China currency bill: politics vs. economics

 EmailPrint This Post Print This Post

This post is a guest contribution by Dian Chu, market analyst, trader and author of the EconMatters blog.

The latest move on China politics at Washington is the China currency bill, due at the U.S. Senate on Tuesday, Oct. 12. The proposal would levy tariffs on China and four other Asian countries for artificially depressing the value of their currencies to boost their exports.

To us, it seems evident that those in Washington have not thought this through completely (or chose to ignore). Here is how the math would work.

According to the government trade data, China imports from the U.S. about $57.7 billion for the first 7 months of 2011 ($100 billion annualized), and the number will only grow with increasing Chinese household income. So just based on pure math, the Big Question #1 is this:

How many American jobs will be lost if the U.S. loses all or even part of the $100 billion annual export business with China when China retaliates with similar tariffs on U.S. goods?

The same math works for the U.S. imports from China, which is at about $374 billion annualized using the July 2011 year-to-date figure. So the Big Question #2 is:

How much damage would the U.S. tariff on Chinese imported goods do to the pocketbook of American business and consumers?

It seems many are quite fixated on the trade deficit number the U.S. has with China. However, as the table (showing the top 10 countries) and chart below illustrates, America runs trade deficits with many other trading partners, not just China. And realistically, the total trade deficit of $160.4 billion for the first seven months of 2011, even if completely reversed to zero, is a tiny drop in the big bucket of the $14-trillion U.S. economy.

The point is that even if China revalues Yuan to Washington’s satisfaction, it will not have the significant impact to the U.S. economy and jobs as some are led to believe.

One strong support of this currency bill is that by keeping the Chinese Yuan artificially low, many American jobs have lost/outsourced to China; whereas in fact, tax is actually one of the biggest considerations that U.S. corporations have moved operations overseas, including China.

Another reason China has become attractive to many western firms (including the U.S.) is the access to a large and highly educated work force on a lower pay scale. Due to the long ingrained cultural belief that values higher education, China has too many college graduates that the domestic economy can’t fully absorb yet.

Apple, for example, has a huge China operation with Foxcom producing its popular i products, but hit a wall at Brazil. Reuters reported that Apple’s $12 billion iPad deal with Brazil came to a screeching halt partly due to “Brazil’s own deep structural problems such as a lack of skilled labor,” high taxes and bad infrastructure.

In addition to decades of anti-business policies, including unfavorable tax treatments and bureaucratic regulations, to disincentivize establishing business at home, the U.S. also has similar structural problems to those of Brazil in labor and infrastructure.

A few forecasts we have seen so far already indicate that the U.S. is not producing enough college educated work force to even fuel its normal growth. On the infrastructure side, according to the estimate by the American Society of Civil Engineers (ASCE), America is in need of $2.2 trillion investment to high-grade the aging and outdated infrastructure up to where they should be.

Now, since the central focus of this latest currency bill is China’s “currency manipulation”, we can take a look at other countries that have also dabbled in this sport.

For instance, Japan has repeatedly intervened in the currency market over the years. So, does the massive unprecedented G7 Yen intervention in March count? How about when Swiss National Bank (SNB) vowed to “defend” the minimum EUR/CHF exchange rate at 1.20 with some very sizable interventions in the open currency market?

The two aforementioned examples may all have perfectly legitimate reasons, but they highlighted the fact that no country wants a strong currency which hurts its export business. Many central banks have intervened in the currency market (some well publicized, some more “discrete”) when its currency put the country at a disadvantage. And these past interventions will not be the last either.

On that note, China most likely could make a fairly good argument that the U.S. Fed’s programs of QE’s, Twist, the rising federal deficits, and debt are all just part of the effort by the U.S. government to debase the Dollar in order to have the trade advantage over rival currencies as well.

Also from a logical point of view, should the bill not be amended to include all of the U.S. trading partners who have engaged in currency intervention activity? If so, then the Big Question #3 would be:

Is the U.S. ready for a global trade war?

So it is quite hypocritical for the politicians at Washington to single China out when there are many other countries (including the U.S.) doing exactly the same thing.

What it comes down to is that many U.S. politicians are facing reelection in 13 months, and China currency bill is one easy mark to show voters that they are doing something to address the unemployment issue. However, one such bill would come with a hidden high price tag and serious repercussion to the U.S. economy that taxpayers can not afford to foot.

Even if Washington has the answers and contingency plans in place for the 3 Big Questions asked herein (which is highly improbable, and also begs the question of risk/reward and value-add), the currency bill is nothing more than politics to save their own jobs in the next election, instead of one with any kind of economic considerations.

Frankly, in light of the U.S. debt and deficit shamble, lawmakers would be much better off focusing on cleaning the fiscal house (and not to repeat the embarrassing debt ceiling debate to get yet another sovereign credit downgrade), instead of spending precious time and energy taking on China and/or any of the trading partners over currency valuation.

Source: Dian Chu, EconMatters, October 10, 2011.

Did you enjoy this post? If so, click here to subscribe to updates to Investment Postcards from Cape Town by e-mail.

OverSeas Radio Network

Gartman: China not likely to raise rates

 EmailPrint This Post Print This Post

Renowned currency and commodities trader Dennis Gartman explains why he doesn’t think China will raise interest rates.

Source: CNBC, December 13, 2010.

Did you enjoy this post? If so, click here to subscribe to updates to Investment Postcards from Cape Town by e-mail.

OverSeas Radio Network

China increases the flexibility of the renminbi

 EmailPrint This Post Print This Post

The paragraphs below come courtesy of Mark Mobius, emerging markets guru and executive chairman of Templeton Asset Management.

For approximately two years, China has effectively pegged the value of its currency, the renminbi, to the value of the U.S. dollar. In 2005, it briefly allowed a controlled appreciation of the currency, but it ended that policy with the emergence of the global economic crisis.

On Saturday, 19 June 2010, China’s central bank, the People’s Bank of China (PBOC), announced that it would increase the flexibility of the renminbi. In its statement, the PBOC cited the “recovery and upturn of the Chinese economy,” the country’s “enhanced economic stability” and the PBOC’s desire to “proceed further with reform” of its exchange rate regime as reasons for the change in policy.

In reaction to the announcement, equity markets in Asia and Europe closed higher on Monday, while U.S. markets were somewhat mixed. However, we think the potential change in the value of the currency is not likely to be either fast or dramatic. Judging from past experience, we believe that the Chinese authorities may be prepared to see a gentle appreciation in the coming weeks and months, but they are not likely to allow any large jumps in the value of the renminbi because they are afraid of the consequences of such volatility.

Indeed, the PBOC also stated that, with its balance of payments nearing equilibrium, the “basis for large-scale appreciation” of the renminbi exchange rate did not exist. It also made clear its intention to maintain the exchange rate at a “basically stable” level.

As bottom-up equity investors, we focus on individual companies when evaluating investment opportunities. However, it is also important for us to understand how a company is positioned within its sector and country or region, and as such, our outlook on currencies forms part of our broader assessment of a company’s operating environment.

Since we expect China’s exchange rate change to be gradual, this move does not dramatically change our overall outlook on Chinese stocks. We are still able to selectively find what we believe are some attractive stocks on an individual basis, with companies in sectors related to commodities and consumer products and services seeming to offer more interesting opportunities at this time.

Source: Mark Mobius, Franklin Templeton Investment – Emerging Markets Overview, June 30, 2010.

Did you enjoy this post? If so, click here to subscribe to updates to Investment Postcards from Cape Town by e-mail.

OverSeas Radio Network

Mobius: Keeping an eye on currencies

 EmailPrint This Post Print This Post

The paragraphs below come courtesy of Mark Mobius, emerging markets guru and executive chairman of Templeton Asset Management.

The value of the Chinese currency, the renminbi, has been a hot topic in recent weeks. China ties the value of the renminbi to the value of the U.S. dollar. Recently, however, the U.S. and some global institutions have increased pressure on China to change this valuation, which, they argue, has kept Chinese exports relative to the U.S. comparatively cheap. But the U.S. Treasury Department, which was due to issue a report on China’s currency on April 15, 2010, delayed this report by several months in order to allow a series of high-level meetings to take place.

As bottom-up equity investors, we focus on individual companies when evaluating investment opportunities. However, it is also important for us to understand how a company looks within its sector and country or region, and as such, our outlook on currencies forms part of our broader assessment on a company’s operating environment.

We look at all currencies on the basis of purchasing power parity (i.e. comparisons of different inflation rates) and, of course, any controls and influences imposed by the central bank of each country. We then try to assess whether a currency is over or undervalued, how devaluation or revaluation may impact a specific currency, and then gauge the potential impact of such currency characteristics on the business of each company. For example, for an export-oriented company, a devaluation of its operating currency could be positive because it may be able to export more aggressively and more profitably, while the opposite could be true for an import-oriented company.

Our purchasing power parity studies indicate that China’s currency, the renminbi, is actually close to fair value against the U.S. dollar at this stage. Judging from past experience, we believe that China is unlikely to act quickly on currency adjustments because they are afraid of the consequences of such volatility.

Continue reading Mobius: Keeping an eye on currencies

OverSeas Radio Network

Timmy to the Chinese: “We’re all comrades now”

 EmailPrint This Post Print This Post

I have often said that the U.S. is not in a position to smack its largest creditor in the face as seems to be happening more regularly, especially regarding the renminbi peg and trade barriers. I have been wondering how the conversation about these issues was running between Timmy and the Chinese, but there is no need to guess as Dave Galland over at Casey Daily’s Dispatch have come up with a possible script for the “negotiations”.

Timmy: “Okay, what do you guys want?” Timmy asks nervously.

Chinese: “We need access to U.S. markets, because if we can’t get all these empty factories humming, we’re going to get strung up by our collective heels.”

T: “And so you want us to do what?”

C: “For starters, pretty boy, tell your most esteemed party members to stop yapping like diseased dogs about our currency. And stop all this talk about tariffs. We got business to do, and that business is selling your peasants cheap stuff. “

T: “We can do that. But in exchange, you have to keep showing up at our Treasury auctions. Use that big pile of foreign reserves to buy a ton of Treasuries over the next couple of years. That way we can try to buy our way out of this damn recession while keeping rates low. That works out well for you guys, too, because it will mean that our peasants will still be able to afford the stuff made by your peasants. That’s what we Americans like to call a ‘win-win’.”

C: “But then we’ll end up with even more Treasury paper. Already it’s getting hard to find a place to stash all of it.  And if you keep cranking the stuff out like a noodle shop, then in time it will be worthless.”

T: “I hate to break it to you, but it’s already pretty much worthless. We’re so broke that I had to pass on the lobster last night. Your only hope is to keep the shell game going a little longer – you know, buy us some time to work this thing out.”

C: “Can’t you just invade Canada? They got lots of resources, but they don’t have no nukes. Kind of like Tibet.”

T: “Let’s just say that all options are on the table. But for now, all that’s required is that you just keep showing up at the Treasury auctions.”

C: “We are going to want some special considerations, starting with losing that whole currency manipulator thing.”

Did you enjoy this post? If so, click here to subscribe to updates to Investment Postcards from Cape Town by e-mail.

T: “Well make it go away. After all, we’re all comrades now.”

Yeh, sure “we’re all comrades now”.

Source: Casey’s Daily Dispatch, April 8, 2010.

OverSeas Radio Network

Overtaking the dollar: The three phases of the yuan

 EmailPrint This Post Print This Post

This post is a guest contribution by Dian Chu, market analyst, trader and author of the Economic Forecasts and Opinions blog.

The use of the Chinese Renminbi in Hong Kong is on the increase.

Over the last ten years, the Renminbi (RMB) or yuan, has been slowly gaining influence in the markets that surround mainland China. And about one year ago Hong Kong, a major commerce and trading hub, introduced a new trade settlement that allowed Hong Kong business’ to use the RMB as a trading currency.

Three stages for yuan

With the rapid development of China’s foreign trade, the RMB is increasingly flowing out of China. Although it still lacks broad international circulation, many analysts believe the Yuan should eventually become a major international trading currency.

In a China Daily interview (clip below), Dr. Billy Mak, Associate Professor in Finance at Hong Kong Baptist University believes this will happen in three phases:

  1. The yuan should be used as a pricing currency and a settlement currency for the international trade, because right now China is one of the biggest partner in international trade, so its quite natural to make the RMB as a key currency for the pricing and the settlement for the trading.
  2. Using the RMB as an investment vehicle similar to the euro and the US dollar.
  3. The third phase will be for the RMB to be “internationalized” becoming an international foreign currency reserve just like the US dollar, the euro and sterling.

According to Mak, we are in the early stage of phase one since RMB is used as a trade settlement currency just last year.

Asian Monetary Fund launched

Asia became keenly aware of the need for a liquidity safety net following the Asian financial crisis that hit the continent in 1997 and 1998.  Wary of a dollar crisis, it is in China’s interest to promote its own currency as alternatives.

As part of the strategy to wean itself off the dollar and the dependency of exports to the U.S., China, together with Korea, and Japan, also became a member of a regional fund lauched just this month by the ten ASEAN (Association of Southeast Asian Nations) member nations.

The $120 billion fund known as the Chiang Mai Initiative Multi-lateralization Agreement has come into effect to act as a safety net for member countries in the case of an urgent need of liquidity (e.g. a U.S. dollar crisis).

Although not quite the status of an Asian Monetary Fund (AMF) yet, one thing for certain is that the region now has its own financial safety net which can perhaps one day grow to become an AMF.

Line blurred – capitalism & communism

While China seems more focused on promoting bilateral trade agreeements and forming economic alliance, the United States, in sharp contrast, appears to be alienating major trading parterners with a weaker currency than its own, and feverishly interfering with private companies’ operations.

While there’s an ongoing debate about the two systems – at the moment – it seems this unprecedented global financial crisis is nudging the US towards much despised centralized system, while China is becoming much more capitalistic.

Source: YouTube, March 23, 2009 (hat tip: Mar Turok).

Source: Dian Chu, Economic Forecasts and Opinions, April 1, 2010.

Did you enjoy this post? If so, click here to subscribe to updates to Investment Postcards from Cape Town by e-mail.

OverSeas Radio Network

Top 100 Financial Blogs

Recent Posts

Charts & Indexes

Gold Price (US$)

Don Coxe’s Weekly Webcast

Podcast – Dow Jones


One minute - every hour - weekdays
(requires Windows Media Player)
newsflashr network
National Debt Clock

Calendar of Posts

August 2019
MTWTFSS
« Jan  
 1234
567891011
12131415161718
19202122232425
262728293031 

Feed the Bull