EconomicsJunkie » Monetary Economics

China to Float Yuan More Freely – Roubini Predicts: Yuan Appreciation Against Dollar Unlikely – I Say: Yuan Has Already Begun Depreciating

Nima — Sat, 19 Jun 2010 17:48:51 +0000

Reuters writes China forex move could thwart U.S. hopes – Roubini:

China’s decision to move away from its currency peg might mean the yuan weakens against the dollar instead of strengthens as Washington wants, Nouriel Roubini, one of Wall Street’s most closely followed economists, said on Saturday.

China said on Saturday it would gradually make the yuan more flexible after pegging it to the dollar for nearly two years, a move that the U.S. government and others around the world have long been calling for.

“This is the first significant signal in years of a change in Chinese currency policy,” Roubini, best known for having predicted the U.S. housing meltdown, told Reuters.

But it remains to be seen how China would put the new system into practice including the composition of a basket of currencies that Beijing will use as a reference point for the yuan — also known as the renminbi — and the base date for that basket, he said in an e-mail.

“Since they have not changed the previous range for the band — plus or minus 0.5 percent — most likely on Monday China will allow the renminbi vs U.S. dollar to move,” said Roubini.

The yuan has risen sharply in recent months against the euro, which sank over Europe’s debt problems, so a stronger yuan could not be taken for granted, he said.

If the euro were to continue to depreciate, “the renminbi would have to be allowed to depreciate relative to the dollar, a paradoxical outcome,” Roubini said.

His comments echoed those of an adviser to China’s central bank on Saturday.

Li Daokui, an academic adviser to the monetary policy committee of the People’s Bank of China, told Reuters in Beijing that the yuan could depreciate against the dollar if the euro falls sharply against the U.S. currency.

Roubini, like other analysts, said a major strengthening of the yuan looked unlikely.

“Even if the Chinese were to allow a gradual renminbi appreciation relative to the U.S. dollar, the size of such appreciation would be modest over the next year, not more than 3 or 4 percent as the trade surplus has shrunk, growth is likely to slow down on China and labor/employment unrest remains of concern to the Chinese.”

For more on this see my own predictions on this particular matter.

July 2009 – China Pegging Yuan to Dollar Again?

The stabilization of the Dollar against the Yuan has almost coincided the reversal of the Dollar’s fall against other major currencies. It thus appears as if, since mid 2008, the Yuan/Dollar peg has been reinstated and continues to be in place as these lines are written. What is also noteworthy is that the US current account deficit has been declining sharply since then.

A first look at the above chart leads one to believe that Chinese and US authorities aimed at putting an end to the fall of the Dollar, and thus intervened accordingly. However, another possibility which I would like to propose is that the Dollar had fundamentally and truly begun to stabilize at the level of RMB 6.83 at that point and was actually in for a major revaluation upwards. Thus the current intervention by Chinese authorities could actually be aiming at a stabilization of its own currency at a higher level than the market would mandate.

Some points fundamentally support the thesis that the dollar should gain in value against the major currencies:

- Global deleveraging is driving investors from other currencies back to the Dollar
- Deflation hitting the US first, and other countries only later
- Imports into the US are falling rapidly
- Significant domestic spending sprees by the Chinese government

All this may indicate that if the Chinese government were to let the Yuan float freely at some point, it may actually drop significantly against the US Dollar. Such an event could possibly be the ignition for a significant Dollar rally in the years to come.

The Reuters article is also in line with something I pointed out recently:

An interesting side effect of the Dollar rally is what’s happening to Chinese exports. Since its currency is pegged to the US Dollar, the Yuan is strengthening against the Euro which is hurting the powerful Chinese export lobbyists.
…
Bottom line: The supposed Yuan devaluation everyone seems to be expecting, were the Yuan to be freely floated, is simply not gonna happen!

Luckily, such predictions are testable. Let’s see how we are doing so far. Let’s observe the direction the Dollar has begun to take against the Yuan:

Let’s see if the trend holds up …

Dollar Rally – Iranian Central Bank Dumps Euros, Buys Dollars

Nima — Sun, 06 Jun 2010 20:50:50 +0000

As a corollary effect to the current Dollar rally, Iran Selling 45 Billion Euros of Reserves for Dollars:

Iran’s central bank began the first phase of the 45 billion-euro ($55 billion) sale of some of its reserves for dollars, the state-run Jaam-e-Jam newspaper reported, citing people it didn’t identify.

The bank is selling 15 billion euros in the first of three stages, which will be completed by Sept. 22, the newspaper reported on its website on May 31.

Iran will “substantially” decrease its oil sales in euros, the paper said. It informed Japan and other crude-oil customers of the change, Jaam-e-Jam said. The Persian Gulf country’s euro reserves are 55 percent of the total, and would be reduced to 20 to 25 percent after the sale is complete and after oil sales in euros have been reduced, the paper said.

Iran’s shift out of euros has been prompted by the single currency’s decline, said Jaam-e-Jam, which is owned by the state broadcaster. Other central banks, including those of the Persian Gulf states, also are selling their euro reserves, it said.

The euro was little changed against the dollar, rising 0.1 percent to $1.2241 at 12:45 p.m. in New York.

The euro made up 27.4 percent of global currency reserves at the end of 2009, according to the most recent data available from the International Monetary Fund. While that was down from 27.8 percent in September, it was up from 26.4 percent a year earlier.

Experts in Iran’s central bank have suggested the country buy gold because they forecast the precious metal’s price will increase, Jaam-e-Jam said.

Euro’s Decline

The euro has fallen 15 percent against the dollar this year, reaching a four-year low yesterday, amid concern the debt crisis that started in Greece will spread to other nations and dent economic growth. The slide forced European Union leaders to piece together an almost $1 trillion loan package last month as confidence in the euro’s status as an alternative reserve currency to the dollar faded.

Gold is up 11 percent this year and is headed for a 10th annual gain, the longest rally since at least 1920. The metal reached a record $1,249.40 an ounce on May 14 and traded at $1,223.05 an ounce in London today.

In essence, Iranian central bankers are jumping on the boat of the deflation trade …

I still think that a healthy mix of gold, Dollars, and Treasurys is the right recipe to protect one’s wealth in these turbulent times.

Money & Credit Supply – April 2010

Nima — Wed, 19 May 2010 02:10:30 +0000

In April of 2010 the annual growth rate of the true money supply has dropped to 3.68%.

The total true money supply at this point is $2,214 billion:

The money supply growth rate continues to move sideways and even appears to be on the verge of falling once again. One thing’s for sure: There is no extraordinary growth happening in the money supply, regardless how how many nonsensical purchase programs the Fed has started and how much “quantitative easing” it is trying to shove down people’s throats.

Consumer credit credit continues to contract steadily, ever since I called the peak in 2008:

This is part of what I meant when I called for a long lasting End of Consumerism:

The end of consumerism really means the end of capital consumption. It means that people realize that they need to save more and consume less, so as to provide for economic progress and more efficiency in the future, and to restore balance to the economy as a whole. It means that people have understood that too much of the existing capital stock has been consumed and has deteriorated.

This is the causality that the majority of pundits and economics professors that one can hear talk every evening on the news simply don’t understand. All their theories and policies are ignoring this one crucial fact: That Americans are done consuming for the foreseeable future. The end of consumerism isn’t just a temporary ditch. It is here and now and it won’t go a way for a long long time. It is a once in a lifetime occurrence. This is why it is so hard to grasp and to accept. But it is very simple to understand when one approaches it with sane common sense. How many more Starbucks branches do we need in the streets of New York? How many more gas guzzling cars should each family posess? Three, four, ten …? How many more different brands of detergents, shampoos, toothpastes, and consumer electronics products do we really need?

In particular have a look at the ride that securitized consumer loans have been taking since the beginning of the year!

Securitized consumer loans are more likely to be marked to market I think. This may be why we are getting a much clearer picture of the real extent to which credit is contracting here, but this is just speculation on my part.

After the mirage bump which was supposedly due to a regulatory adjustment of certain loans, total credit and loans continue to contract steadily:

Credit:

Loans:

Deflation is alive and well indeed!

Money Supply – March 2010; Supplemetary Financing Revived

Nima — Sun, 18 Apr 2010 23:07:50 +0000

Money Supply

The true money supply in March has grown slightly to $2,202 billion in March:

The annual growth rate has, however, dropped to 3.85% now:

Fed & Treasury Revive Supplementary Financing

For a little while the Treasury has been winding down its mysterious supplementary financing program.

Now, after Congress has, as always, made way for more public debt by raising the ceiling, the program is being revived:

The Treasury Department announced Tuesday that it is expanding its Supplementary Financing Program to help the Federal Reserve manage its enormous balance sheet. In a statement, Treasury said it will boost the SFA to $200 billion from its current level of $5 billion. The fund had been up to $200 billion but was scaled back when Congress delayed passage of an increase in the debt limit. Now that an expansion of the debt limit has been signed into law, the department is able to resume the program. Starting on Wednesday, Treasury will conduct the first of eight weekly $25 billion 56-day SFP bills to restore the program. The department said it will then roll the bills over. “We are committed to work with the Fed to ensure they have the flexibility to manage their balance sheet,” a Treasury official said.

I’m not sure if this really means anything to anybody. Maybe I am just not getting something here. But I would love for somebody from the Treasury or the Fed to explain to me what precisely they mean by working “with the Fed to ensure they have the flexibility to manage their balance sheet”.

Obviously something shady is going on here when they have to use such complicated constructs and fuzzy terminology.

Credit and Loans

What has been most noteworthy recently was the following development in the supply of credit and loans during the last week or March:

The last time such a severe spike occurred was in October of 2008, to no avail as credit relapsed afterwards along with a severe market crash … a pattern which is only too likely to repeat itself at this point.

Update: I just chatted with Mish about this and he told me that this recent spike is likely to be just a technicality that is due to some reclassification of some student loan.

Money Supply – February 2010

Nima — Sat, 13 Mar 2010 06:03:16 +0000

The true money supply has dropped by $72 billion from $2,253 billion in January to $2,181 billion in February 2010.

The annual growth rate has again leveled off to now 5.5%.

Ron Paul on the Fed, Recessions, the Great Depression

Nima — Tue, 26 Jan 2010 09:36:06 +0000

… seriousy, I wonder if these clowns they send in again and again to defend secrecy, bailouts, and cronyism are actually highly unreceptive robots, smuggled in from Japan.

Their nonsense is debunked in every single conversation, then someone hits reset, puts on a new skin, and back in action they are!!

Money Supply – December 2009 – Early Double Dip Recession Signs?

Nima — Sun, 17 Jan 2010 04:02:26 +0000

The true money supply has grown to $2,232 billion in December 2009.

The annual growth rate has now slowed down to 3.2%:

A sustained drop below 3% is most of the time a good recession indicator. Given that we are still in a recession which may be declared over soon, this may be just another indicator of the coming double dip recession, as I have outlined a few days ago.

Money Supply – November 2009

Nima — Mon, 11 Jan 2010 05:49:40 +0000

The growth rate of the true money supply has slowed down to 6.68 percent in November 2009.

Below is the actual amount of money in circulation over the past months till now:

Below please find a charge of the true money supply growth rates since 1930:

The red areas indicate recessions. As I have mentioned before the growth rate of the true money supply tends to be a relatively reliable indicator of coming recessions whenever it drops below 3 percent.

Note the area between 1930 and 1940: The Great Depression, an obvious result of the government’s previous inflation and credit expansion policies and the ensuing business cycle, was accompanied by a decline in the money supply. In 1933 the true money supply spiked up through 1936 only to contract again in the recession of 1937/38. The pattern that is currently panning out may very well be following that one in one way or another. It is certainly likely that soon an official end to the recession will be declared. Another one is likely to follow quickly, attempting to correct all the malinvestments that will have been created or left uncorrected by the recent and ongoing bailout and stimulus policies.

The government’s response to that coming recession is of course predictable. What exactly it will lead to no one knows, except that it won’t be good at all. The recession of 1938 was closely followed by World War II …

Ron Paul on Audit the Fed (on Kudlow)

Nima — Tue, 01 Dec 2009 03:07:13 +0000

Free Floating Yuan = Stronger Yuan ??

Nima — Wed, 18 Nov 2009 10:36:05 +0000

An interesting assumption in virtually all debates concerning the Yuan is that it would appreciate against the Dollar, once let float freely. A good example is the article below in which this premise is applied, set in stone and unquestioned from start to finish:

A growing number of global leaders are urging China to look to its long-term interests and allow its tightly controlled currency to rise. But they are encountering reluctance from a government still very much worried about the economy in the short term.

President Barack Obama and Dominique Strauss-Kahn, managing director of the International Monetary Fund, in Beijing on separate visits Tuesday, told Chinese officials that yielding to market pressures for a stronger yuan would help the global economy recover.

Nonetheless, Chinese President Hu Jintao didn’t announce any new commitment on currency policy to Mr. Obama. Other Chinese officials and economists continue to defend China’s policy of keeping the yuan steady against the dollar to aid Chinese exports, which are still vital in sustaining the nation’s economic recovery despite growing domestic consumption.
[Geithner] Reuters

Treasury Secretary Timothy Geithner took a softer tone on China’s currency at a Senate Foreign Relations Committee hearing on Tuesday.

At a congressional hearing Tuesday, Treasury Secretary Timothy Geithner sounded a much softer tone than in the past on China’s currency, saying it’s “very important” that the Chinese government pursue “broader reforms to their exchange system over time.”

“China has to take steps to move away from excessive reliance on exports” and find ways to stimulate domestic consumption, Mr. Geithner said at the hearing before the Senate Foreign Relations Committee, refraining from harsh rhetoric toward the Asian giant. He said that China is already making progress on rebalancing its economy and that “we’re seeing very promising, early signs” of a shift toward growth that relies on “domestic consumption and investment.”

The discussions highlight how China’s heavily managed currency is once again at the center of debates over global economic policy, after being pushed to the background by the financial crisis.

Though Mr. Hu, Mr. Obama and other world leaders have promised to cooperate in pulling the world economy out of its deepest slump in a generation, coordinating economic policies across very different countries remains difficult.

High unemployment makes trade with China a volatile political issue in the U.S., but similar pressures make it difficult for China to yield to U.S. pressure on the currency. A stronger yuan would make Chinese exports less competitive, which is unappealing for China in a year when exports are down about 20% and many manufacturers have closed.

Chinese leaders who have criticized the West’s economic management may also find it politically difficult to yield to demands on the currency.

On the other hand, China’s economy has recovered faster than most. Because the yuan has weakened sharply against other currencies, European and Asian competitors complain that China has an unfair advantage.

Meanwhile, some economists worry the extra juice to the economy from the cheap yuan, in addition to huge government stimulus, risks new bubbles in real estate and stocks.

Mr. Strauss-Kahn said keeping the currency down may help exports in the short term, but it imposes other costs. “You have to balance your needs in the short term with the long term,” he said. For instance, an undervalued currency encourages companies to invest in ways that may not be viable once the currency rises.

“If you have wrong prices, you make wrong decisions, especially concerning investment in the long run,” he said, adding that it is time for China to look more toward long-term stability now that it has accumulated advantages from an undervalued currency.

A stronger currency also would boost the purchasing power of Chinese households, which would support the Chinese government’s drive to make economic growth less dependent on exports, Mr. Strauss-Kahn said.

Chinese officials frequently counter that big swings in the exchange rate can harm companies and disrupt the economy, which is of particular concern at a time when confidence is fragile. They sometimes contrast the stability of the yuan’s exchange rate — which makes it easier for firms to plan ahead — with the wild swings in the dollar’s value.

“China keeping a basically stable exchange-rate policy is, in reality, good for the global economic recovery,” Yao Jian, spokesman for China’s Ministry of Commerce, told reporters Monday. “If the request is to strengthen other currencies, while allowing the dollar to keep weakening, that’s not very fair.”

Chinese officials aren’t totally closed to arguments for a stronger yuan. In a statement many interpreted as a gesture to the growing concerns about the currency, the People’s Bank of China last week said exchange-rate policy would take into account “changes in international capital flows and the trends of major currencies.”

Still, many private analysts don’t think a move on the yuan is imminent.

Authorities may feel freer to shift once exports are growing again and inflation has turned positive, which could happen early next year. In coming months, China will have to tell other members of the Group of 20 leading economies how it plans to boost consumer spending.

Although China’s government publicly has grown more confident about the strength of its recovery, growth still remains heavily dependent on government stimulus programs.

“China needs the U.S. economy to recover strongly and renew its import growth. Otherwise, China will have a tough time sustaining its recovery,” said Eswar Prasad, an economist at Cornell University.

That is one of the key reasons China is reluctant to lift its currency now. World Bank chief economist Justin Yifu Lin, a former Chinese government adviser, has argued that if a stronger yuan snuffs out a recovery in China’s export sector, it could weaken China’s entire economy and have negative consequences for global growth.

As I noted before on this matter (and so far I see no reason to change my mind on that):

Some points fundamentally support the thesis that the dollar should gain in value against the major currencies:

- Global deleveraging is driving investors from other currencies back to the Dollar
- Deflation hitting the US first, and other countries only later
- Imports into the US are falling rapidly
- Significant domestic spending sprees by the Chinese government

All this may indicate that if the Chinese government were to let the Yuan float freely at some point, it may actually drop significantly against the US Dollar. Such an event could possibly be the ignition for a significant Dollar rally in the years to come.

We will see how things develop over time. I am not saying that my scenario HAS to occur. But I think it certainly is a possibility over the next 2 years or so. What I reject is a completely one-sided approach to this question. As Ayn Rand always used to say: Whenever you encounter contradiction in your thinking, check your premise. I will surely check mine if I turn out to be wrong.