Notes From Underground: Chinese announce that they will make YUAN more flexible

The weekend’s financial news is being dominated by the announcement from the People’s Bank of China, who said it will break the dollar peg and give the Reminbi greater flexibility. The PBC said it would allow greater currency flexibility but will not let the currency move more then 0.5 percent per day in keeping its present bands in place–that is, up or down. Directly from the PBC statement:

“With the Balance of Payments[BOP] accountmoving closer to equilibrium,the basis for large-scale appreciation of the RMB exchange rate does not exist … the People’s Bank of Chinahas decided to proceedfurther with reformof the RMB exchange rate regime and to enhance the RMBexchange rate flexibilty.”

In reading the entire statement we feel that the Chinese authorities have been studying Greenspanese for the words are so nuanced that many differing views can be drawn. The weekend financial press has already reported diverse opinions as to the effects of the Chinese move. Nouriel Roubini thought it could result in the YUAN DECLINING against the DOLLAR. Other analysts believe the initial reaction will be for the DOLLAR to be down and for risk trades to come to the fore.

Senator Schumer and others have opined that this move is not enough and is done solely to head off criticism of the Chinese at the G-20 meeting. Some have called it a great victory for Secretary Geithner, so thus Greenspan would be proud because he is the man who said, “if you think you understood what I said you must have misheard.”

We say to our readers that there is a great deal to absorb in the PBC statement so be careful before just jumping into the fray. We at NOTES do agree with the initial analysis that this move should be positive for the global growth story as any appreciation will result in cheaper imports into China, thus lending credibility to this being a move to aid domestic demand and enrich the middle class Chinese. Commodity prices should get a bid as the slower China growth story will move to the sidelines as the Chinese government will be slower to raise interest rates with a stronger YUAN.

The commodity currencies should also do well but the AUSSIE already rallied strongly last week. Bond prices in the developed countries should also be under pressure as the need for less intervention will also lead to a decline in Chinese purchases of foreign DEBT. The political ramifications are tougher to decipher. We agree with those who believe that this will alleviate the immediate pressure on the Chinese and allow them to point the finger at the profligate developed nations such as the U.S., U.K. and the rest of the big deficit spenders of the world at next week’s G-20.

However, it seems as if some U.S. politicians are not going to be placated by enhanced flexibility that results in a small appreciation of the RMB. The OBAMA administration seems content with this Chinese action, but Congress seems to be far less so. Levin and Schumer may just be feeling their oats and getting prepared for more populist rhetoric. One thing we wish to advise our readers about is if you think Chinese domsetic demand is about to grow and a bigger YUAN appreciation is in the works, then watch the Mexican Peso. As the costs of exports from China rise, the MELQUIADORES on the Southern U.S. border will become an enticing productive facility to replace Chinese goods.

We like to remind those new to our missives that the Chinese devalued the RMB by 50 percent on January 1, 1994 in response to the advent of NAFTA, which undermined the manufacturing advantage that was to adhere to a cheap labor base in Mexico. If China is serious about a global rebalancing, Mexico ought to be a recipient. This is why we always believe 2+2=5.

Tags: , , , , , , , , ,

Leave a Reply