Globally Imbalanced

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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.

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About Me

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