volatile USD/CNY trading (and consequently large fluctuation in all Asian currencies). There were ridiculous moments like when a State-run newspaper’s English version reported that a reval was imminent and there would be a 3% band, and then hours later a government statement was issued that the English story was in fact a mistranslation.

If you’re at all involved in these markets, it’s definitely time to get ready for some excitement. While the long term might be an inevitability, the coming months should be anything but calm.

Filed under: Chinese Politics, US Politics, , ,

Two more……

Wow. That was quick.

I started up this blog this week as I felt the coming months will be critical in US-China relations, especially related to currency. Yesterday’s example of leading Chinese businessmen coming out in favor of a stronger Yuan definitely struck me as an indication that the government is slowly considering allowing some CNY strength.

Well, today, add another two voices. First, came Cheng Siwei, a former Chinese lawmaker who is advocating a 6% band (3% above or below a midpoint). He commented, “I read a report saying that a 2 percent appreciation in the yuan might kill China’s textile industry. That is certainly an exaggeration.”

Mr. Cheng appears to be a longtime Party member, reaching the ranks of Vice Chairman of the 9th Standing NPC Committee in 1998-2003. These voices, grounded in public service, are exactly the type of voices to be listening for in the crucial month ahead.

Even more in line with the “random, seemingly trivial” leaks I mentioned that led up to the 2005 reval was a report in Caijing Magazine. An anonymous government source was reported saying, “If the central bank does not want to see a quick rate hike, a better way to fight inflation would be to expand the daily yuan trading band to allow the yuan to appreciate properly.”

I cannot stress the importance of these leaks and officials voicing their concerns. The tight control of the Chinese media is still firmly in place and it cannot be simple mistake and coincidence as these statements are released. My concern is that overly aggressive moves by the US government (i.e. an April 15th citation as a ‘currency manipulator’) will move this from a logical, economic debate to a nationalistic debate catalyzed by pride.

*Also of note: Caijing Magazine was a longtime, contrarian voice in the Chinese financial press, run by Hu Shuli. Hu’s departure in November 2009 was decried by many as a government takeover of a formerly independent voice. This actually makes the idea of Caijing printing the above statement without some implicit government permission even more implausible.

Filed under: Chinese Politics, , ,

Voices From Within

One of the odder aspects of the US -China currency revaluation debate is trying to keep track of which groups in which country support what. A stronger Yuan would hit Chinese exporters hard, as the stronger currency would make their products more expensive for US customers who transact in dollars. The flipside is the Chinese households that would increase their purchasing power of foreign products, buying cheaper goods with their newly strengthened currency. As Michael Pettis noted,

There is a significant transfer within China of wealth, which will create clear winners and losers. Basically any economic entity that is explicitly or implicitly long dollars (by which I mean any foreign currency not pegged to the RMB) and short RMB, will lose in a revaluation. Conversely, any entity that is explicitly or implicitly long RMB, and short dollars, will win.

The Chinese export industry is the obvious loser and currently has the ear of the Commerce Ministry, trying to prevent any CNY revaluation. The PBoC itself would take a significant hit as they have significant USD holdings. Companies holding stockpiles of commodities would lose, and basically any Chinese person with a large USD savings account somewhere would take a hit. On the other hand, every Chinese household with a CNY savings account would come out a winner as they could then buy foreign goods cheaper. This could contribute significantly towards the continued rise of the middle class and equitable growth across China.

The last month has seen aggressive posturing from both sides. However, there was a significant breakthrough this week as some of China’s leading businessmen actually supported the idea of a stronger Yuan.

Lenovo CEO Yang Yuanqing recognized the increased purchasing power effect mentioned above, telling reporters that, “We may not worry too much about exporters if we can conduct more yuan-denominated trade.” Lenovo is the ideal example of where China could be heading. A stronger Yuan would hurt lower margin textile and manufacturing Chinese companies, but a company like Lenovo would benefit tremendously from a new class of empowered Chinese consumers. Furthermore, it symbolizes the high-tech, higher-margin manufacturing businesses that China has the potential to create.

Chen Daifu, the Chairman of Hunan Lengshuijiang Iron & Steel Group told Bloomberg News, ” “Yuan appreciation will bring us benefits because we import several billion yuan worth of ore every year from abroad.” Iron price hikes in the past year hit Mr. Chen’s company hard and they are realizing that the value of exporting cheaper steel may soon be outweighed by more expensive import requirements. As companies begin to weigh short-term export related benefits against longer-term domestic growth stories, hopefully there will be increased pressure to build domestic consumption by every means possible.

These statements should not be taken lightly as they appeared to be directly in conflict with most recent comments out of the Chinese government. Belinda Cao and Judy Chen over at Businessweek astutely noted that, “As Chinese business leaders speak out, it becomes possible for Beijing to act without being seen as bending to U.S. pressure.”

This is a critical observation as it reminds me of the buildup to the initial July 21, 2005 revaluation. It was random, seemingly trivial events like this that in retrospect were the crucial signals of impending action. Up until the very day of revaluation, nearly every government statement was still against a reval and anti-US pressure. Occasionally you would get a rogue Central Bank official or leading Chinese scholar saying something about needing to reval, who would then magically retract his statement. Looking back, these “rogue” statements and leaks became more and more frequent up until the day of the reval. There were theories among the traders that info was being leaked so the PBoC could monitor price movements as they worked to determine a proper reval amount and strategy. I’ll never know if this was true, but I believe having major figures come out in this public of a manner indicates that all options are being seriously considered.

A long-term rebalancing of both economies involved is inevitable in some capacity. It’s in the interest of the US and China to avoid a major trade war and avoid knee-jerk populism and self-interested business lobbies. Hopefully, the Chinese government will begin listening to this school of Chinese businessmen who recognize this eventuality and can not only live with it, but actually welcome it.

Filed under: Chinese Politics, , ,

About Me

Former emerging markets currency trader in NYC for seven years, turned MBA student at INSEAD living in Singapore.